A few days ago Dave McClure posted the above tweet.
This was the consummation of a heated debate on Twitter regarding a blog posting by Niki Scevak entitled Angel Index Funding Bullshit. Niki argues that Ron Conway and Dave McClure by investing in a large number of startups leads to them being more passively involved than if they focused on a smaller number of companies. He goes on to argue that "handsome returns" will not be forthcoming due to high fees, the increasing number of startups, that if you invest in the market then you get market level of returns (i.e. median returns), and that if involvement leads to higher returns you ultimately will not get them as you are spread too thin.
This is an interesting discussion as it ties in closely with an increasing amount of capital being deployed in the early stage VC space, be it by funds like ff Asset Management and even some larger traditional VC funds. Entrepreneurs that have oversubscribed rounds are then forced to allocate, and when the allocate they then should carefully examine what is the motivation for the investor to invest in their company, as well as what is the quality of the money? Many startups will not face this dilemma, but as the capital drought of early 2009 has been replaced by the glut of late 2010 more and more startups are having this "problem". This is despite the withdrawal of funds by angels themselves. In 2007 $26bn or so was invested by angels. In 2009 this fell to, perhaps $12bn. This has recovered in 2010, but not to the 2007 levels. VC's, on the other hand, because of the long-term nature of their funds still have plenty of capital to deploy.
All funds are managed for return (or should be!), and return is a function of the size of investment and time devoted to the investment for any actively managed VC portfolio. I personally think that if the fund is investing well less than 1% of the total fund's size in an investment then there is a risk of misalignment of interests between the investor and the entrepreneur. Remember, the investor is buying an option to participate if the company is successful, and walk away if not. That is generally fine, but it can pose a risk for the startup if it is a large traditional well known VC where people will care if they do not re-up. If the investor's fund will end up with well north of 50 investments in the fund at maturity, then there is the question of whether the startup will get sufficient attention from the fund's principal(s) for the money to be treated as "smart" money and not "dumb" money. Finally, if the fund is spread too thin, then the fund will not have the capital for follow on investments, and new relationships will need to be developed at the next round - not a real problem, but something to understand.
Bottom lime, if you have an oversubscribed round then understand the motivation of each investor and their fund: If there is alignment, great; if not, then think carefully if you expect your investor to invest not only money but also time.
If you are not oversubscribed then consider this article (which like most "news" overstates the situation):
One person we know who has a startup trying to raise money was floored at how easy it was to get a small slug of cash. It was basically a short phone call with a potential investor who said, "I've heard good things about you from people I trust. When you're ready for me to invest, just call me back."
