The Rise of the “Gentlemen VC”

Today’s local investing environment in undergoing change.  Huge change.  And we in the Triangle are not alone. This issue has been framed all around the country in the context of “the VC Model is Broken” discussion that has been going on for a few years now.  What does this mean and how does it affect us as entrepreneurs, investors and friends of both?

Let me peel this back a bit.

Traditionally the local angel served as first money in a deal.  And, as an angel, their role was to provide enough cash to bridge to some market validation point and deliver some light advice to help get this idea off the ground.  We called this the seed round and if you were able to, you secured $10,000 to $50,000 from a handful of angels totaling somewhere between $100,000 and $250,000.  The notion of board seats and formal corporate structures were pushed to later rounds and left for the professional investors.

Typical “A” rounds for software/tech companies these days sit plus or minus $500,000 – sometimes much lower. Ten years ago this would have been $2M to $3M.  I spoke to David Ranii about this a few weeks ago which inspired this article from him.  This would have been the round where a professional investor would begin to work his/her magic.   But this cannot work today as there are very few VCs that can write checks as low as $500k with their fund structure (save that thought for a future post).

So – what’s the issue?  You see, these lines are being blurred. The labels are becoming almost meaningless and the investor roles are being re-defined.  The bottom line here in good old North Cackalacky is that angel investors are the new “A” round VCs.

They are filling the void left by professional investors – in effect serving as the new professional advisor.  This is working real well in the Valley and other locations where both the volume of experienced startup angels as well as domain startup experience provides an awesome foundation for future investment success.

Maybe not so much here.

In my travels throughout our region, I am seeing the advent of the “Gentlemen VC.

The term gentlemen farmer refers to “a man of independent means who farms chiefly for pleasure rather than income.” A seriously talented local VC and I were talking about this a while back and the phrase “Gentlemen VC” was bandied about to over-illustrate this issue.

Now, don’t get me wrong – these investors want to generate a return.  I also have to add that their intentions are generally pure (though in a small community I worry about investors investing in competing companies).  See this great post by Fred Wilson.  The point here is that some of our angels are filling the investment gap (yea) left by VCs but operating without the professional investment experience needed or required to serve the role well (ouch).  There is a certain maturity to a company at the “A” round – and a subtle yet critical understanding of how to help propel this company through this stage of startup adolescence.

To further exacerbate this issue, our local professional VCs are doing what they should do – investing up and down the eastern seaboard looking for great investments that meet their investment charter.

None of this helps draw together our ecosystem as hot startups like adzerk go outside the area for funding, advice and leverage.

What do you think?



Speaker, investor, mentor, startup founder. One of 3 or 4 Co-Founders of MapQuest (sold to AOL for $1.2B). Managing Director of $25M Venture Fund in late 90's. CEO, COO or President of various companies ranging from $200k to $20M in size. One of two Managing Directors of The Startup Factory (35 investments across 7 cohorts), founder and MC of the Big Top Reverse Job Fair and national writer and speaker waxing poetic around startups and startup communities. Currently EIR @ Techstars with Brad Feld ~ Startup Communities, to help community leaders around the world grow their startup community.

5 comments On The Rise of the “Gentlemen VC”

  • Along with the decreasing capital costs of software startups, I can’t help but think this is part of the broader zeitgeist in the US today: a distaste for faceless globalism and demands for direct participation in society (whether business, or government, or…).

    Amy Cortese coined the term “locavesting” which doesn’t fit perfectly but does capture a small slice of the spirit.

  • A few weeks ago, a number of us attended the SE ACA annual meeting in Charlotte. About 20 angel groups were represented, with over 80 investors in attendance from throughout the SE. It’s important to point out that the Triangle region was very well represented, with about 20 investor attendees!

    To a certain extent, I do agree the lines between angel and the small VC are becoming blurred, however this is even more so in vibrant entrepreneurial communities with robust capital formation, such as NYC, Boston, and Silicon Valley. Personally, I believe this is a natural evolution, particularly as angel investors become more experienced in the science of seed and early stage investing (and even this will suffer its peaks and valleys, just like any other cycle).

