Don’t Confuse Getting to Market with Building a Company: Charles River Ventures’ Izhar Armony Busts Some Micro-VC Myths

8/27/10Follow @gthuang

“Micro VC” and “super angel” funds are all the rage these days. These terms refer to the emerging segment of venture capital and angel capital in which a growing number of investors are putting small amounts of seed money into very early-stage startups—mainly in Internet software.

How are traditional venture firms reacting to this movement? Many already make seed-stage investments, and others are starting to do more. I recently sat down with Izhar Armony, a partner at Charles River Ventures, which has offices in Waltham, MA, and Silicon Valley, to talk about many things—among them, how he views the micro-VC landscape. Charles River Ventures has had its own formal seed-stage funding program, called QuickStart, since 2006. In this program, the firm invests $250,000 in the form of a loan to each startup, and it has backed more than 30 of them to date. “For a certain kind of investment, it’s good,” Armony says.

Armony’s expertise runs the gamut from mobile software, open source, and software-as-a-service, to intellectual property and alternative energy. He was a veteran of Onyx Interactive, a computer-based training company in Israel, before joining Charles River Ventures in 1997. His startup exits have included Virtusa, iPhrase, ThinQ, Yantra, Guardent, and Oberon. He is currently involved with a number of companies we report on regularly at Xconomy, including Intellectual Ventures, RPX, TerraPower, 24M Technologies (the new spinout from A123Systems), and Vlingo. [Disclosure: The author’s brother-in-law, Mike Phillips, is a co-founder of Vlingo---Eds.]

Here are some excerpts from our chat, about micro-VC strategy and some misconceptions that first-time entrepreneurs may have about building companies. I thought it was particularly interesting to hear these things coming from a well-established tech VC in town:

Xconomy: What do you think about the evolution of micro VC?

Charles River Ventures

Izhar Armony: In general, I think it’s a positive phenomenon for the entrepreneur to have a more approachable source of capital that can write very small checks to begin with. Specifically, for certain kinds of startups—consumer Internet startups, less so [software-as-a-service] companies, but maybe, where within weeks you’re up and running, and the cost to launch is in the tens of thousands, or hundreds of thousands of dollars, but not millions—it’s very good. As Chairman Mao said, “Let a thousand flowers bloom.” From the entrepreneur perspective, it’s a good thing.

But there are two problems. One is that innovation is much broader than Web 2.0. … Next Page »

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

Single Page Currently on Page: 1 2

By posting a comment, you agree to our terms and conditions.

  • http://www.dailygrommet.com Jules Pieri

    Izhar…I think what you say about distinguishing finding a product market fit and building a company is very true. But I think you pin the confusion over that too squarely on the entrepreneurs. I have met several micro VC’s who have illusions of a $25-$100M company built on one small sub $1M round. They hold up the “be capital efficient” card as the only measure of success. You can kill an opportunity with a sole focus on capital efficiency, at some point.

    One investor even told me, “I only invest in companies that will never need more than $100K.” He went on to say he expected the team to basically go without pay as long as it took, and as big as the team got, to get to profitability. Hmmmm….he’s not going to find many savvy or experienced teams who are going to sign up for that. They know better…about what it takes to build a business, rather than a product.

    Thanks for sharing your smart thinking on this topic.

  • http://www.commonangels.com James Geshwiler

    Izhar: good points. I agree and have been emphasizing for some time that entrepreneurs and investors have be a good match for their strategies and resources. No one is going to build a network communications company on $500K or even $5M.

    I believe a lot of the attention has been going to “super angel”/”micro VC” because there’s been a real gap in the market as most VC funds have grown >$100M and in this town >$200M. There also have been more exits lately in Web 2.0 companies. Finally, consumer-oriented web companies just have more mass market brand recognition than some back-office, lower-in-the-stack, infrastructure company regardless of how valuable the latter becomes.

    We need a diverse capital market both to support entrepreneurs and to support the economy. If low-capital-to-start companies grow bigger, they ought to be able to go to the market and raise more money. We don’t have one-size-fits-all entrepreneurs and should be glad not to have one-size-fits-all investors.

  • Amir Eldad

    Izhar, strongly agree; I think the good super-angels / micro-VC’s can help a strong founders team get to the point of proof of concept / feasibility, and then adding connections and some mentoring.

    The question is, for the good founders team, is it the best for their interest to take this $50K (for example) from a super-angel, or maybe get this money from other places for a significantly lower cost of capital.

    It is clear (in my mind, at least), that the next stage (after POC) is mostly fulfilled by the classic VC.

  • EP

    Guys, Isn’t the statistic something like 87% of the Fortune 500 never took venture capital? Wasn’t Cisco started on a $5k F&f investment? Didn’t Webvan fail after $850M VC invested? IMHO, there are no absolutes but predominantly VC is not needed as much as patient hard working folks with some start up capital in the right market with the right offering at the right time and place, and the right goals. There are increasingly more smart brand name investors betting small $ on these types of start-ups. VC has its place as the interviewee mentioned, but my take is that these super Angels are going to make some great investments.

  • http://www.agilebizdev.com Peter Eggleston

    I think it was Jean Hammond who once told me “Angels fund experiments.” That really stuck with me and the danger of the funding gap that James Geshwiler describe is that with out enough angel investment, you don’t get the luxury of doing a lot of experiments to “get it right.” Steven Gary Blank does a great job of outlining this in his book “The Four Steps to the Epiphany” (http://www.amazon.com/gp/product/0976470705/ref=cm_li_v_cr_self?tag=linkedin-20).

  • Len Williams

    Great article. There are some advantages for micro finance investing, such as a smaller risk, achievable profit targets, cashflow return after 1-3 years. For innovation the advantages are that more and more emerging companies can quickly and cheaply launch their products. But, whether they succeed or fail – that is going to be visible quickly, as well.But, as you said, to build significant businesses you need investors with deep pockets, as these micro vcs are not able to support subsequent investments on their own. So, there could be a positive evolution of micro-funds, also useful for startups, but the “old-school” venture capitalists are still to be considered. Not everybody’s business is going to become as successful as Facebook, but every entrepreneur should have high aspirations, that are not only connected to immediate high returns.