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1,747 karma · joined April 26, 2007
My blog is at http://andrewchen.com
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1) an angel investor is someone who invests their own money 2) a venture capitalist invests out of a fund, which is mostly other peoples' money (OPM!) while taking a fee + economics from the fund (the famous "2 and 20" model)
But that's not too useful, because what's important are the behaviors that come out of the situation.
Because most angels are investing their own money, they usually don't have crazy amounts of capital to work with. Thus, they usually invest early so they can get a better percentage at a lower valuation.
Many VCs also invest early, sometimes exclusively so with smaller funds, but they are often called "seed funds" to make that distinction. A fund which invests OPM is never called an "angel" regardless of what stage they invest at.
And finally, big funds (managing 100s of millions of dollars) are what we think of usually as venture capital.
(Funds that invest even larger amounts at higher valuations are often referred to as "late stage venture capital" or "growth capital." And there's more specialized terminology later stage since more specialized financial instruments can be brought into play - SPVs/debt/mezzanine/etc)
Where Scott's essay rings true is that idea that investors of all classes are more risk averse these days- they prefer to see traction since the cost of building an app/website is rapidly decreasing. Thus, they are all behaviorally acting like "traction investors" rather than "idea investors" whereas in the past, traction investors purely consisted of the growth capital guys.
This might be worse for the ecosystem since people want you to have everything built before taking in our first dollar of investment, but you could argue it means the ecosystem's $s are being allocated more efficiently also.
Worth reading the counterpoint: http://avc.com/2013/04/return-and-ridicule/
"This notion also plays into Clayton Christensen's framework for disruptive innovation. Many of the most disruptive technologies started out as what Clay calls "toys". The PC is a great example of that. PCs came out of the homebrew computer movement. Geeks were building computers in their garages. And everyone thought they were nuts. But from that came the Apple Computer and the IBM PC and we were off to the races with personal computers."
In my experience in silicon valley, people start with building something small/simple (but in a big market), get little drips of funding from investors as they show progress. If they fail at any point along the way, there's value in what they've created, and they exit for whatever they get. The later you exit, typically the further along you get, and the bigger the exit. That's why the diversity of outcomes in the valley are everything from zero to billions, and companies raise anywhere from zero to a dozen rounds of funding.
At any inflection point in the business, you have lots of options: you can sell, raise more money, raise more and cash out some shares, you can quit, you can make yourself chairman and have your cofoudner run it, you can do nothing and grow it organically, etc., etc.
Each one of the choices above are part of your arsenal of options at almost any point. The people who choose to raise tons of money, not cash out at all, and then who fail- well, they made a series of active decisions to do all of that. They're big boys.
My point is, when you're building a company you can make a lot of choices along the way, and it's not just setting out for a suicide run of either 1% of $100M or 10% of $10M. Choosing to raise outside financing is sort of like deciding whether or not you want a cofounder (or 2, or 3) - it just another form of business partner. You get less %, but hopefully they add to the business in a meaningful way that leaves you better off.
Disagree. What does it meant to have Basecamp with "more features"? Features aren't in themselves good things.
Instead, you end up needing to focus the new features around a particular theme or value proposition- be it better collaboration, or better security, or whatever.
And then while you're adding features in that direction, oftentimes you don't need to implement the full Basecamp featureset. You just need to be better in a direction that's valuable and enough of the base featureset to have an OK product. Seriously, it's not a good idea to start up a new product and expect to build all of Basecamp AND add new features and be successful. That'd take years to even get the first version of the product out. Avoid unless you have millions in funding and an excellent team from the get-go that knows exactly how to execute this strategy.
You should run small experiments (<$50) per day until you figure out that you get can profitable. Only then do you scale up. The point is understanding what the microeconomics look like, so that you know how to grow the business over time profitably.
If you can go viral, that's even better obviously. I've written extensively on that also - and it's my preferred approach. But it's just true that for most subscription products, it's easier to buy the users than to acquire them virally.
One of the biggest examples of this is eHarmony, which is rumored to have $100M+ revenue, but terrible margins because they have to plow so much of that money back into advertising.
Note also that you pay upfront for acquisition but your revenue base builds up over time - the more momentum you get, the better off you are.
It is however true that a lot of businesses that rely on paid acquisition end up with low margins - just look into the leadgen industry as a good example of this. This is particularly true in the Google Adwords world where auctions systematically drive up prices.
That said, if you can pay $80k and get $120k out, and that scales up to LOTS of revenue, then making $1.2B in revenue per year on $800M in cost may not be that bad. Certainly better than a lot of businesses.