The Power Law (Part Three): Angels and VC’s

In the world of venture capital, there are two species: great white shark VC’s and goldfish angel investors. They dwarf us in size and power as we wiggle about looking for an insect to eat.

So I was surprised to learn that in some of the hottest deals, angel investors actually have the advantage.

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In his superb new book The Power Law: Venture Capital and the Making of the New Future, Sebastian Mallaby recounts how the greatest tech companies found their first supporters. Time and again, the hottest companies rejected entreaties to meet from the top venture firms.

Instead, they went to angel investors to raise money quickly and easily with a minimum of oversight.

Mark Zuckerberg refused to meet with Accel early on. He even showed up at the offices of heavyweight Sequoia Capital in his pajamas!

Sequoia founder Don Valentine recognized the stunt for what it was: a provocation. Zuckerberg wanted the princes of Sand Hill Road to know he didn’t need them.

Instead, he turned to Peter Thiel and other angels for his first funding. Unlike the slow moving investment committees of venture firms, they could write a check on the spot.

But Zuckerberg was not the first great entrepreneur to shun VC’s. Google founders Larry Page and Sergey Brin had every firm in the Valley breathing down their necks.

Instead, they met angel Andy Bechtolsheim on their front porch.

After a brief pitch, Betcholsheim raced back to his Porsche and returned with a checkbook. He invested $100,000 when the company wasn’t even incorporated.

Along with angels, lesser known venture firms also back many of the greatest companies. As Mallaby notes:

“…the idea that venture capitalists get into deals on the strength of their brands can be exaggerated. A deal seen by a partner at Sequoia will also be seen by rivals at other firms: in a fragmented cottage industry, there is no lack of competition. Often, winning the deal depends on skill as much as brand: it’s about understanding the business model well enough to impress entrepreneurs; it’s about judging what valuation might be reasonable. One careful tally concluded that new or emerging venture partnerships capture around half the gains in the top deals, and there are myriad examples of famous VC’s having a chance to invest and then flubbing it.”

I was very surprised to learn that being at a top firm isn’t the advantage it may seem. No wonder Sequoia still cold messages founders!

In this competitive environment, I look for ways for us to cooperate.

VC’s can benefit if angels bring them great early stage deals. Angels benefit by being able to help their portfolio companies.

In the end, if we can work together to build the greatest companies of the future, everybody wins!

What are your experiences raising from angels and VC’s? Leave a comment at the bottom and let me know!

More on tech:

The Power Law (Part Two)

The Power Law (Part One)

Managing a Crisis the Sequoia Way

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Photo: Google founders Larry Page and Sergey Brin. “File:Google page brin.jpg” by Ehud Kenan is licensed under CC BY 2.0.


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