How to spot an active firm
Guest Post by Fred Destin
An entrepreneur
called Danielle Morrill just kicked up a bit of a shitstorm with a nicely
titled "Zombie VC" post. It's
a nice pendant to her recent Zombie Startupspost in
which she deals with her own fears of becoming a living dead company after
pivoting her startup, Referly.
In it she tries to define rules for entrepreneurs for
spotting Zombie firms.
Rise of the Zombie Firm
Entrepreneurs should be aware the we are, indeed,
surrounded by Zombie Firms. The largest shakeup ever in the venture
industry in resulting in:
- firms whose numbers
will never allow them to raise again but who will continue to live on fees
until the last man standing turns the lights off (a Zombie Firm)
- firms who bravely try but may take two years on the road to raise and be short of fresh cash to invest in the interim (a Trying Hard To Make It Firm).
In a newsletter from one of the most respected venture
fund investors out there, the following statement was made: "in our
estimation, there are only 100 truly active institutional venture
firms out there". Whilst that number feels conservative
and does not seem to include the Super Angel funds, compare that to an
estimated 1,000 firms active in the early 2000.
Both Zombie firms and Trying Hard To Make It
Firms are going to give the outward signs of market activity. In fact
they may have more time than their funded brethren to be a mentor at TechStars
or a judge at MIT Entrepreneurship Contest.
All this leaves entrepreneurs with the difficult task
of weaving their way through a morass of people who can't actually give them,
you know, actual money.
Finding the Active Ones
First of all let me say that I applaud Danielle's initiative,
accusations of sensationalism aside. We are all know that countless
entrepreneurs waste countless hours with folks who cannot invest.
Directionally her analysis is correct; a quickscan of
your zombie VC list and one nods head in recognition. There a few
fundamental flaws with the current method though, though I am still very happy
someone is getting the ball rolling in driving transparency.
She tries to use normative rules for what defines
activity. Like any binary method it’s prone to fail, either because of
inaccurate data or discrete / unannounced deals. Ideally one would
recognize that the data is inaccurate and instead of making an A and a B list
would compute an index of activity and determine who’s “most likely a zombie”
or "most likely active" instead of including teams Shasta Ventures in
the "bad" list (given their new over-target fund was raised in late
2011, not a credibility builder).
Funds could be ranked
according to their activity score or even
better a holistic score that would take into account their own announced
fundraising data combined with assumptions about investment period (few funds
have more than a 5 year investment period).
Any zombie firm can make a few seed investments late
in its life to maintain the semblance of activity. Conversely many highly
respected firms like Benchmark indicate their strategy does not include doing
seeds. A bunch of firms will simply not do series A. How can
Emergence Capital Partners appear in a blog post called Zombie Firms ?
How To Spot An Active Early Stage Firm
The bottom line : I love the initiative but the “Rules
for spotting a Zombie Firm” should more accurately be turned around to say
“Likely Indicators that you are talking to an active Seed or Series A
investor”. Less dramatic but probably more useful.
So how do you spot an active venture firm in the early
stage world:
- Has raised a fund in the preceding 5 years
at most (most firms have a 5 year investment period)
- Displays a regular pattern of activity in
seed (if such is their strategy) and an active presence on
AngelList
- Acted as lead investor or named new
investor on a number of investment in the last [12] months
- Displays a regular pattern of thought leadership and ecosystem development activity not geared towards limited partners but towards entrepreneurs, indicating the desire to build mindshare and dealflow for the future
No hard and fast rule will tell you whether an
investor is out of the market, but you're getting the clues. Keep an open
mind and remember that people without money may be ready to help in other ways.
Last piece of advice I would not use / waste VC
meetings to try and "turn the table on them" and due diligence the
crap out of investors. Do desktop research and ask market players.
However any venture capitalist should be able to tell
you exactly how much they've raised and how much they're looking to invest in
the coming year.
For us at Atlas Venture Tech, we're looking at
approximately 12 seeds (average check $400K) and 4 or 5 Series A investments
(average check $4M) ... if we can find the entrepreneurs to partner with !
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