One of the supposed drawbacks of more seed stage funding in Silicon Valley is that it encourages more “quick flip” exits.  Max Levchin wrote an excellent post on this observation, and my friend and old colleague Bijan Sabet shared his thoughts on this as well. 

I largely share Max and Bijan’s affinity towards entrepreneurs that are trying built long-term, sustainable, and market transforming businesses.  Those companies tend to be the backbone of meaningful economic growth, and it’s just plain fun to be involved with these kinds of businesses. 

But I hope folks don’t get the message that all seed investors are driving towards quick flips.  Frankly, I think very few micro-VC’s (or Super Angels, or whatever) are driving towards quick flips.  And based on the folks I know, I think very few micro-VC’s invest in entrepreneurs who are explicitly going for a quick flip.  For what it’s worth, here are my more nuanced thoughts on this. 

Glimmers of Greatness. This is similar language that Mike Moritz used on stage at Techcrunch Disrupt. Really transformative companies usually begin with a glimmer of greatness.  And as Bijan said, very small amounts of capital can help an entrepreneur begin to pursue greatness. But a glimmer is just a glimmer.  It’s not a sure thing, and most audacious ideas start with something small, confusing, and maybe even seemingly insignificant. I would suggest that almost all micro-VC’s need to see this glimmer to make an investment, and hope that their seed capital gives birth to Thunder Lizards.. 

Prospective vs. Retrospective. Here’s what it gets interesting.  The difficulty in certain sectors of the internet is that often, it’s very very difficult to prospectively know whether a company is going to become great.  The glimmer may be there, but glimmers fade.  You might not get a thunder lizard… you may just get a Kimodo Dragon. There are so many examples of this it’s not worth listing.  The point is that most companies aren’t clearly “go big or go home” companies or “small but sure” companies.  Most companies fall somewhere in the middle, and the likely outcomes are very unce.rtain (and can change over time). 

Alignment and Slow Capital. Because of these challenges, large VC’s are in a difficult position.  They end up passing very often because an idea seemed “too small”, even if the entrepreneur was clearly going to build important value in the early years of the company.  What micro-VC’s are able to do is not worry too much about this.  They are better aligned with the entrepreneur early on because they can do well in both a smaller, capital efficient win, or a big, venture scale outcome.  They can allow the entrepreneur to make progress, build value, and make the decision of “go big or go home” with more information. It’s just a matter of incentives. At the end of the day, anyone managing a fund is just trying to produce meaningful returns.  As a rule of thumb, an exit that produces a “meaningful return” for a VC ~ their fund size, and that’s part of what drives alignment or misalignment. 

Making the Most of Time.  This element is usually overlooked I find.  It takes a lot of time to try to build a big company.  Also, if you’ve raised a lot of money, some investors will try really hard to keep a company alive to try to make their money back – and this also takes a lot of time. But an entrepreneur may get to year 2 or 3 of their company and say “there’s a 5% chance this can be huge but it will take another 7 years, or I could sell now for a good outcome and move on.”  What to do?  5% isn’t great odds, but some investors might really urge the entrepreneur to go big or go home.  I think the answer is: the entrepreneur should do whatever he/she wants.  Those 7 years are valuable, and who knows?  After a mid-sized win, this entrepreneur will just have more flexibility to go for a big home run. Which brings me to my last point:

It’s a Multi-Turn Game.  I think some investors are short sighted and think too hard about optimizing one deal or extracting as much money from one exit.  But it’s a multi-turn game.  Sure, it’s too bad if an entrepreneur decides to sell a bit earlier than an investor would like.   But they will be back, maybe several more times