"Venture Capital is in Crisis" - Lessons From PreMoney

In the course of a day last week, one event brought more than 300 investors together with the world's leading VCs, angels and LPs. No, it wasn't a meetup where everyone swam in their collective piles of money (though we might like to see that), it was PreMoney500 Startup's first conference on the changing future of venture capital.

Why should VCs and startups alike take note? There’s been a social shift, as it becomes more common than ever for young, smart people to start their own company with the promise of it becoming big. While this is great for the rise of startups, the lower cost of entry means they can afford to take less investor capital. As Dave McClure has often said, the current VC model is outdated, and PreMoney was about solutions to modernize it. The speakers focused on providing fund managers and investors with insights to build scalable portfolios that are as innovative as the companies they back.

Here are Dashboard’s takeaways from PreMoney’s disruptive tactics to revive an industry that is overdue for a shake up.

Wisdom From Investment Giants

Break the cycle and listen to founders

Where's the biggest opportunity? Paul Graham of Y Combinator said to look to the series A stage. Series A has typically been where a vicious cycle occurred — VCs looked to grab a huge chunk of the company to compensate for the cost of the board seat, and promising companies were forced to take more money than they needed. Graham says the first VC to break away from this old-fashioned model will win, especially as angels gain many of the same privileges, thanks to things like Demo Days and AngelList.

What can VCs do differently?

  1. Close series A rounds for as equal equity as what founders want to sell
  2. Be quick with their investment decision-making

Be a true value-added investor

It used to be that VC firms could get by on just providing money alone. First Round Capital’s Josh Kopelman outlined four new ways that VCs should offer real help for startups: money, services, partner advice, and networking.

Some firms have already gotten creative by providing help with recruiting, business development, and PR/marketing, though that can be difficult to scale unless you have strong resources in place. First Round suggests fostering the connections between startups in your portfolio and assisting them in seeking each other out for mentoring. They’ve realized the unmatched value in organizing an entrepreneur community that shares knowledge and real-time advice from the trenches.

The Talks You May Have Missed

Sure, you read up this week on what Paul Graham, Marc Andreessen and the like had to say at PreMoney. What did you miss from the less-covered talks with just as much to offer investors?

How to Make a Million Dollars as an Angel Investor (hint: start with $2M)
Elad Gil, Serial Entrepreneur

Elad Gil, a “serial investor” with a stellar portfolio who’s backed companies like AirBnB, Square, Pinterest, opened with an honest look at “How to Lose Money as an Angel”.

Gil has found that following momentum is often a killer, and that the best investments are usually contrarian. He noted that the best way to make money is instead by seeking gaps. Look for a capital gap from $500K to $1M seeds in the series A round, Gil said. Screw saturated industries — be opportunistic and look for industry gaps, especially in areas like Bioinformatics and hardware. Also consider your own differentiation gap, or, the unique skillset you bring to the table. As we enter a time when entrepreneurship becomes more and more de-risked, investors who follow these maxims stand to win.

Looking Forward: How the JOBS Act Might Change Fundraising as We Know It
Kate Mitchell, Co-Founder & Partner, Scale Venture Partners and Barry Silbert, Founder & CEO, SecondMarket

Passed a year and a half ago, the JOBS Act shows just how much policy change around fundraising matters. In this talk, Kate Mitchell spoke of how the act’s passing, and its support by VCs and investors through social media and the Angel List petition, shows that the investment community’s small but mighty voice was heard.

Barry Silbert also spoke of the biggest JOBS Act win that no one’s talking about it — the removal of the ban on general solicitation. This 80 year-old rule that said whether you were a company or fund, you couldn’t tell anyone you didn’t have a direct relationship with that you were raising money. In lawyer speak, this means every Demo Day? A general solicitation. Lifting this ban means that fund managers can now talk about historical returns. Investors can have access to more deal flow to make decisions. Issuers can exercise creative ways to promote the fact that they’re raising money. Silbert says to think of it as the equivalent of the real estate MLS for investing, allowing curated and consolidated data for better fundraising.

The final big effect of the JOBS Act is crowdfunding. This aspect is currently stuck in the land of SEC approvals, expected to clear in 6-12 months, waiting mainly on rules for investor protection. However, once passed, it means that any company will be able to raise up to a million dollars from anyone — a monumental shift for the investing ecosystem.

Always be Adapting

The message that “The VC industry is broken” is alarmist, and not entirely accurate. Instead, it’s just changing. VCs who follow these new methods, listening to founders as their customers, and making investment decisions that help them as much as it helps their own portfolio, will succeed more than ever. It’s important to realize that as a community of investors and entrepreneurs we all stand to benefit from more openness and sharing of lessons like those learned at PreMoney.