Separating Men from boys
(This was published to my letter.ly newsletter June 17th. To get more like this, sign up at letter.ly/dave. Thanks! It helps pay my rent. I'm not kidding — letter.ly already pays 30% of my rent!)
Hi all,
Since i'm out fundraising for Postling right now, I thought I'd briefly talk about something I've noticed – there are true early stage VCs, and then there are investment bankers who invest in companies who call themselves startups. What I mean by that is there are VCs who recognize a good team + good idea + good market and will, without hesitation, pull out the check book. And then there are VCs who want to see revenue / run-rate projections to "prove" value. Guess which ones end up doing better?
I'll give a little more detail. Right now my company is in an interesting position where we've had sustained strong user growth and we've started to get some revenue from the paid features we launched last month. And I've been talking to about a dozen VCs. Some of them (all East Coast based) say, "We like the idea, we like the team, we like the market" but hem and haw about investing because they want to see more "revenue traction".
Then you talk to other VCs (mostly West Coast but some East Coast) who immediately get it. Their reactions are "Love it" and "This makes total sense" and "You're going to be like X but a lot more profitable". And these people don't need to see what my free -> paid conversion rate is, because they know a great team in a great market will make magic happen.
This is a big reason why a small number of funds are very successful and everyone else has done terribly. You're either in it to win, or you're in it to collect your management fee. The truth comes out when it's time to make the tough decisions.
Dave
NB — As a side note, notice how the majority of returns are coming from small funds and not big ones. In fact, as Josh Kopelman says, "small funds are 24 times more likely to produce returns above 2X than large funds". There are a couple reasons why that is, but one of them is that it's the small funds that are focusing on early stage investing, and that's where the most tough calls are concentrated. In later stage investing, you've got all kinds of financial models available to help you make more comfortable decisions. The true winners are super-angels like Ron Conway, Dave McClure, Founders Collective, etc.