It all started at 9 a.m. on July 30, when Dave McClure launched his blog post declaring that venture capitalists are dinosaurs. Since then, TechCrunch has posted four televised smack-downs between venture capitalists and angel investors, wondered aloud if Silicon Valley’s disruptors are themselves about to get disrupted, and will undoubtedly cover a live debate scheduled for this morning between Dave McClure and David Hornik.
This is an important discussion, between two of my favorite people in Silicon Valley, with folks here in Seattle lining up on either side. The differences in fees, fund size and management structure between these investors are important to the endowments and others who entrust their money with venture firms.
But the argument over economics hardly matters to an entrepreneur, who is going to evaluate each investor using different criteria. Negative returns are just another word for high valuations, which entrepreneurs like. Here, for example, are the factors Redfin considered when raising money:
- Valuation, terms: the less stock you have to sell, the better
- Prestige of investor: used by recruits and journalists, especially at an early stage, to decide if you’re worth checking out.
- Board member relationship: can you have a real conversation with the person leading the investment, about what’s really going on?
- Portfolio: can you learn much from peers running other companies in your investors’ portfolio?
- Follow-on funds: some investors will bail you out of a jam, some won’t, some are in a jam themselves
- Board member insight: It’s fashionable now for entrepreneurs to say they only want an investor’s money. But my experience has been different: Emily Melton persuaded Redfin to focus on search engine optimization, which has accounted for as much as 40% of our traffic. And Paul Goodrich was the first champion of our now-wildly successful partner business. An investor is invested in your business, but he doesn’t report to you. It’s good to have that perspective. And to my own surprise, I have started to question what was once an article of faith, that operational experience is a requirement; two of my favorite investors, Marc Singer and Fred Wilson, have none. If anything, entrepreneurs initially under-value the importance of the board member they’ll be working with over the next five years.
With that said, I still like watching the fur fly. I get out a bucket of popcorn each night before watching the re-runs of these debates. But I wish the two sides would talk more about what matters to entrepreneurs, and less about what matters to limited partners.