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« Venture Capital Overhang Continues To Shrink | Main | Falling Start-up Costs and Seed Investing »

The Case For Lowercase

Recently, Chris Sacca, former Head of Special Initiatives at Google, announced that his new venture firm, Lowercase Capital, had raised $8.5 million. Sacca has raised $8.5 million for what is essentially an angel fund targeting web startups. While larger venture firms  often deploy more than $8.5 million in a single deal, Sacca’s fund provides start-ups with something much more valuable than just capital: “time, attention, and the empathy that catalyze winning outcomes for all involved,” as  he puts it. As I mentioned in my previous post, the cost of starting an internet company has fallen dramatically, so much so that angel investors (or “micro VCs”) may come to dominate early-stage investments in the internet sector. This is especially true since traditional firms find it difficult to deploy their funds at that level and often lack the personnel to do so in a truly meaningful way. Traditional VC isn’t dead; it just isn’t as competitive as it used to be at the earliest stages of internet investing.

Sacca does a good job of laying out some of the reasons why “venture capital is broken” when it comes to investing in internet startups:

“Today, web services can be conceived, architected, tested, and deployed to millions of users for little incremental cost beyond rent and Ramen noodles for the entrepreneurs. Yet, many traditional VC funds have been loath to admit this reality and downsize their five hundred million dollar hauls. Why? They are paid fees based upon their total amount of money managed, thus there is no incentive for them to be smaller. Yet, as they try to inject those piles of money into early stage companies, interests become misaligned and an inherent conflict between the investor and the founder often arises. Fund returns, the companies, the entrepreneurs, and the users all suffer as a result.”

It’s a rather harsh take but there is truth to his argument – there is now a huge disconnect between most venture capitalists and web entrepreneurs, and part of the solution is smaller pools of capital and dedicating more time to collaborating and working with entrepreneurs. It doesn’t necessarily have to be Lowercase’s approach (although it does address the problem directly), it can also be done through larger firms - they just need the discipline to invest smaller pools or simply set aside portions (and even staff) of larger funds for seed internet investments, otherwise they risk losing ground in the space.

Who are investors in Sacca’s fund? I’m not 100% sure but I know Kevin Rose is one. This brings about another aspect of the new angel/micro VC phenomenon – institutional investors could be left out. Instead, angels or micro VCs, are increasingly investing their own money or raising funds from other like-minded colleagues, entrepreneurs and investors. This works perfectly well because, again, the fund sizes are relatively small and when given the choice, you want like-minded, understanding, and potentially helpful limited partners.

Stepping back, as angles investment comes to dominate early stage internet investing, we may be seeing a bubble of sorts. The best are great at what they do, but those looking to mimic will probably suffer, just as “me too” venture firms have struggled. It seems as though angel funds are popping up all over the place these days. Are these angles and “micro VCs” restricting dealflow to the larger firms? In some cases yes, but you also often see them investing alongside the traditional venture firms that get this space. Plenty of traditional venture firms have recognized the shift occurring in seed internet investments and are active in this style of investing (and will probably be the most successful). Some examples are Spark Capital, Sequoia (though they kind of outsource their seed involvement through Y combinatory), and Charles River Ventures. There is undoubtedly a fascinating new venture ecosystem developing for early-stage internet companies and it will be very interesting to monitor its continued evolution – Lowercase capital is simply the latest reminder of where things are heading.