    One of the panel moderators at SE ACA posed a question to the audience: “How many of you have been doing this since 2005”? Many, but not all, investor hand’s were raised. By the time the moderator got to 1995, maybe a half dozen hand’s were raised. Moral of this little exercise is that as an angel community, we don’t have deep experience. One could argue that this could be one of the many reasons for meager angel returns in the SE.

    Which leads to the point I seek to make. “Blurring of the lines” could become a very positive thing for seed and early stage capital formation. Syndication, although not a new concept, is becoming more widely embraced between SE angel groups. This is a necessity, as the number of VC firms have declined, the Valley of Death being very real, and most SE angel funds and groups individually don’t have the financial bandwidth to carry most deals to exit, much less sufficient critical mass to attract the VC community. Furthermore, established VC firms seek to do deals with angel groups they respect and know (which is directly correlated to quality deals).

    However, it’s not just about the money, it’s about risk mitigation in all its forms. Considering these factors, many experienced angel investors are not simply going to invest like our predecessors of the past. We’re going to do our homework and be very discerning about where we’ll invest. Many of us are inclined to deploy capital in companies where we can leverage our experiences and relationships for the benefit of the portfolio company. And we’ll seek allies with other investors that we know personally, bringing more money, expertise, and additional relationships, all to the benefit of the start-up.

    This approach truly does “blur the lines.” I would also argue, particularly with seed stage, angels really can add meaning, make a difference, and at least position themselves for more logical “shots on goal”. And ultimately, the Venture community should see better qualified investment opportunities as a result.

  • There is a fundamental difference between investing your own money in a deal compared to being paid to invest someone else’s money in a deal. I would suggest that the sport of “recreational capital” has emerged as a fun and important part of the local ecosystem. You meet bright people with big ideas and hope that you get lucky and make 10X on your cash. There are no barriers to entry other than being an accredited investor. But the real question emerges post investment where heavy lifting is required to build out a company especially when it comes to hiring and firing. It remains to be seen what the success ratio will be for angel-backed deals. The classic 1 in 10 success ratio might drop to 1 in 15 or 1 in 20 successful deals. Can the ecosystem and angel investors handle 9 out of 10 of their deals closing down?

  • The sport of “recreational capital” predates the term “angel” and surprising equates to large dollars and numbers of participants. Although it’s been awhile since I looked at the stats, the Center for Venture Research at the University of New Hampshire reported that in 2006, “angels” deployed $25.6 Billion, and they estimated 234,000 individual angels. In 1996, about 10 angel groups were in existence, and by 2007 this number had expanded to about 250 groups. The Angel Capital Association, which is the industry association representing angel investors, is also a relatively new entity.

    This equates to evolution. As one of my associates aptly points out, successful angel investing has become a “contact sport”. Recreational participation will continue to be a big deal (followers and less experienced money), but the industry itself is transitioning to best practices and strong leadership at the national, regional, and local level. Even today, “benchmarking” is finally beginning to take shape, much like the PwC Money Tree report for VC investments. And make no mistake about it, a direct correlation exists between due diligence (not analysis paralysis) and returns (accordingly to a 2007 ACA Study, and many of us can substantiate through our own extensive years of experience).

    Luck does play a big role. However, I’m inclined to believe that we all create our own luck. Experienced investors don’t gamble, and I’d argue that just like professional poker players, we speculate based on information, facts and assumptions. Those that don’t, rarely make the final table.

    As one of the leaders of a local angel group, one of my biggest concerns relates to Tom’s point about “can our local ecosystem handle a high failure rate”? As a community, we’ve been through this exercise in the past, with TiG, Atlantis, RTV, etc. The worst thing a group such as ours could do is not be diligent in our processes, including post investment activities.

    Population migration is a real benefit to bringing in local dollars, but building a vibrant investment community including: i) increasing the number of angels; ii) investor education; and iii) strong relationships will take time.

    Hopefully my points shed additional light on the “blurring of the lines”.

  • Pingback: » Measuring Startup Success ()

Leave a reply:

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Site Footer