How angels have broken the traditional venture model

Venture Shift panel discusses the rise of the angel and the resulting venture pivot

At last night’s first ever Venture Shift in New York, the topic of angels vs. VCs was a recurring theme.  In the third panel of the night, moderated by BullPen’s Richard Melmon, several VCs took the stage to discuss the VC industry and whether it’s been forced to pivot (if we were playing the VatorSplash drinking game, you’d be taking a drink right now) by the rise of the angels.  James Robinson (RRE), Howard Morgan (First Round Capital), Gil Beyda (Genacast), Tony Florence (NEA), and Bobby Ocampo (Grotech), all weighed in on the issue.

Howard: “We saw that the venture model was broken as it affected Internet companies.  The classic venture model was not the only model.  Some of the older, more established firms have realized if they want to get established with some of these new rising

Tony: “We’ve done 30 exits this year and most of those have been seed deals.  I think we’re seeing acceleration in the level of innovation and entrepreneur activity, and we’ve reacted by increasing our seed investments.  We’ve capitalized our business to take seed businesses through the lifecycle.  That’s been our model, and that’s been the big change in the last decade—this disruption in the capital markets, and the length of time to get companies to liquidity.”

Gil: “We’re a seed stage fund. We were formed three years ago in partnership with Comcast.  We’re going through a disruptive period right now.  These companies are early and there’s a lot of diaper changing going on…there’s a lot of value to add here.  There’s a general recognition that you have to do things different at the early stage.”

Jim: “From my perspective, if there’s a downside to the form of capital formation we have right now, it’s that we have a barbell.  We’re quite a ways away from the angels who were more astute…the ones that have followed don’t have as much wherewithal.  What we don’t have as much today is that middle of that barbell.  That’s a problem for entrepreneurs trying to graduate from the seed capital to that next step.  It’s more acute in the northeast than the west coast.”

Bobby: “We do strictly A rounds.  Because we’re regionally focused, we don’t see the pressure of these incubators and angels.  Being a traditional firm, our strategy has really had to change.  We don’t have enough man power or time to go through all the deals and that can lead to bad decisions.  Being a regional firm, we’re not a progressive firm—we’re strict with what we do and still trying to figure out how to get into the Valley because it’s just a different game.”

Melmon: “I’m really interested in hearing how each of you respond to the pivot.  In the old days, pivoting wasn’t looked upon with as much affection as it is today.”

Howard: "I invest in two stages—too early and way too early.  What you’re really investing in at the seed stage is great people.  We want big markets, great product ideas, but we know that at this stage, it’s great people.  When we saw the stickybits traction not quite getting there, it took guts for the company to say ‘the company isn’t failing, but it’s not succeeding.’  Same thing with Jason at Fab [Fab.com, formerly Fabulis]—it started out as a social network, but he stopped and shut down the site and built a great daily deals site.  The giant pivots take a CEO who’s been doing it for a while, the first-time CEO doesn’t pivot as easily.”

Bobby: “It’s true: LivingSocial, where we did an A round, they started out doing pick-your-five and then they went to daily deals.  There was something in the DNA of the company and we believed in that.  We didn’t know they were going to be a multi-billion dollar company, but we knew they were going to do well.”

Gil: “We try to behave like Howard and First Round, we try to be really progressive.  I think in an early stage company, there are five or six assumptions—this business is going to be great because 1-2-3-4-5, and the money is about proving those notions true.  If it doesn’t happen, you get the data and figure out what you need to do.  I have a love-hate relationship with the pivot—it should be more like your days where the pivot is a serious thing.  Your team, the board, the investors all have to sign up for something different.  It should be taken very judiciously.  There’s a difference between a pivot based on data, and being wishy-washy.”

Tony: “You don’t really know what you have sometimes until you get in and see what works and what doesn’t.  A good investor has to get in and guide the entrepreneur—you have to be objective and point out what’s not working.  In Groupon, for example, there was a kernel of something that was working [i.e. The Point], and they switched the business and created a new market.”

Howard: “We once invested in a company called Odeo that was doing podcasting.  But then Apple got into podcasting, and we panicked and sold all of our share of Odeo.  And now Odeo is Twitter—so that’s an example of a pivot we should’ve embraced.”

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