You could have gotten an MBA's worth of venture capital education from a few VC Twitter exchanges yesterday
What is more exhilarating than venture capitalists, angel investors, and Silicon Valley talking heads spending a nice little Friday in May debating management fees, pro bono rights, and the whims of LPs on the Twitterspere?
Well, it many not have been that enthralling, but it is fascinating reading if you have any interest on the inner workings and logic of VCs, as well as some of the pressures that are rattling the status quo, including challenges from new investment platforms such as AngelList.
The excitement started when Hunter Walk of Homebrew VC tweeted out a couple of comments about VCs, AngelList, and asked some innocuous questions about the capital-gain preferences of investors.
Walk's first tweet created a cascade of Twitter responses — more than 150 response — from folks like Fred Wilson, Semil Shah, Naval Ravikant, and Keith Rabois (as well as Farhad Manjoo looking for someone to explain what the hell everyone was talking about).
While many commenters had great points to make on the value of VCs carry and limited partners' rights, the discussion first veered towards the merits of AngelList — whether or not angel investors had as much "skin in the game" as VCs to be precise — and the pro rata rights of angel investors.
Would large VCs give up mgmt fees in order to receive carry by deal vs fund (a la @AngelList syndicates)?— Hunter Walk (@hunterwalk) May 8, 2015
AngelList's Navikant stepped in and dropped his own Tweetstorm within the original, epic Twitter discussion.
@hunterwalk 1) No fees 95 cents on dollar invested instead of 70 cents on dollar invested. Bigger pie for everyone.— Naval Ravikant (@naval) May 8, 2015
@hunterwalk 2) VC GP contributions / skin in the game are *negative.* 25% in fees and 1%-5% GP contribution is -20% in "skin in game."— Naval Ravikant (@naval) May 8, 2015
@hunterwalk 3) Deal by deal carry is lower on average (15, not 20-25) and is the flip side of Backer being able to opt out of any deal.— Naval Ravikant (@naval) May 8, 2015
@hunterwalk 4) Remove deal-by-deal and opt-in / opt-out goes away too.— Naval Ravikant (@naval) May 8, 2015
@hunterwalk 5) Syndicate Backers deserve pro-rata at least as much as VC's passive LPs do.— Naval Ravikant (@naval) May 8, 2015
@hunterwalk 6) Pooled carry is coming to AL. But it requires Backers to give up opt-out, so will be less popular than some think.— Naval Ravikant (@naval) May 8, 2015
Talking to Ravikant this afternoon, the idea that angel investors don't have enough "skin in the game" as he says is a common misconception. Ravikant's point was that VCs rarely lose money because of management fees. "As a venture capitalist, there is literally no way that I can lose money for myself, since the fees are always greater than the general partner commit," he said in an email.
@hunterwalk 7) Backers can stop investing anytime. Not completely locked up like LPs.— Naval Ravikant (@naval) May 8, 2015
"If I run five syndicated deals and they all lose — highly likely given how rare hits are in seed investing — I will lose my backers' money, plus the money I've invested," he said in the email of those leading Syndicates.
But just as the initial Twitter discussion began to die down, another exploded.
Don't think that the first Twitter blowup stopped Walk; he went on to dig into another "hornet's nest," as he called it:
If you don't know what pro rata rights are, they are the rights for investors to participate in later investment rounds, and often, the opportunity is a part of the initial legal agreement from the early investment. The pro rata issue is one that gets angel investors, who often feel they deserve some benefit for being the first to help a company get off the ground and should have the option to continue investing -- all worked up. The point Walk brings up is whether or not investing money is just a small part of an investor's value or whether they should play an active part in helping the company grow to earn a the opportunity to invest in a follow-on.
ok, i'll open this hornet nest too. Passive angels thinking they deserve legal pro rata rights from founders = haha https://t.co/5HvWxFJ3Xg— Hunter Walk (@hunterwalk) May 8, 2015
Honestly, I don't think there is anything as enlightening into the ins and outs of VC and angel investing as the commentary today. I'm sure there will be plenty of blog posts to follow.
If Twitter could ever figure out a way to monetize the type of rich and truly informative discussions like the ones today, maybe people wouldn't be freaking out about the company's bottom line every quarter.