Seed-stage investing has embraced greater professionalism and institutionalization
Arthur Rock, the 31-year-old Harvard Business School MBA graduate, and young Wall Street investment banker, might not have imagined that his 1957 investment in Fairchild Semiconductor would be the starting point of Silicon Valley’s history. His subsequent investments in Intel and Apple earned him the title of a pioneer angel investor in Silicon Valley.
For startups, the seed stage generally refers to the early development phase. Seed-stage funding has been synonymous with angel investors, who are often called the 3Fs: Family, Friends, and Fools, implying that only these people are willing to bear the high risks of investing in seed-stage startups.
In recent years, the seed-stage landscape has bloomed and innovations such as Startup Accelerators, Venture Scouts, and Angel Syndicates have emerged. These innovations not only bring more capital to the game but also professionalize and institutionalize seed-stage investment. It’s not just about the money either. More resources are thrown into helping these startups grow.
Welcome to Angel Co-op
Angel Co-op is a type of venture capital fund that operates from the bottom up, with decisions decentralized. Established by a group of angel investors, Angel Co-op seeks to amplify the returns of each individual fund investor through the power of collective investing.
How does Angel Co-op work? Angel Co-op combines the best parts of Venture Scouts, Angel Syndicates, and Startup Accelerators. Angel Co-op members wear a bunch of hats. They’re not just backers of the fund. They actively scout for promising startups, lead investment, and often step into mentoring roles to guide the startups they invest in. On the flip side, the fund manager in an Angel Co-op facilitates investment evaluations and manages the investment portfolio.
This is quite different from the conventional venture capital structures where the fund manager typically steers the ship. In Angel Co-op, the power is in the hands of the fund investors. Unlike angel clubs that match startups with angel investors, Angel Co-op is committed to building real, long-lasting partnerships between angel investors and founders.
So, why is Angel Co-op the go-to for seed-stage investment? Next, I will dive into four things: deal sourcing, investment decision, post-investment support, and fundraising. These are the core responsibilities of any venture capital firm.
Deal Sourcing
From my venture capital experience, my entrepreneur friends often bring the most promising investment opportunities. The startup teams they referred to me always catch my eye. Top founders are like talent magnets, pulling in the best of the best to work with them. Whenever their friends consider starting a business, these top founders are the first they turn to for advice. Conventional venture capital funds often struggle to access these high-potential startups, especially since these startups haven’t started fundraising or even established the company yet! This explains why venture capital firms are launching their venture scout programs, hoping to discover the stars of tomorrow through their founder networks. Angel Co-op employs this approach to source prospects as well. The distinction lies in the dual role of the venture scouts within an Angel Co-op: they are not only scouts but also fund investors, ensuring alignment with the fund’s interests and reducing potential conflicts of interest.
When it comes to seed-stage startups, given their lack of traction for investment evaluation, the focus often lies on the ‘team’ and ‘market’ – assessing whether the team can actually make their plan happen and whether the target market they’re targeting has real potential. Getting to know a founder takes time. That is why Angel Co-op prefers investing in startups where scouts share a bond of trust with the founders. Founders, with their insight into market trends, are perfectly suited to gauge the potential of seed-stage startups, positioning them as the optimal venture scouts for an Angel Co-op.
Investment Decision
People aspiring to get into the venture investment game generally have two paths to choose from. One option is to be an angel investor and go solo. But here’s the catch: An angel investor needs a deep pocket to construct a venture investment portfolio, and not everyone’s got that. The other route is to invest in a venture capital fund and let the professionals handle the investments for you. Investing in a venture capital fund attains professional management and diversification of risks through an investment portfolio. But, there’s a trade-off – a fund investor might not have the chance to build direct relationships with founders as a solo angel investor would.
When spotting an investment opportunity, a scout of an Angel Co-op acts as the lead investor, much like one from an Angel Syndicate. The Angel Co-op and its fund investors can participate if they want. This mechanism combines the advantages of both being a solo angel and investing in a venture capital fund, allowing angel investors to make smaller indirect investments through a fund while also having the choice to increase their personal stake. Flexibility is the name of the game here.
Post-investment Support
Once startups successfully complete their seed round of fundraising, their immediate focus shifts to validate the product-market fit, usually with a timeframe of one to two years before raising the next funding round. Any small missteps can delay the next round of funding, jeopardizing the startup’s survival, which is pretty much make-or-break time for startups. Seed-stage startups can really use some guidance from experienced founders who have been there and done that. This is why, although Startup Accelerators offer all sorts of help, one of the biggest things they do is mentorship.
Having served as a mentor in a couple of incubators and accelerators, I always share my experiences and resources as much as possible, whether it’s pro bono or not. However, without an actual stake in the startup, it’s like I’m cheering from the sidelines but not really playing the game. An Angel Co-op’s investors, being experienced founders who’ve successfully steered their own startups through the turbulent seed stages, not only offer mentorship but are also more committed to helping the startup succeed because they also invest in the startup directly or indirectly through an Angel Co-op.
Fundraising
You might assume the primary task of a venture capital firm is all about investing, but in reality, fundraising is what really matters. When the current fund is about to dry up, a venture capital firm risks closing the shop. So it’s a bit like startups, always chasing the next round of funding. But for fund managers, it’s even trickier because they don’t have flashy products and tangible metrics to show off as startup founders do.
So, when I launched GPV, modeled after the Angel Co-op structure, I knew I had to get creative with the fundraising game. Luckily, my years in venture capital have introduced me to some awesome founders. As their own startups blossomed, many began entertaining the idea of angel investing, making them potential backers for GPV. Unlike the conventional venture capital model, the Angel Co-op model puts the fund investors in the driver’s seat and empowers them. It clicked with these founder friends. Plus, the collaborative ethos of Angel Co-op creates a domino effect, with existing members often introducing new, credible founders to join, further simplifying the fundraising process.
At its core, Angel Co-op is all about the investors, not the fund managers. This investor-centric approach ensures that as long as there’s a steady stream of Angel Co-op members passionate about angel investing, an Angel Co-op can keep on running for the long haul, without being limited by a predetermined fund lifespan.
“I invest in people, not ideas.”
Arthur Rock once said, “I invest in people, not ideas”. Looking back at the history of Fairchild Semiconductor, this Silicon Valley star of the 60s assembled some of the US’s most brilliant scientists of the time. Yet, due to the lack of equity incentives and excessive intervention from the investor, core members left rapidly, leading to a loss of technological advantage. Despite several restructures and M&A, the company never fully recovered. The Silicon Valley legend ended when Onsemi acquired it in 2016. Lesson learned: it’s all about the people.
Angel Co-op’s game plan is all about ‘people’ and ‘trust’. It will work as a lean seed-stage investment machine when everyone involved in an Angel Co-op – fund investors, scouts, and entrepreneurs – trusts each other. Can Angel Co-op become the sustainable seed-stage investment model I envision? I’m not sure. GPV is the MVP of Angel Co-op. I choose to act first and see where it leads.