In part two of my interview with Greg Gretsch of Sigma Partners, I focus on the entrepreneur. Greg sheds some light on how entrepreneurs should approach fund-raising and some advice about taking money from the controversial “Super Angel.”
If you missed part one, where Greg explains Sigma’s unique approach to world class investing while maintaining a low profile, check it out here.
Andrew Bellay: How did Sigma view this last recession?
Greg: The late 2008 crash was not the dot-com bubble bursting. The 1999 crash was a tech-led recession, a tech led dive. This one was led by the financial markets. It’s not our fault. We knew companies would be hit and hit hard. More importantly, we believed that this was not going to be an across-the-board thing like it was in 1999.
What we thought was an absolute truism was that the cost of capital had gone up. If you see an investment that can help extend the lead between you and your competitors, build more barriers to entry, or make your business more valuable: spend the money. If you don’t have a ton of conviction around it, you might want to think about holding off on it. We had a lot of companies that continued to extend the lead against their competitors in 2009. During the crash of 2008 companies got better at doing more with less. There are all sorts of trends that are emerging that are letting companies build themselves more effectively and with less capital.
Andrew Bellay: With the capital cost of starting a company in certain sectors going down, what are your thoughts on the tension between this new breed of super angels and the venture capital community?
Greg: It’s interesting – the rise of the super angels. We’re getting back to where we were in the late 90’s in the angle market where companies would raise $2-4 million in an angle round at incredibly high prices. We’re not quite there yet again, but you’d be hard pressed to find any of those that came out well for the entrepreneur. The angels will disappear at the drop of a hat if the company runs into big bumps on the road. There are very few companies that progress in a straight line. Most companies hit bumps at some point. Some of them never recover from it and that’s the Darwinian nature of Silicon Valley. But some hit bumps for a long time and then turn around at the other end with very successful outcomes.
If you bring in a couple venture guys, then they’re probably going to support you for the next round.There are certainly plenty of times when venture guys don’t. But for the most part, if you bring in some top-tier venture capital, they believe in the investment enough that they’re probably going to see it through and continue to make progress.
Currently, angles aren’t yet at the 4 million dollar round, but they’re creeping up there pretty quickly. Startups are collecting $50-500k from a bunch of different angels. Before you know it you’ve got 1.5-2 million dollars in and that’s not really an angel round. If these really are lean startups and you want to get some validation before you get your venture round, then build a lot with a couple hundred thousand. Be like the Posterous guys who with a couple hundred thousand dollars built a really interesting product. They didn’t raise a full round, they raised a little bit of angle money. I think as angel starts to get bigger and bigger, it is starting to create a bit of conflict. The ones who will get hurt the most are the entrepreneurs who think it’s a good idea.
Andrew Bellay: So what’s your advice for entrepreneurs in our audience about raising money?
Greg: Have an honest understanding of the capital requirements of your business. If you need strong financial backers from the beginning, get it from the beginning because you want them to ride with you throughout. If you think you can prove a lot with a little bit of money, then take a little bit, don’t take a ton. Also, if you’re going to take a little bit of angle money, make sure it’s angle money. If you let a venture guy come in and write a check for that angel round, then you’ve been deflowered. No one else is going to come lead it after that. And if that venture guy decides that he doesn’t want to re-invest for whatever reason, you’re going to have a bitch of a time raising money again. If the early stage venture capitalist – whose an insider on your deal – doesn’t want to put money in again, that’s a pretty big red flag.
Andrew Bellay: To wrap things up, there’s a part of our audience who would love to be in your shoes as a venture capitalist. Can you tell us how you got here?
Greg: I’m not one of those guys that graduated from college and looked in the mirror and said ‘I want to be a venture capitalist!’ I was someone who, growing up, looked in the mirror and wanted to be an entrepreneur. This was back before the days when you could take a couple of Stanford grads, add water, and poof you had a startup that gets funded on Sand Hill Road. After spending four years at Apple I had the bug and had to go off and start a company. I started three in a row – lost a lot of money on the first one and did very well on the next two. I talked to the guys at Sigma. I liked the history here, liked the team, and liked the approach. It’s mostly people that do have entrepreneurial or operating backgrounds. I wanted to join a team that had seen good markets and bad, that I could learn from and grow into. VC wasn’t something that I had ever planned on doing. Opportunity came and I took the shot.
A big thanks to Greg for an awesome interview. Make sure you read part I if you missed it. Keep an eye out for his posts on his blog: Dispatches from the Darkside.
[Originally published By Andrew Bellay on aonetwork.com]
