The Real VC's Of Silicon Valley

Commentary
The Real VCs Of Silicon Valley
Sramana Mitra 04.04.08, 6:00 AM ET

Muhammad Yunus and his Grameen Bank won a Nobel Peace Prize for their development of microlending.
For Silicon Valley's entrepreneurial culture to thrive, we need to create a sort of microequity program for start-ups.
Originally, of course, this is what venture capitalism was about. In recent years, venture capitalists have amassed huge war chests, raising funds that in some cases approach $1 billion. Even so, the number of people in most venture partnerships has stayed relatively modest. You don't have to do much math to realize that such firms are forced to make bigger and bigger investments to generate adequate returns for their limited partners. (If you are wondering why this is the case, read " The VC-Entrepreneur Compensation Disbalance")
That's a problem for first-time entrepreneurs. Of course, the bar has always been high for those trying to start out. Alex Osadzinski, a general partner at Trinity Ventures, notes that most VCs are reluctant to fund a first-time CEO who hasn't had a key position in a previous start-up. "If this is your first CEO job, and the first time in a start-up, you're putting a steep learning curve in your way," warns Osadzinski. His advice: become the technical founder in someone else's company or vice president of marketing.
Very well. But that's a bucket of cold water for any entrepreneur with a burning passion. Besides, history is full of counterexamples--look at Steve Jobs or Bill Gates. Larry Page and Sergey Brin were PhD students at Stanford University--their lack of experience didn't stop Google from taking root. Similarly, Mark Zuckerberg came completely from left field to create the Facebook phenomenom.
The truth is, start-up-land is littered with mavericks, iconoclasts, drops-outs and misfits.
"It definitely makes it easier to raise money if you're a serial entrepreneur," concurs Venky Harinarayan, chief executive of Kosmix, a search engine start-up. "That said, the prevailing VC wisdom is that serial entrepreneurs can get you great returns, but the franchise companies are created by first-timers." Those would be Microsoft, Google, Apple, Facebook and dozens of others.
So how did these legendary entrepreneurs navigate their ways through the maze?
Lacking a better alternative, first-time entrepreneurs often turn to friends and family. Bill Gates funded Microsoft with family money.
It's a dangerous path, though. If the start-up hits tough times, relationships can be strained. Some say that taking money from friends is the surest way to lose them. Having traveled this path in my early entrepreneurial years, I would say that it is to be avoided at all costs.
But what is the alternative, especially if VCs are becoming scarce players in this part of the financing ecosystem?
So-called "angels." While VCs primarily invest other people's money, angels invest their own. An entrepreneur working on a fledgling idea needs investors who not only provide valuable business advice but also connect the dots to make business development partnerships happen, help recruit key team members and help move the venture from concept to a fundable company. Angels tend to have the operational background necessary to play such a role.
In Silicon Valley, "super-angels" like Ron Conway, Reid Hoffman, Ram Shriram and Jeff Clavier are providing seed capital. There are even formal efforts to institutionalize this kind of financing: The dinner club investment group called the Band of Angels is the most organized in Silicon Valley.
Some angels offer more value than others. Don Hutchison is one who is widely respected. "Generally I'll provide less money and more advisory support while likely attracting others to the deal as well," Hutchison says. In many ways, this is a much better value proposition for entrepreneurs, especially those taking their first swing in this game.
Some angels have even started to institutionalize their investments by raising small funds focused on seed-stage investments. Jeff Clavier's new fund is $12 million, focused solely on seed. Dave Whorton has a $50 million fund. Stewart Alsop, a former VC from NEA, has raised a $75 million fund to invest in early-stage deals.
However, cracks are developing in the angel ecosystem. Super-angels are adopting a spray-and-pray investment strategy, investing in lots of deals. Many individual entrepreneurs aren't getting enough of their time or mentorship.
In other parts of the world, seed investment remains a huge barrier to entrepreneurship. In India, entrepreneurs are severely hindered by the lack of "mentor capital." A few small funds have come together to address the gap, notably including Mahesh Murthy and Praveen Gandhi's Seed Fund. Entrepreneurs in India would like to work more closely with the many successful Indians in Silicon Valley who have the expertise to offer them mentoring, connections and capital, but the bridge, as of yet, is wobbly at best.
So, if you are an entrepreneur, especially a first-time entrepreneur, you need to look for the "real" VCs who are willing to take risks and invest their time in mentoring you, not those big names that the term venture capital normally conjures.
In capitalism, gaps generally get spotted and filled. This one--and the entrepreneurs in it--is still waiting.
Sramana Mitra is a technology entrepreneur and strategy consultant in Silicon Valley. She has founded three companies and writes a business blog, Sramana Mitra on Strategy . She has a master's degree in electrical engineering and computer science from the Massachusetts Institute of Technology.

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