AGILEVC My idle thoughts on tech startups

October 11, 2010

A question I’m frequently asked, and frequently struggle with in the rapidly-evolving seed stage investing world, is “What’s the difference between a super angel, a micro VC, and an VC?”  Actually, there’s probably a joke in there somewhere but I haven’t thought of any really good punch lines.

But I think the current confusion around terminology is mostly unhelpful to all… entrepreneurs, co-investors, institutional limited partners.  It would be useful to standardize our language a little bit, so let me attempt to put a stake in the ground here.  

Firms That Are Paid to Manage Institutional Capital - Every organization in this bucket invests money on behalf of institutional LP investors (endowments, pension funds, etc) on a full-time basis.  

1) “VCs” or “Traditional VCs” – I think everybody understands this one.  This group obviously includes older established firms like Greylock, Sequoia, Kleiner, Benchmark, et al.  But it also includes newer groups like Foundry Group, Union Square Ventures, or Spark Capital.  Many of these groups do some investing at a seed stage alongside angels or micro VCs, but that isn’t really the important distinction.  Traditional VCs are life-cycle investors, e.g. they typically invest in all or nearly all the rounds of pre-IPO funding a startup might raise and the partners typically sit on those startup boards from initial investment to exit. If a group manages a fund with $40-50M per investing partner, they’re a traditional VC.

2) “Micro VCs” or “Seed Stage VC” - I’m not sure who first coined the “micro VC” term… the first time I recall seeing it was on Mike Maples’s original website prior to rebranding as Floodgate.  Actually I’ve seen Floodgate use the “super angel” terminology occasionally too, but I think their self-described approach encapsulates micro VC well. Many micro VCs have strategies which include follow-on investment in later rounds, but virtually all invest at the seed stage initially.  As a result micro VCs are also sometimes described as “seed stage VCs” or something similar, but since many traditional VCs do some seed investing I think “seed fund” or “seed VC” can be confusing when referring to this strategy distinctly.  

Most of these funds are managing <$25M per partner (some far less), but all are staffed by full time investment professionals.  Besides Floodgate this group includes firms like Felicis, OATV, Harrison Metal, Founder Collective, and IA Ventures.  I usually put First Round in this bucket too because on a capital per investor ratio and with a seed focus I think this is a clear fit, though some put them in the VC bucket because they’re current fund is >$100M.  

As an aside, I believe the “micro VC” term started out as a rough analogy to “micro cap” mutual funds in the public equity investing world, relative to traditional VCs as large cap investors.  But the analogy quickly broke down since micro VCs and traditional VCs are often (but not always) investing in the same companies, simply at different stages.  In the public markets a micro cap mutual fund invests in very different businesses than large cap funds.  So I vote in favor of abolishing “micro cap VC” until a meaningful number of investors emerge pursuing such a strategy (i.e. investing solely in companies that intend to remain small / capital efficient forever).

People or Small Groups of Individuals Who Primarily Invest Their Own Capital - Everybody in this bucket is investing their own capital (more or less) and frequently on a part-time basis in addition to other endeavors.

3)  “Angels” and “Super Angels” – I think the distinctions between angels and super angels are pretty modest.  At the end of the day, if you’re investing your own capital solely you’re an angel.  The “super angel” term applies to those angels where one or more of the following conditions apply:  being very prolific (to me that’s a portfolio of >20 companies), investing significant amounts ($100K+ per company), and willing to lead & price rounds.  Before they became VCs guys like Reid Hoffman and Marc Andreessen were often the most cited examples of super angels.  

4) “Angel Funds” or “Super Angel Funds” - There are a number of angels who either invest as a formal team and/or have created fund vehicles to enable other individuals to invest alongside them. Youniversity Ventures is an example of the former.  The best example of the latter is Ron Conway with SV Angel though there are a few others too, and like a VC the managers of these funds basically have sole discretion on what companies to invest the capital in.  

A “micro VC” and an “angel fund” may look very similar in terms of investment strategy.  But to me the key distinctions are:  is the majority of the capital being invested on behalf of institutional investors or the principals and is the fund the full-time employment of the investors in question. Both these questions have the potential to impact the investor’s approach in subtle ways.

5) “Angel Groups” - These are membership driven organizations, formed for the purpose of combining the efforts of a number of angel investors.  Organizing in this fashion benefits individual angel members by enabling them to combine their investment dollars (basically a form of collective bargaining), share deal flow, collaborate on due diligence, and generally cooperate on angel investing activity.  

The angel members typically pay some form of dues, a portion of which may go to pay the cost of full-time staff involved in running the organization.  Structure and decision-making varies from group to group, but at the end of the day investment decisions are directly or indirectly being driven by member angels.  Some have sidecar funds which invest alongside the individual members.  The oldest one I’m aware of is Band of Angels in Silicon Valley, but in general these angel groups are more common on the east coast including Common Angels and Hub Angels in Boston and New York Angels. 

Incubators & Accelerators - There’s all sorts of different models here, many of which include investing capital into startups as part of what they do.  This bucket includes programs like Y-Combinator and Techstars.  But their primary purpose is to create, advise, and/or foster relatively new startups rather than to be a source of investment capital.  

I’m making no particular value judgments here – these are all interesting investment strategies.  This is an incredibly fluid space where new groups are seeking to innovate and some groups that started in one bucket end up in another.  Some individual people may be investing in more than one of these contexts.  And I realize that a very small handful are genuinely hard to classify (betaworks comes to mind), or may choose to market themselves with a different label than others might apply.  But lets start calling a spade a spade just for the sake of clarity.