Back in the day Venture Capitalists were king makers. They decided who got funded, facilitated strategic partnerships, and brokered M&A transactions for their portfolio companies. The world has changed...a lot. Evelyn Rusli wrote an insightful story for the New York Times about how startup founders are more in control now. Angel Investors are willing to invest more at higher valuations, and Private Equity investors are willing to invest huge sums at later stages and allow founders to cash in some of their stock. VCs are left in the middle with much less power.
Now startup founders can "have their cake and eat it too". They can get the funding they need to start or expand their company, AND maintain ownership control, AND take some money off the table by cashing in some of their stock before an exit. This is a big change.
Traditional Venture Capital (VC) investors would invest $1M to $3M in a Series A and take 40% to 60% of the company. More importantly, they would take Board seats, and sometimes control the company. Sometimes the BOD would replace the founders with seasoned executives, and later take on additional rounds of financing that would dilute the founders ownership to minimal levels. The VCs had all the power. Not anymore. From Evelyn Rusli's the New York Times story;
“For the next-generation opportunities around the Internet and social networks, I believe the biggest opportunities will be driven by young founders who maintain their C.E.O. positions,” said Jim Breyer, an early investor in Facebook and a partner at Accel Partners.
Angel Investors, "Super Angels" and some forward thinking VCs like Founders Fund and Accel Partners changed all that. Angels are typically wealthy entrepreneurs that have started and sold several companies. They are founders themselves and identify with the startup founders. Ron Conway, Mike Maples, Aydin Senkut, Jeff Clavier, Paul Graham, Brad Feld, Dave McClure, Paige Craig, and lots of former employees of PayPal, Google, Facebook, etc. are very active Angel investors. Often they can invest enough to cover what would have been a traditional VC Series A round.
Later stage investors like Yuri Milner (DST), Founders Fund, and Andreessen Horowitz are willing to invest from $50M to hundreds of millions in private companies at very high valuations. In the past only an IPO could support such high valuations. Not anymore. Now later stage investors are investing at billion dollar valuations and allowing founders to cash out some of their stock. In the NYT story, Andrew Mason, founder of Groupon says;
“By taking money off the table, you’re expunging a big source of risk, allowing you to focus on the interests of the company you’re building instead of your own,” said Andrew Mason, the 30-year-old founder and chief executive of Groupon. He said he was able to sell some of his shares in D.S.T. Global’s initial Groupon investment, a $135 million round last April.
Still Not Easy - Plentiful capital, and low cost of startup resources like Open Source software, cheap hosting, and pay as you go services, has made it fast and cheap to start a company. That doesn't mean it is easy. Far from it. It may be easier to start a company, but it is much harder to be discovered and gain traction with users and customers. There is a lot of competition for user attention.
There is another disruption happening in Press, PR, and startup promotion. The traditional PR agencies are of diminishing importance. The press editors don't have the king maker power they once had. The old line startup conferences can't charge the high prices they once did. Social media, blogs, Twitter, and Facebook are changing the way startups market to their customers. Techcrunch Disrupt, Ycombinator, Launch Conference, and TechStars provide a grand stage for startups to strut their stuff for little or no cost. That is disruptive.
All these changes have put more power in the hands of the startup founder. That is a good thing.
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