Global Themes

On Globalization & Venture Capital

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 othersoffer 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.

June 10th, 2007 Posted by | Venture Capital | 4 comments

4 Comments »

  1. Hi Shanatu,

    My company is currently going through the TechStars program and we are very happy with how it has gone so far.

    As to your question about Ycomb and TS beating the returns of the best VC’s over time…I think it is to early to try and answer this question. TechStars and Ycomb are still in their infancy and within 2-3 years we should know more.

    Comment by Josh | June 10, 2007

  2. Josh: Thanks for the comment and for sharing your first-hand experience with TechStars.

    I think you may be right about returns. It is probably a bit too early for that…but this will be interesting to watch.

    Comment by Shantanu | June 10, 2007

  3. Another fallout of the increasing realization that VC model in its current form is not very industry (neither for entrepreneurs nor for LPs) friendly.

    Check out CRV QuickStart seedfunding program at this link.
    http://www.crv.com/AboutCRV/QuickStart.html

    Note that what they offer is by way of convertible notes (in the form of loan initially)…I think that begins with a distrust (meaning if the venture doesn’t take off, the debt sticks on the company, letting the VC bear no risk)

    You were wondering why the VC model is breaking up. The (ad)venture (read `risk’) element in VC is fading…that explains it.

    Comment by Krishna | June 11, 2007

  4. Krishna: Thanks for the link. Will have a look.

    Comment by Shantanu Bhagwat | June 14, 2007

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