Finding the right trade-off between bootstrapping and raising money early is not easy, in particular if these are the only two available choices. One of the great thing about good entrepreneurs and VCs is that they find ways to create new options when they don’t like the options presented to them. In that spirit I wrote Beyond Bootstrapping for AlwaysOn. The piece came from a conversation Tony Perkins and I had about GoingOn, Tony’s new venture–a social infrastructure play that came out of his experience with AlwaysOn.
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Simeon, this was a fantastic article. Great insight into the funding process between early stage seed and first round of institutional (venture). It’s a novel idea but I wonder how many venture capitalists would partake in this form of relationship and be monogamous.
Well, Darren, I guess that’s my competitive advantage. 🙂
This is really an awesome idea. I just have one question. If I happen to be a humble entrepreneur with some big ideas, how do I get started?
Steve, the best way to get started is to meet + talk to people who’ve done it before. If you are based in one of the tech centers, that should be easy to do through your network of friends/co-workers. If you are someplace else, it’s a little harder but still doable. Also, you should start conversations with some of the bloggers with experience in the space you’re trying to target.
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Great post and blog. I’m trying to network with venture capitalists interested in taking venture capital-like investments in the management companies of hedge funds. I don’t think there are many VCs out there open to this though…Do you have any experience in this area?
– Richard
Hedge Fund Consultant
http://richard-wilson.blogspot.com
Richard, over the last 18mos I have seen a marked increase in the number of hedge funds looking to raise capital from VCs. There are three issues that make this a poor fit:
1. While the risk/return profile of hedge funds on average may be better than that of high-tech startups, the risk/return profile of an individual hedge fund early on is often worse. It’s the classic “it works great until it doesn’t.” LTCM is the perfect example here.
2. The second issue is what increases the long-term value-generation prospects of the fund. Too much is in the heads of too few people. If they leave, the hedge fund entity can loose significant value almost immediately. That’s in marked contrast with a great tech company where the value lies in the intellectual property, relationships with customers, brand, etc.
3. Last but not least, the exit market for hedge funds is nascent. This complicates the evaluation of the investment.
Hope this helps,
Sim
True, I agree the funds are always doing great until the day they are not.
It is also true that the hedge funds who need venture capital are also the ones with relatively small teams and only 2-3 products at most, there’s a high concentration of risk there without a lot of real assets besides investor money which can be pulled.
I think point number three could be worked past due to the enormous returns produced once a hedge fund did “make it.” An early stage investor could potentially make more off an investment while keeping his full equity share in the firm simply from the fees being brought it then they sometimes would within a traditional buy-out or IPO exit strategy. Also, once a hedge fund has climbed from $20M to over $500M the hedge fund managers involved would have the cash to buy out the VC fund at a high premium.
I think most funds are looking to VCs because they are stuck at the $2M-$25M stage and are scared of slowly melting away into nothing if they stay that small for too long.
Thanks for your thoughts.
– Richard
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