Monday, August 18, 2008

Small dream is a futile attempt in venture capital?

Long time, no post. I owe the audience some interesting insights... so here we go.

In a world of venture-backed companies, we talk a lot about billion dollar opportunities. To be honest, there ain't too many billion dollar companies out there, not that many hundreds of millions dollar companies either. This is one of the reasons that only about 1 out of 100 companies seeking venture capital ends up getting the "deal done". If I may use a little vulgar language, companies with "small" dreams are what some VCs call "crappy deals".

Having seen the financing from so-called top-tier firms and angel groups, it almost seems that the bigger pocket they have, small dreams are just futile attempts... at least in the eyes of beholder.

I'll say this now. Small dreams are NOT futile attempts. It's an issue more inherent within the venture capital community. I've just seen too many companies that solve big enough problems not addressing the billion dollar opportunities. Not only do I have a lot of respect for them, they just rock. The only problem is... they don't work well for venture economics. I'll dig into the whole venture economics in the future. Meanwhile, Fred Wilson has an awesome posting here.

Just as there are big dreams/small dreams in startups, there are big pocket/small pocket venture investors. If you look at the portfolio companies of Kleiner Perkins, Sequoia, Benchmarket and compare them with those of Band of Angels, not many overlaps there, if any. I'm not saying that angel groups invest in small dreams. I'm just saying that the financing strategies are just very, very different.

Early-stage VC firms typically put money to work in fast growing companies with a sufficiently large addressable market size, and expect additinoal financing to break cash flow positive. Angel groups are sort of different animals. There are angel groups with or without their own venture fund. Those without their own venture funds follow startegies to make the company become profitable without subsequent funding. This is very, very different financing strategy. Angel financing is not only WAY smaller than VC financing, but the dynamics of invested companies also need to be extremely capital efficient.

Case in point: If you are in the business of hearing from VC that you're not "big enough", consider different financing strategies. Talk to bankers, 3 F's (friends, family, and fools), revenue from customers/partners, sponsorship. You'll still make a lot of differences in this world and probably make some money for yourself as well.