VC in New Mexico: Yesterday, Today & Tomorrow (part II)
(2nd in a five part series)II. What is a Venture Capitalist and Why do I care?
Before I go on, I should take a minute to talk about definitions. Specifically, what is venture capital? Venture Capital (or VC) is only one mechanism in the overall set of fundraising options that are available to entrepreneurs – and hardly the biggest one at that. It is the best known, to be sure (other than commercial banking, of course), but it is one piece of the overall funding spectrum needed for companies to start, grow and be prosperous. There is an important distinction to understand in the difference between “angels” and “venture capitalists.” Both invest in private equity and both are important. Angels are high net-worth individuals, investing their own money. Venture capitalists are professional investors investing other people’s money. Why is this distinction important? It is important because it helps to explain why VCs say “no” so much, but it also highlights the fact that in most cases, angels invest in a far greater range of projects, for typically fewer dollars, and for reasons that may or may not be 100% economically driven. By contrast, VCs are easy to understand: it is all about the money! We invest for financial return. In the earliest days of venture capital, VCs often invested at the seed stage, when the product might not be finished, the business strategy might not be fully fleshed out, and the management team would have several holes. As the industry grew more mature and as funds have gotten larger, however, VCs have moved away from the early stages, in favor of more mature deals, and have left seed stage investing primarily to the purview of angels. In the post-bubble VC industry, some firms such as my firm, Verge, and others, are willing to reach down and invest fewer dollars at the earliest stages of a company’s development. Nonetheless, most seed-stage investing today is today done by angels. In 2003, for example angels in the United States invested roughly the same amount as venture capitalists did ($18.1 Billion vs. $18.8 billion), But while the VCs invested that amount in just under 3,000 companies, angels invested in over 42,000 companies. Let me say that again. Angels invested just as many dollars, but they did it in more than 10 times as many deals.
To be continued...
