UnVenture Capital: An Alternative Approach to Startup Investing

I was recently quoted in a story on startup fundraising where I was identified as a "Venture Capitalist". This is not the first time I've been incorrectly labeled a VC. I can see how the confusion could arise - my operating entity for direct early-stage investing is named "Aprilis Ventures" and our website homepage identifies us as the "venture capital company of angel investor Jesse Rasch". Since I'd hardly want my untraditional approach to seed and early-stage private equity to sully the reputation of ordinary venture capitalists, I thought it prudent to better describe the nature of my startup investing.

The following 10 points provide an overview of my approach to angel investing. In future posts, I will elaborate on my criteria for making investments and fundraising tips for entrepreneurs. Of note, there is a fair amount of commonality here within to my approach to funding non-profit projects through my charitable foundation.

FLEXIBLE INVESTMENT PARAMETERS

I only invest on my own account. I have no limited partners to answer too, no fees on assets under management to maximize, and no minimum deal size constraints. The latter point is important, as most early-stage VCs faced with a promising company that does not require $2.5MM+ in funds are forced to choose between overcapitalizing the company to get the deal or passing on the opportunity all together.

Most companies I work with raise between $200K and $2MM in their first round. My average investment is in the $250K to $500K range. I have invested as little as $50K and as much as $1.5MM in single round. This broad range represents companies at the opposite end of the startup spectrum - from two university students working on an idea after classes to a team of serial entrepreneurs with early revenues and deep domain expertise.

A GUT FEELING

At this stage of investing, early in the company lifecycle, I rely more on my gut feeling than cumbersome due diligence. To a large degree, I believe success is inversely proportional to the amount of due diligence performed on an investment. The more deeply we analyze a company the more reasons we can find to say no.

FIRST ROUND FOCUS

The majority of my self-directed venture investing is in seed and early-stage ventures. It is at this stage of company formation where I derive the most satisfaction from working with entrepreneurs. I will occasionally invest in later-stage companies when we have either deep domain expertise or the entrepreneur is well known to us.

SIGNIFICANT BOOTSTRAPPING EXPERTISE

Having bootstrapped a number of businesses from the idea stage to a cumulative equity value of nearly half a billion dollars, we have proven company building expertise. We are not armchair investors. We live and breath an entrepreneurial existence and share common ground with our fellow entrepreneurs.

AN ENTREPRENEURIAL PERSPECTIVE

With a long history of entrepreneurship, I take a very hands-on approach to venture capital. Capital is widely available; if all an entrepreneur seeks is funding, he should go talk to a VC. In most cases, the investment of our time, knowledge, experience, and operating assistance appreciably outweighs the value of our capital contribution to a business.

COLLABORATIVE FUNDRAISING

Historically I operated as a lone angel, often providing the sole source of funding for seed and early-stage startups I worked with. As I return to more active investing in the startup space, I am increasingly collaborating with other entrepreneurial investors to expand our investment universe and bring additional expertise to ventures I fund.

WE ARE NOT VC TASKMASTERS

We consider our role to be consultative and collaborative. We are an entrepreneur's partner, not employer. Many entrepreneurs receive a rude awakening to the power imbalance present in the relationship with their VC. An entrepreneur who does not choose their investor wisely may find themselves sharing their bed with a VC dominatrix. The venture capitalist as a destructive force is not without precedent.

For the record, I have no personal disdain for venture capitalists. On the contrary, I am an investor in numerous venture capital funds and I count a number of venture capitalists as personal friends. However, any good venture capitalist will tell you that not all venture capitalists are good. Most merely perform a perfunctory role as lenders of unsophisticated risk capital to the startup ecosystem.

There are of course excellent venture capitalists. Nevertheless, in analyzing the performance of VC funds, there is a significant skew towards top-decile firms. It is immediately evident that the majority of VCs will deliver very poor risk-adjusted returns to their investors. This information is useful to an entrepreneur weighing the value a prospective VC brings to the table - statistically, there is likely to be no value.

A PARTNER YOU CAN COUNT ON

Many entrepreneurs are forced to early or untimely financing or liquidity events by investors who exert undue influence on the entrepreneur's company. While it is important for an angel investor to see a path to an exit, it is critical that an entrepreneur align himself with an investor who will be an enduring partner in both good and bad times. We stand by our companies through thick and thin.

SELFISH PERSONAL INTEREST

As a general investor in numerous asset classes, my direct investments in venture capital represent a small percentage of my overall investing activities when measured on a capital basis. However, when measured against time, life's most precious commodity, it is immediately evident that I spend a disproportionately large amount of time wearing my angel investor hat.

This is important to emphasize. A skillful entrepreneur or investor will never run out money, but one day, they will run out of time. How you spend your time is of the utmost importance, as it is a constantly depleting asset. The fact that I often spend more time than is economically rational working with startup entrepreneurs is a reflection of my genuine interest in promoting a culture of entrepreneurship. In this regard I could be considered selfish, as I often derive more satisfaction from my working relationship with an entrepreneur than I derive economic benefit.

THE BEST OF BOTH WORLDS

Put most succinctly, my early stage investing activity is a hybrid of angel investing and venture capital. Maybe that makes me a Venture Angel, or an Angel Capitalist. In the final analysis, the label is not important. There are easier ways to engineer financial returns in the capital markets - for me, angel investing is equal parts passion and business. We see ourselves as a true partner to entrepreneurs. We actively help to build an entrepreneur's business by leveraging our knowledge, experience, and network to create a successful company.

Comments

[Riggs]

Jesse - nice post, and glad to hear all is well. The former Kickstarts guys all say hello.

