There was a great article in the NY Times the other day about new trends in start-ups and venture funds, you can see the full article here. Miguel Helft, the reporter, takes us through the new-new wave of venture investing, which was best characterized by Mike Maples, who said he discovered that $500,000 is the the new $5 million. What does that mean? I'll tell you (besides the obvious fact I am a very trendy guy)...
It means that given the very low barriers to starting to develop a product (open source, cheap bandwidth, constantly dropping prices on hardware), companies can develop far more on much less. This the funds and investors who can deploy smaller amounts are actually better off. You see, large funds need to invest large amounts -- otherwise they cannot justify the funds they raise (which give them the management fees they like, typically 2% on investment commitments. If you have a $500 million fund...$10 million a year in management fees...). But small funds like Jerusalem Capital and Maples Investments (a $15 million fund) can get in with hundreds of thousands of dollars, roll up our sleeves and really work with the company. You will never find a small fund manager sitting on 9 boards (which often happens at large funds). While some journalists are calling us "Microfund managers," (see article in Mercury News here), we follow the exactly the same process as our larger friends -- we just move quicker, and are a lot more focused.
According to Bill Draper, one the more august names in the venture industry, ``Today, funds have gotten into the billions (of dollars) and the general partners are increasing the amount of money they manage in order to keep increasing their fees, and that's not a good thing for the valley or the VC industry or even the partners themselves because they tend to aim at the wrong target.''
Now, I am not saying that all large funds have the wrong incentive, or that no partners at large funds can provide value to their portfolio companies. What I am saying is that for those of us who love the "zero-60" stage of a companies life cycle, smaller funds are the way to go.
Just today I gave the founder of a wonderful start-up, Game Array (www.gamearray.com) my "do you want me as a partner" speech. Yes, I am investing money -- but do not love me for my money! Us microfund managers see ourselves as an extension to the founding management team, and expect to be treated (and compensated) in line with that position.
Over the coming days I will pick up this thread and weave a bit more through the particular impact on the Israeli tech scene. In terms of more generic nuts and bolt analysis and discussion of start-ups, venture funds, and the painful but necessary dance of raising capital, I point you to my good friend Tom Evslin's blog, and will quote often from it. Tom has the rare ability of taking often complex issues and boiling them down to their essence (and I love his analysis almost 100% of the time).
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