
VC Syndicates: How Many VCs Is Too Many? - bjonathan
http://www.avc.com/a_vc/2010/10/vc-syndicates-how-many-vcs-is-too-many.html
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lkrubner
Fred Wilson writes:

"The pile on seems to be gaining attraction for both entrpreneurs and VCs. But
I don't think it's the best way to finance your company and hope that our firm
can avoid them."

I get that the VCs themselves might like to have more control over what they
are investing in. The entrepreneurs, however, usually feel that they know best
what their startups need. From the point of view of the entrepreneur, one way
of retaining control of one's company is to be sure each VC has only a small
slice of the company. Most of us who have been following the startup scene for
awhile remember what happened to Phillip Greenspun, and the clever way the VCs
were able to take his company away from him. Most of us who are thinking about
starting our own startups want to avoid that fate.

And I think there is a much larger context that should be considered. The USA
went into recession in December of 2007, and in September of 2008, it suffered
a financial crisis that caused markets all over the world to seize up, leading
to the worst post-war recession in the USA, and triggering crisises in many
other countries.

The point is this: yields have collapsed.

Last week, 30 year USA Treasuries traded for 3.676%. Think about it. If you
would like to give the government a million dollars, the government will
happily give you $36,760 a year for the next 30 years. (Several key rates hit
all time lows last week.) If you would like to get so rich that you can live
comfortably on your asset income forever, you will need… uh, wow. Being a
millionaire is not what it used to be.

The amazing thing here is not the low rate, but that this is for 30 years –
anyone who buys at this rate is essentially investing in the idea that
inflation will not return to the USA for several decades. Honestly, my mind
staggers at the implications.

In this context, it is not surprising that we might get a glut of VCs, a glut
of equity funding, and VCs having to settle for small slices. Startups are one
of the only things in the world that can still promise the possibility of
exciting returns. If I was rich, I’d be out chasing yield too. And I'd be
willing to settle for just a slice of a startup. I'd be putting my money into
VC funds, hoping to find a way to get better than a 4% return.

I do get the argument that the best VCs offer a kind of guidance that goes way
beyond the value of the money they invest. But my point is, a glut of money
chasing yield must lead to a glut of VCs, and that means most VCs will not be
at the level of Paul Graham or Fred Wilson. Most VCs will be somewhat
mediocre. The more money that sloshes into the VC market, the more new,
inexperienced VCs there will be. Their money will, in fact, be the main thing
they have to offer.

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davidu
There's a big difference between syndicating with VCs and syndicating with
Angels.

With VCs, everything Fred writes holds true -- they will crowd out future
rounds and create other unbalanced dynamics.

With Angels, however, they are used to being minority position holders and
will encourage the introduction of later stage VCs, should your company
require it.

That's one distinction that I think is worth pointing out.

The other is that my experience with my investors (Sequoia and Greylock and
Minor) is that each of them would have preferred to be the only investor in
the deal if they could have. I'm quite happy with the balance I ended up with,
but it could have been a very different outcome.

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marknutter
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