8 reasons why you shouldn’t raise a VC fund (and 4 why I love being a VC regardless)
I sometimes talk to angel investors who consider raising a fund and ponder on how things will change if they go from investing their own money to investing as a fund. As I was an angel investor for about three years before teaming up with Pawel to start Point Nine about eight years ago, I have a fair amount of experience on both sides which I’m happy to share. If you’re an angel investor and you’re considering making the move (or, historically less likely, a VC considering the opposite move), here are some thoughts on the topic.
Why you should stay an angel investor:
1. You have more flexibility
As an angel investor, you can do whatever the f*** you want. Except for your portfolio founders, you’re not responsible to anyone. You can invest in any company that you like and that takes money from you. You can write a $25k pre-seed check in a consumer Internet startup out of South America on one day and invest in a late-stage enterprise software company from Eastern Europe the next day, without having to explain your rationale or strategy to anyone. Whether it makes sense to be so opportunistic and whether you don’t make better decisions by having a sounding board is another question — I personally wasn’t less focused as an angel investor (the examples above are made up), and I deeply appreciate having a team that helps me avoid dumb decisions. But if you want to have the maximum amount of flexibility to do anything you want, angel investing is for you!
2. You can work in your pajamas ;-)
Speaking of flexibility, one of the great advantages of being an angel investor is that you can work from anywhere in the world, at the hours that you prefer. Most angel investors don’t take many board seats, so most of the work can be done over Skype/Zoom, and since you don’t have to align meetings and working hours with a team you don’t have to have a rigid schedule. I spent a couple of months on a Caribbean island in 2009 and 2011, but that didn’t stop me from making several angel investments during that time.
3. You can sneak into deals
Getting into competitive deals is much easier if you invest, say, $50–150k per company. If you invest from a fund, you’ll have to invest much larger amounts to make your fund model work, which often means you’ll have to convince founders to choose you over other investors. Making space for a $50–100k “ticket” is obviously much easier. Given how hot the market has become, this may no longer be true for the hottest companies which everybody wants to invest in, but there’s still a huge difference between having to win a seed round and being able to sneak in with an angel ticket.
4. You don’t have to win against others
For the same reason, it’s much easier to be friends with everyone if you’re investing $50–150k per company. If you want to lead a seed round with an investment of, say, $0.5–1.5M that often means that other investors won’t be able to invest as much as they’d like to invest or may not be able to participate at all. This can lead to difficult discussions, especially if the other investors are people who you like and respect. So if you want to optimize for peace and harmony, stick to your angel investments and don’t raise a fund. :-)
5. No issues with signaling!
Another topic that’s easier if you’re an angel investor are bridge financings and more generally follow-on investments in companies that are struggling or going sideways. If a portfolio company of an angel investor is doing so-so and she’s not keen on investing more, she can rather easily pull back because the market generally doesn’t have clear expectations for follow-on investments from angel investors. As a fund, you have a much bigger responsibility because other investors are trying to take clues from how you decide (AKA signaling). If you don’t invest, you might scare away other investors, which might kill the company.
6. You avoid a ton of overhead
Running a fund creates a huge administrative overhead. If you invest other people’s money, you’ll have to write quarterly reports, do various regulatory and tax-related filings, deal with auditors, have AGMs, and take care of various other things that you probably didn’t know and never wanted to know about before. I’m fortunate that at Point Nine we have and always had an awesome Operations Team which takes care of 99% of this, but if you start out new, expect that it will take some years until all of this will run smoothly. On a related note, unless you have an extremely strong track record (as an angel investor or VC at another firm) and long-standing relationships with institutional LPs or (you’re a lucky genius), expect that raising a fund will take you at least a year.
7. No long term commitment
Last but not least, you shouldn’t raise a fund unless you’re almost certain that this is what you want to do for the next 1–2 decades. Most funds have an initial lifetime of ten years and are typically extended by another one or two (or more) years. That makes sense if you consider that you’ll make investments for about three years and that it may take ten or more years from a seed investment to a large exit. So even just one fund means a commitment for 10–12 years, but if you decide to build a venture capital firm you’ll probably raise another fund after a few years, and another one a few years after that, and voilà, you’ve entered into a commitment that will get you close to the typical retirement age. :)
8. You don’t need unicorns to survive
As Jason M. Lemkin put it, VCs need unicorns to survive. That’s not quite true for small seed funds, but even a $50M seed fund needs a couple of $300–500M exits to deliver a great performance. In contrast, if you do $50–150k angel investments and you get in early, you can do a great return even if all your successful companies exit at $50–100M.
