Analysis, Capital

The Adapted Capital Firm: Venture Capital, Metamorphosed

There is a rather new type of venture capital form that is slowly gaining ground. It’s a fusion of angel and venture capital that combines the best of the two creating an excellent middle ground for raising capital.

SiteAdvisor and Hunch co-founder, angel investor, and startup icon Chris Dixon announced the launch of seed-stage venture capital firm Founder Collective today, forming an entrepreneur-backed firm making investments worldwide. Headquartered in New York and Cambridge (MA), it is staffed with a number of serial entrepreneurs. In addition to Chris Dixon, it includes angel investors Eric Paley, David Frankel, Bill Trenchard, Mark Gerson, Micah Rosenbloom, and Zach Klein.

The notable part of Founder Collective is that all of the partners have been founders or co-founders of a startup, and most of them have done angel investments in the past. The pool of the investments that they have done is available on their Companies page, which represents the depth of the angel investments they have collectively done to date.

In Chris Dixon’s blog article, he talks about the new adapted private capital firms.

We think of ourselves as part of a new wave venture firms led by Y Combinator, First Round, Maples, Ron Conway/Baseline, and Betaworks, among others, that have adapted to a world where venture capital is abundant but authentic seed capital and, more importantly, mentorship from experienced entrepreneurs, is scarce.

The Mark Bao Journal drew some insights from Marc Andreessen’s new firm Andreessen Horowitz, a new kind of venture capital firm based on knowledgeable, serious, and supportive investments. Although it only focuses on seed-stage investments while Andreessen Horowitz does seed and more, Founder Collective is in the same vein of this new kind of metamorphosed private capital firm, a modern capital firm.

Adapted capital firms have a number of advantages over older capital firms.

  • backed by entrepreneurs, they leverage the same knowledge as older (and prestigious) Sand Hill Road-esque firms like Sequoia Capital, and offer support from the knowledge they have gathered over the years—as entrepreneurs.
  • the firms are usually backed by at least a portion of partner money, which allows the partners to have the same crucial “investing with my own money” approach that angel investors have, while increasing the volume of money that they can invest with, using outside capital.
  • there is greater incentive for success. Not only do partners take their time more with their money (since a portion of it is theirs), there is a higher chance that they will work closely with the company to make it succeed. This comes from the angel side of the metamorphosical Angel-VC fusion.
  • as a result, there is a greater emphasis put into the relationship with the partners of the firm, rather than just having a good place to get money from. There is greater value to applying to a adapted capital firm, since it doesn’t only come with money: it comes with dedication of partners and connections, not completely unlike the Y Combinator or TechStars programs (but definitely not completely similar.) This is what Dixon mentions is part of “authentic seed capital.”
  • seed stage, while done at a more unstable stage of a company, is lucrative in the case of a successful exit. In many instances, a successful company had a lower valuation during seed-stage funding, which generally means a larger multiple of return for a seed-stage funding business (for a successful business.)
  • the partners know what your product does and what’s going on. In many venture capital firms, the senior MPs are quite knowledgeable about the area that they invest in, such as technology. However, the rest of the staff decrease in knowledge about the sector. Zynga CEO Mark Pincus spoke at Startup School 2009 about a junior VC with no knowledge in technology taking over his board at one of his past companies.
  • smaller core staff means more attention by the people that matter.

Founder Collective poses itself as a more accessible firm than Andreessen Horowitz. Founder Collective at least has a website, and one can connect to the partners at the firm; on the other hand, Andreessen Horowitz does not have a website and the only way to truly get to Andreessen or Horowitz is to know somebody to connect them. Although Founder Collective is a larger (in staff, not fund balance) firm than Andreessen Horowitz, they will most likely practice the same thing.

Though there’s one small thing that I’d like to note that is interesting, from Dixon’s blog post:

We try to be respectful. We’ve all sat in countless meetings where VCs show up late, email while you are presenting, and generally act arrogant and dismissive. We try really hard not to be like that.

Part of the venture capital culture is intimidation and a bit of disrespect, to show who really holds the power in the transaction. (Not all venture capitalists do this, but it seems like something that generally is associated with venture capital.) And indeed: part of the disdain associated with venture capital is with the venture capitalists that have this attitude. Take a look at TheFunded.

The new adapted capital firm is a new movement in funding for businesses. Time will tell how well these turn out—but when you put together established, proven startup entrepreneurs, with rigorously tested new startups, it’s surely going to produce industry-changing effects.