VC Competition

Business Insider published a follow up to my post yesterday on acqui-hires.

It’s a little bit snarky, which is fine because it’s just the writer trying to find an angle to add his own thoughts. But there’s an interesting part at the end where Nicholas Carlson says “Also, remember, Arrington is a VC now, so he has a reason to spread mistrust about the competition.”

That seems like an obviously true statement – that I’m a VC so I may be inclined to spread FUD about other VCs to get a competitive edge.

But it’s not the case at all. And that’s why I like being a VC so much in today’s world.

I’ve raised venture capital a few times now for startups going back to 2000, and I’ve seen scores of other deals from when I was a corporate attorney before that and more recently blogging at TechCrunch. The industry has definitely changed over those 17 years.

A decade ago there were few organized angel investors. You grabbed what you could from the ones you met but pretty quickly you were hitting Sand Hill Road and asking for a Series A round. Everyone wanted a certain firm and asked them first. If they passed you moved on to the next ones, but those firms knew you had already seen their more famous competitors just by the fact that you were there – if the top guys had invested you wouldn’t be. Everyone had the same lawyers, too, and the gossip flew pretty freely through those lawyers. Lots of emotion and jealousy pervaded the industry.

If a company was hot they got multiple term sheets and they could maybe accept two firms. Usually though they just picked one. Competition was fierce. VCs routinely trashed each other and trashed companies that they couldn’t get a piece of. It didn’t seem all that fun.

That’s not the world I live in today. There’s still fierce competition at the Series A round level, although I see firms being much more willing to work together than they were a few years ago. When Google took money from both Kleiner Perkins and Sequoia, for example, it was a major news story. Today those types of deals are way more common.

At the angel/seed level though we haven’t seen any competition at all really. It’s not that there aren’t competitors out there, but we’re not trying to keep them out of deals and they aren’t trying to keep us out of deals. Exactly the opposite.

A typical seed deal is a million or so dollars. We like to invest a small fraction of that in deals. If we’re the first to look at a company and commit we then spend a great deal of time pitching other investors to join. We also don’t price rounds or negotiate terms, so we look for a firm or angel that does that.

Most of our deals though are brought in from other firms. Something they really like and want to get us involved. Our “competitors” tend to invest the same amounts as us so they aren’t taking whole deals, either.

This usually holds true for really hot deals as well. If there’s more money on the table than the company wants or needs, we always advise them to try to find a way to let people in. On more than a handful of occasions we’ve offered to invest less money than we want to in order to get other investors in.

This isn’t just us being awesome. It’s also in our best interest. More allies is almost always better than fewer for a company (the only exception being the very occasional investor who’s a huge pain in the ass to entrepreneurs and who is quickly steered out of the valley).

You’ll probably never see a deal where we’re the only investors. We rely on our competitors to bring us deal flow and they rely on us to do the same.

In fact there sometimes may be too much cooperation among investors. In 2010 I wrote about the Bin 38 thing. One thing we always have to be careful about when investing as a group with others is not to try to coordinate on pricing or other terms. That’s a big reason why we don’t negotiate terms and simply invest or not, a binary decision.

So, there’s no one I’m trying to cleverly trash with that post yesterday. It’s simply an interesting topic that isn’t being reported on much by the tech press.

9 thoughts on “VC Competition

  1. Jason Carr says:

    You don’t need to spread mistrust about them (and I don’t believe you were)…they create enough of that on their own.

  2. vc competition? sounds like tiltnyc.

  3. David Callahan says:

    … Mike, any comments on Ark’s 4.2M seed round?
    Thanks!

  4. Dave McClure says:

    one significant point in mike’s post that might otherwise be overlooked: the average check size for an investor (VC or Angel) matters a lot in how competitive that investor will be relative to peers.

    for investors putting in $100k or less in a seed round of $500k-$1M, there isn’t that much competition with peers… however for investors writing avg checks at $250-500K+, it may be a lot more difficult for 2-3 investors to do a deal together, at which point elbows get a lot sharper.

    this point is greatly unappreciated by most members of the press, and even by many investors who are less experienced. but it’s an extremely important one to understand.

  5. joshuabolin says:

    Mike-

    Given your unique prospective having structured deals as a lawyer, Writer, Exit, now investor… If you were to start a new venture today with all that you know- which funding route would you take? More specifically- a large check (if offered) or a series of smaller angel checks? Any pros and cons would be especially helpful.

    jb.

  6. “Also, remember, Arrington is a VC now, so he has a reason to spread mistrust about the competition.”
    >> That’s a pretty shallow analysis, I think Nick is reading too much into it. FWIW as an entrepreneur, the Acquihire post was informative.

  7. JK says:

    Basically you are not going to shit where you eat, esp if each of you bring meals to each other. Sounds about right human behavior.

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