I just gave you eight reasons why angel investors shouldn’t raise a VC fund, so you might be wondering if I regret having made the switch from angel to VC. The answer is a resounding, abso-f***ing-lutely NO.
Here are some of the advantages of investing a fund:
1. You can give companies far more runway
When I did my angel investments in 2008–2011 I typically invested $50–150k per company. In some cases, I was the only investor (in case of Zendesk, for example, although the company had already raised a friends & family round before). More often, I co-invested with a few other investors, which usually brought the size of the seed round to a few hundred thousand dollars or Euros. In any case, these small seed investments didn’t give the companies a lot of runway, which meant that right after wiring my investment I had to work on getting follow-on investors. With Point Nine, I am now in the lucky position of being able to finance a seed startup for 15–18 months and sometimes longer. I consider this a big advantage, as raising a somewhat larger seed round allows founders to not spend any time on fundraising for at least 12 months. It also gives them more leeway and allows them to be less short-term oriented when they choose their priorities and strategies.
That being said, seed funds obviously don’t have a monopoly on $1–3M seed rounds anymore, since there are more and more angel investors who can write $250k checks (or even more). Also, good angel investors today have the opportunity to co-invest with seed funds (which wasn’t the case in Europe ten years ago because there were no seed funds) or lead syndicates on AngelList, so there are now more opportunities to invest a small amount as part of a larger round. Therefore the “runway” argument may or may not apply depending on your strategy as an angel investor.
2. You can provide more value-add
Besides more runway, investing with Point Nine also allows me to provide more value-add. Point Nine is much more than Christoph Janz — Point Nine is our investment team, our operations & support team, our advisors, our LPs, and maybe most important of all, a family of meanwhile about 200 founders who come together IRL at our various portfolio events and online using our #p9family workspace throughout the year. It would be hard for an angel investor to build such a host of valuable resources and such a community all by himself.
3. Teamwork makes the dream work ;-)
Having a team not only allows me to make better investment decisions and to provide more and better support to our portfolio, it’s also more fun. Simple as that. If you have a fulltime job and angel investing is just a “hobby”, this may be irrelevant for you (but then this post is probably not for you anyway).
4. The joy of building something
If you’re a naturally born entrepreneur, nothing compares with the joy and satisfaction you get from building. People might argue that operating a VC is not comparable at all to running a startup, but in spite of the obvious differences — we’re not developing a tech product at Point Nine, nor are we scaling to hundreds of people — there are actually quite some similarities. We, too, are in a competitive market, so we think about our “product”, our differentiation, our reputation, and our brand all the time. We run NPS surveys with our customers (our portfolio founders) to find out how we can do better; we’ve set up (and continuously optimize) various internal tools and processes to do our jobs as efficiently as possible; we’ve spent time to craft our company vision, mission, and values; we run all kinds of experiments aimed at finding as many of the relevant companies in our sweet spots; we have a weekly all-hands meeting and weekly 1on1s with every team member, we do various team events and go to a company offsite twice a year; and we’re almost always recruiting for at least one new person. In other words, we’re a real little company. :-)
Building something that has lasting value and might even outlive me, the chance to make a dent in the universe, is one of the things that keeps me motivated every day. But whether you’ll be happier as an angel investor or as a VC depends entirely on your personal preferences.
Finally, you may have noticed that I didn’t talk about the financial aspects of the two alternatives at all. Intuitively, you’d think that investing as a fund has bigger upside because you’re increasing your leverage. That’s generally true, but if you keep in mind that it’s much harder to generate, say, a 5x return on a $50M fund than it is to do the same on $1–2M of your own money it becomes less clear. More importantly, though, I don’t think that financial incentives should play a big role in your decision making. It’s much more important that you do what you enjoy more.
All illustrations taken from unDraw, a great platform for open-source illustrations. Thank you, Thank you, Aleksandra Zorylo, Clement Vouillon, and Pawel Chudzinski for reviewing a draft of this post and providing your feedback!
If you’re considering raising a fund and would like to discuss your plans, please feel free to reach out.