Is seed capital the new black in VC?
… or have people finally stumbled upon a good way of making money in this niche?
Red Herring reported on “The New VC Way” a few weeks back mentioning how ”tiny investments in startups” may be the “the wave of the future” in venture capital.
Now I do not count myself as a veteran of the industry, nor an expert in any sense but given how hard it is to make money in venture capital, I cannot help wondering how exactly will the new wave of incubators get their returns.
But lets get back to the article.
It talks about Paul Graham’s Y Combinator although it is not strictly speaking an “Incubator”… (see the FAQ on the site) ..and mentions how Y Combinator and others “offer early-stage Internet entrepreneurs relatively small amounts of money, technical and business advice, and other assistance in exchange for small ownership stakes and little or no control over the startups’ operations.” (emphasis mine).
But is this really that much different from the incubator model that became very fashionable a few years ago – in a certain time? I dont know enough about these firms to conclusively say anything but there are quite a few similarities.
The firms themselves though prefer not to call themselves incubators (see Y Combintaor’s FAQ excerpt above); David Cohen of TechStars calls this “the professionalization of angel investing.”
However the article does mention that “TechStars and its brethren do not seek a particular financial windfall from their investments like traditional venture capitalists do” – which brings me back to the question – so how exactly do they make their returns?
I do not necessarily doubt that these operations are successful – but I am just curious as to whether they are able to beat the best upper quartile VC funds over an extended period.
Out here, I know Saul Klein is very enthused by the model and thinking of something similar…
I am going to email him to find out his latest thoughts and hopefully we will be able to share it with all of you soon.
