In the past week, I’ve been contacted about several very interesting investment opportunities. The problem is, the companies have approached me thinking that IA Ventures is a domain-expert “Super Angel” who would be interested in filling out a round. Sadly, this is simply not the case. There is huge messaging problem that is not unique to IA Ventures, but applies to the nascent end of the venture investing continuum.
IA Ventures is a $50 million venture fund focused on Big Data tools, technologies and applications. We establish our initial position at the seed stage, either as first-money in investors or perhaps following a small friends-and-family round. However, we are generally looking to establish initial positions in our companies of at least 10% (and sometimes much higher), with the understanding that if our partnership with the entrepreneur deepens and we both want to more fully align our interests, then IA Ventures will often look to buy up in the Series A round. We may well have single-company exposures pushing $5 million, and we are about to close a follow-on investment where our aggregate exposure to one of our portfolio companies will be nearly $4 million. In short, IA Ventures is a true “life cycle” fund that reserves heavily, is open to bridging when it makes sense, will on occasion lead internal rounds and engages in full-contact relationships with our portfolio companies. This puts us in a demonstrably different position than most larger venture firms, whose seemingly immutable “20%+ ownership rule” turns off many an entrepreneur, particularly at the seed stage. Our approach also leaves room for strategic angels and others whom the entrepreneur deems important, something which is of critical importance to us. We also incubate companies at IA Ventures, having worked on three such opportunities to date. Does this sound like we’re a “Super Angel” fund? Are we looking to “fill out” rounds? Would be comfortable being passive investors? No, no and no.
We, and perhaps others like us, have a branding problem. Terms such as “Super Angel,” “Micro VC” and “Seed stage fund” have become almost interchangeable, yet mean very different things to different people. This has caused massive confusion in the marketplace, and has done neither the entrepreneurs nor the investors justice. At this point there is no agreed-upon taxonomy in the world of venture investing. My friends Jeff Clavier, Dave McClure, Ron Conway, Chris Dixon, David Frankel and Eric Paley do great things, but to consider each of strategies as being one and the same and in the same galaxy as IA Ventures couldn’t be further from the truth. While I’m not sure of the appropriate terms, I see the early-stage investor landscape breaking into the following buckets:
- Firms which are focused on building broad, diversified seed stage portfolios. These firms, almost as a rule, do not follow on. Their bet is that a handful of investments in a 100-300 constituent portfolio will hit it big, VERY big, generating attractive overall portfolio returns. These investors often have broad networks of contacts and seek to add value through phone and email without taking an active role in the company, e.g., Board seats. Forget about bridges, internally-led rounds, etc. These firms are followers, not drivers. I’d put Dave M and Ron C in this bucket.
- Firms which build large but not extremely large portfolios, and reserve a limited amount for a select number of follow-on opportunities. Their profile is similar to the above, except portfolio count will generally number less than 100 and they may make slightly larger investments. They also avoid taking Board seats and are in no position to drive internal rounds or bridges. I’d put Jeff C in this category.
- Firms which have a hybrid strategy, one which combines a lesser amount of capital devoted to a large number of small-ticket seed stage investments, with a larger amount focused on chunkier lead and co-lead managed investments. There is an amount of capital reserved for follow-on, but is far smaller than a conventional venture firm. I see Founder Collective as fitting this description.
- Firms which run a traditional venture strategy albeit at smaller amounts of committed capital than the bigger brand names in the business. They make 20-25 investments, reserve heavily for follow-on rounds and expect a small number of their investments to generate the lion’s share of fund returns. This is IA Ventures; I am not aware of any fund raised over the past year that does it the way we do, particularly at our size and with our domain focus.
One can argue with the details of my classification, but I am confident that I am directionally correct. There are tremendous differences in what investors get through relationships with firms in each of these buckets; there is a “just right” firm for every company, and the converse is true as well. Truth is, these firms can all work together extremely well and often do, yet the differentiation in strategies is stark. There is neither rhyme nor reason for labelling them similarly. Hopefully I’ve provided a little of the texture of this burgeoning segment of the venture investment spectrum. And please, PLEASE think twice before lumping all firms together as one. “Super Angel,” “Micro VC” and “Seed stage funds” labels only exist to make reporters lives easier. In reality, the landscape is far more complicated than that.