There's a lot broken about the VC model, but you're right about there being some VCs truly interested in fostering an entrepreneurial community - Rick Segal from JL Albright comes to mind in the Toronto area, and I encourage you to check out his blog if you haven't yet: (http://ricksegal.typepad.com/). Hope all is well and I'll talk to you soon.

Marc

[Tom]

Well, it seems Marc and I share the same taste in blogs among other things. I agree, great post. I've also enjoyed your others thus far. I would just like to point out that there are great entrepreneuers in Canada that are dying to work with someone like you. I'm one of them.

A little company currently flying under the radar. check out our blog.

http://takebackcontrol.typepad.com

[dave williams]

i'd say this makes you an unventure capitalist, but it looks like you've already thought of that, since http://www.unventurecapital.com points to this post! clever.

[David]

Great post Jesse. That goes for this one and the previous ones regarding your transactions.

It's nice to see more momentum for 'super angels' and seed funds these days. I was at a workshop to develop a new one in Vancouver yesterday.

The need is clear - to provide smart money in order to bridge the funding gap between concept and market validation.

One of the important definitions of an 'unventurecapitalist' would be their typical deal terms. I have seen short 2 page common share term sheets that take 1/4 the time and legal cost to complete. We know how important time and money is the the seed stage entrepreneur - a good example is found here: http://www.angelblog.net/The_One_Page_Term_Sheet.html

There are a lot of references to the trends in VC deal terms. One of the better ones is at http://www.cooley.com/files/tbl_s5SiteRepository/FileUpload21/869/PCF%202006%20Q2%20final.pdf. VC deal terms are generally onerous and often misunderstood even by serial entrepreneurs. In the event the company is sold for anything less than a home run the entrepreneurs can come away feeling cheated, which leads to the disdain for some VCs that you reference in your post. This will eventually come back to haunt the VCs and eventually everyone in the cycle looses.

There is also a growing group of investors that understand this and are developing better practices. I believe more energy needs to go into this initiative.

I'd be interested in your thoughts on typical 'unVC' deal terms for this stage of investment.

[JR]

Marc:

Good to hear from you - I trust the former kickstarts guys are doing well. In a Canadian context there are VCs with a genuine interest in creating a community of entrepreneurship, but they are regrettably few and far in between. Mostly lip service IMO. I'll take a look at the JLA blog - they recently funded one of my hedge fund managers turned startup entrepreneur (an interesting career change).

Tom:

Thanks for your favorable feedback. I think you're right about pent-up demand - I've only had an opportunity to author a few posts for this blog but I've seen a sharp increase in the number of questions and plans sent "over the transom" with each new post. Good luck w/ your venture - I'll take a look at what you're up to.

Dave:

Good catch ;-)

David:

I too am seeing the momentum you reference, having recently been contacted by a handful of successful Canadian entrepreneurs with an interest in spreading the "gospel", collaborating, and building community. I'm looking forward to helping advance this agenda. It's my philosophy as well to keep things as simple as possible. At the same time, I think it is incumbent on entrepreneurs to educate themselves so they can be well rounded in all aspects of running a business, including legal issues and contract negotiation. You are right that onerous VC preferences squeeze many an entrepreneur. I've noted to write a post on 'unVC' deal terms in the near future, good suggestion.

[Jacob Bohall]

Very interesting approach. As an entrepreneur currently in the process of securing additional angel investment, and having that lingering thought of having to go after VC's in about 3-4 months, its comforting to know there are those that are committed to the entrepreneurial spirit. You wouldn't happen to know of any type of site that rates VC's would you? Not have any personal connections, (or recommendations), it would be helpful to have a reliable recommendation source. Again.. great posts, I just found the site, and will def. be returning.

[Jai Udun]

An informative and enlightening read. I'm wondering if you could talk more specifically about how many companies you invest in and how much time you allocate to your angel investing vs your other pursuits. Thanks for sharing.

[Samuel Cohen]

Canada really needs more uber angel investors with this type of approach. A friend referred me to this post, I had not heard of you before but I remember your company webhosting.com (I thought it was american!). I've subscribed to your feed and look forward to reading more. Keep it up.

[David Corcoran]

Hi I was curious to know what you expect from someone interested in speaking to you about angel investment? More specifically, are you looking for a full detailed business plan, or will you accept notes on a coaster! No really, I have no idea, first time considering investment backing. Also, as an entrepreneur, is an NDA all that is needed, to protect our ideas?
Thanks,
David

[Todd Lampert]

I'm reading this here in London (England, not Ontario) and wishing I could find local angels with your breadth of knowledge and approach - it's a different and far poorer game over here - finding capital is no issue, but there are not as many who have successfully played the game as there are in the US (and Canada ;-) who are helping the next generation of entrepreneurs.

[Mitchell Harper]

Excellent points Jesse. We (Interspire.com) are in a very similar situation to you back in 2000. We sell branded content management and email marketing software and offer private label solutions for resellers and ISP's. I'll be reading all of your posts over the coming few days when I get some time. Thanks for sharing your insights and experience via your blog.

[Michael Gaudet]

Very enjoyable and accessible post, Jesse. Thanks for your candor. De-mystifying the 'Angel Investor' phenomenon is a truly laudible act. With seven AIs on board at the moment, I would be most interested in chatting re: Skyaak Enterprises.

Maybe we could talk BEFORE I hit Dragon's Den?

Check www.skyaak.blogspot.com and www.myspace.com/skyaak and www.skyaak.com

CU. Michael Gaudet
President, Skyaak Enterprises

[Cliff]

Great post. Sounds like a great alternative approach to early stage investing. Perhaps we can work together someday. - Cliff

[Bahman Motamed]

Loved your site, Loved your Blog. I thought I was the only one who has ruined his credit line over my passion of developing great software that everyone (most people :)) can benefit from. When you have a moment take a look at our web-based surveillance solution www.GBSdvr.com

BM.