Don’t Confuse Getting to Market with Building a Company: Charles River Ventures’ Izhar Armony Busts Some Micro-VC Myths
“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?
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. In areas like cleantech, materials, semiconductors, storage, and telecom, you can’t prove anything on a half-million investment. You’re quite limited to a certain kind of company to begin with. The other problem I see is, I’m puzzled by the way some super angels are marketing against VCs. They’re saying it’s an advantage, as a source of capital, not to have much capital. I think this is silly.
It’s an advantage to start low. But sooner or later, if you are trying to create a meaningful, change-the-world company, you will have to have capital. Look at Facebook, Twitter, YouTube. They needed hundreds of millions of dollars to do their big vision, and to change the world. To say, “I’ll only participate in your seed round, but not Series A, B, C,” I think for the most part, this is bad news for the entrepreneur.
X: So how should entrepreneurs be thinking about this?
IA: The notion of a lean startup—I don’t think first-time entrepreneurs fully understand that. They think on 50,000 to half a million dollars, they’ll be able to build a company. Viral marketing, the cloud as an infrastructure, cheap developers in Romania—they let you get to market on low capital. But let’s not confuse getting to market with building a company. Say you build something on $50K. Now what? If you’re starting to be successful, you’ll have to raise several million.
“Lean startup” refers to getting from an idea to product/market fit. But product/market fit is not an exit. You haven’t changed the world. Maybe Google bought [your company], or Facebook bought it. But lean startup is a start, not the end of it. This is where many young entrepreneurs confuse the true capital needs of a lean startup. And the misunderstanding of what “lean startup” means is very integral to the marketing of micro-VC funds.
X: Will micro VCs just become regular VCs if the exit market comes back?
IA: I think the smart angel funds, or micro VCs, will absolutely learn that in order to make money on their investments, they need to have reserves and participate in later rounds. So in that sense they’re no different from VCs.
But it’s a positive phenomenon. Many VCs can offer the same services. Charles River Ventures has always had a seed program, some of our very best investments have started as seed, and we have had a more formal program called QuickStart since 2006. We are very active in the seed market. But from an entrepreneur perspective, having your funding partner have enough capital is an advantage, not a disadvantage. It’s a resource you can use smartly.