Naval’s View of Seed Stage Investing

by Wayne Willis on October 9, 2010

As many people have already noted, the traditional venture capital model is broken, and it’s not likely to return to its former structure, scale or productivity. The 10 year returns to the limited partners of the leading VC funds is less than returns from the S&P 500. Investing activity has concentrated into just a few dozen funds, and most funds are dormant. The amount raised in new funds is declining, and a shakeout is well-underway.

However, the need for seed stage and Series A funding is only growing bigger. That need is being met by investors characterized as angels (acting alone or affiliated with an angel network) or by so-called “super-angels.” Super-angels are organized as funds, similar to VC funds, but with investment targets set at lower amounts invested and with less investor involvement and control.

Naval Ravikant of Venture Hacks recently made an interesting presentation to a group of entrepreneurs, and I’ll embed his talk below. It does patronize the audience a bit by over-stressing the power that entrepreneurs have today, but it accurately outlines the explosion of angel investing and newly arrived angel groups that make up today’s startup environment.

All of this is cautionary to the Nodal Partners business model. I do believe that there is an oversupply of dumb money going into seed-stage investing, especially “consumer internet” businesses … and that a correction will inevitably occur. The recent “Angelgate” fiasco was a reaction to this felt need to restrain valuations. A “me, too” strategy will likely fail, unless you get preferred access to invest with Marc Andressen or Josh Kopelman or other really smart people investing in this space.

I also believe the Naval is wrong about some of his comments – particularly those issues around control and around segments other than “consumer internet”. He also nakedly promotes his own contributions (Capital Factory, Venture Hacks) – so you need to discount for that. But he’s right about the need for differentiation and sticking to the areas where we can be uniquely valuable. My conclusion: Particularly in business services, where our business development advisory work will be most valuable, I believe we can assert and keep our competitive advantage. By investing only in people we know, we can reduce risk. And walking away from deals with frothy valuations will be a key discipline to maintain.

Anyway, here is some food for thought:

And here is a copy of the slides

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