I’m pleased to announce the formation of K9 Ventures, L.P. – a seed-stage fund.

K9 Ventures, L.P. is a $6.25M fund that is designed to do concept and seed-stage investments in technology companies. The fund will be deployed over a period of 3-4 years, with initial investment in the range of $100K – $250K, while reserving capital to participate in the follow-on round. K9 expects to be an active investor in portfolio companies and will typically make only 4-6 new investments per year.

The fund focuses on investing in companies that meet the following necessary but not sufficient criteria:

• Technical Founders: The founding team needs to be capable of building its own product and have the technical chops to make it happen.
• Technical Product: The product must have some technical depth. Either protectable IP or at least hard IP.
• Direct Revenue: The company must have a direct revenue model. No advertising, content or media businesses which may have a three-way business model, but rather companies which deliver direct value to paying customers.
• Capital Efficient: Companies that need a Seed round, probably a Series A, but potentially may not need a Series B or Series C. No retail, no cleantech, no biotech etc.
• Hyper Local: Entire team must be local to the San Francisco Bay Area. No distributed teams, and no outsourced product development.

The first closing for the fund was held in Q2 2009. K9 began investing in 2009 and is honored to have the following five companies in its portfolio:

• CrowdFlower (Seed and Series A)
• Twilio (Seed and Series A)
• DNAnexus (Series A)
• HighlightCam (Seed)
• “Project Oscar” (Concept/Seed)

K9 Ventures sits in between individual angels and institutional venture capital funds. The fund target was $6M and I’m pleased to meet (and slightly exceed) that target. You may call it a micro-cap VC fund or a super-angel fund. (Personally, I prefer just saying a seed stage fund, but as some folks have pointed out a super-angel sounds a lot better than a micro-VC! ) The objective is to provide entrepreneurs with a meaningful amount of capital and support to help the company build a sustainably profitable business.

I would like to take a moment to thank K9′s Limited Partners for their support of this first fund. Most of all I would like to thank the entrepreneurs who have allowed K9 to be part of their companies and their personal entrepreneurial journeys. In a lot of ways I see K9 as my next startup — except it’s a meta-level startup.

P.S.: The K9 Ventures website will be revamped to provide more details soon. In the interim, please follow @k9ventures and @manukumar for updates and direct any questions to manu@k9ventures.com.

Ever since I found the blog Startup Company Lawyer, I’ve had a high regard for its author, Yokum Taku, a partner at Wilson Sonsini Goodrich & Rosati. Yokum’s posts are always chock-full-of-good-information. His most recent post was on the topic of When do I need to incorporate a company?

I’ve spent some time thinking about this before, and, in fact, had a couple of tweets related to this as well:

Yokum already did an excellent job of laying down the legal considerations. As an extension to my tweets above, I wanted to expand upon some of the reasons behind these tweets. Here is the text of the comment I posted on Yokum’s blog in response to his post. I suggest you read his post first and then read my comment below:

Yokum, thanks for another great post! EAU (Excellent as Usual) as one of my favorite customers used to say!

You provided a great overview of the reasons to incorporate from a legal point of view, I wanted to chime in with some more subtle, but hopefully useful comments:

I maintain that the best time to incorporate is ‘yesterday’ — or as soon as you are 100% sure that you want to give this idea/company a real shot. To me incorporation is a ‘show of commitment’. It sets a date and time in stone for the inception of the company, and, it starts the clock running. This has several advantages:
1) If you are going to be bringing on co-founders or employees, the fact that the company has already been incorporated, and is official, can have an impact on how the equity split gets portioned out.
2) Incorporating starts the clock on the corporate history — which can often be useful when dealing with customers. For example, when asked, ‘How long have you been in business?’ you can confidently point to your date of incorporation as the ‘start of business.’
3) The same also applies when having valuation discussions with VCs. If the company hasn’t even been incorporated yet, then they are likely to try and push you more on valuation. I’m sure several folks will disagree with this, but I am confident this happens — even if it happens subconsciously.
4) Likewise, the date of incorporation often plays a role in what portion of the founders’ stock is already vested at the time of a venture financing.
5) Incorporating forces you to start maintaining the books (or so I hope!) and also forces you to learn all the administrative details it takes to run a company. While this isn’t something that directly adds value to the company, it is something that needs to be done. The sooner you learn this, the better it is. Doing this from the beginning and keeping things clean will be something you appreciate when you get into due diligence.

There are of course some disadvantages to incorporating as well:
1) Cost — even though most law firms will defer some of the legal costs involved, incorporating through a law firm is still an expensive process (deferring is not the same as not charging!)
2) Administrative overhead — once you incorporate, you are expected to comply with federal and state regulations. So you have to file taxes for the entity every year (Federal Taxes, DE Franchise Tax, California Tax ($800 minimum if I remember right)).

Tip: If you are thinking of incorporating and it’s close to November/December already — WAIT till January! That way you don’t have to file all this paperwork for just a month or two of existence! And you’ll have a full year ahead of you to find an accountant/tax person to help for tax time.

But all in all, I say, incorporate as soon as you are sure you want to give this a real shot. Stop hedging, and just do it!

Every once in a while, you read something and you agree with what the author is saying. As you read, you can hear the resounding “yes” that accompanies the comprehension of the text. What doesn’t happen as often is the experience of where you find yourself physically nodding your head in agreement. Well, that is exactly the experience I had when I read Alan Patricof‘s piece in the NY Times DealBook: Another View: V.C. Investing Not Dead, Just Different.

Alan is the founder and managing director of Greycroft Partners, and he clearly has a lot of years of experience to make this analysis. In meeting and chatting with some of the veterans of the venture industry the one thing that I’ve  consistently noticed is that there are a lot of smart people in the business. I haven’t had the pleasure of meeting Alan, but his column certainly resonated with me.

In essence, Alan’s column gets to the core of why I started K9 Ventures, and does a wonderful job of explaining why and how Venture Capital needs to change. He makes the case that because of the changes in the public markets and what it takes to take a company public, those exits are going to be far and few. Therefore, venture capitalists need to change their models. The change can be one of two things, either you focus in the early stage and in that case you have to have a smaller fund and expect to get smaller exits (my strategy) or you can move upstream and go for the later stage opportunity (which is where I would argue most of the well known funds are headed, for example, KP is raising a total of $1.25B).

Though the whole article is well worth the read, I took the liberty of excerpting the key paragraphs here:

… I believe that the paradigm has changed for the venture business. We can no longer realistically expect the same kinds of absolute returns that were achieved in the past through a quick turnaround from start-up to liquidity through an I.P.O. Rather, I believe that most of the companies that venture capitalists are funding today will find an exit through merger or acquisition. And if we expect to achieve a return in a reasonable time frame of three to five years, we are probably looking at a sale price of $20 million to $100 million. This is the valuation range where most young companies are being acquired.

To compensate for these lower gross return expectations, we must establish initial valuations, usually in the single digits, that can provide an adequate multiple return and internal rate of return. Inevitably, this suggests that a true venture capital firm should be reverting to smaller-scale funds and restricting individual investments in early-stage companies to accommodate the realities of the exit opportunity. Larger funds can focus on later-stage growth opportunities that can absorb greater amounts of capital where there still exists the possibility of taking companies public in a timely manner.

I’ve bolded the key statements in the excerpt that had me nodding along as I read Alan’s article.

VentureBeat just blogged about some new statistics published by Thomson Reuters and the NVCA in this post: Venture fundraising: Going, going, gone?.

Here is the most damning/shocking excerpt from this post:

Venture capital funds raised only $3.4 billion in the last three months of 2008, according to new data from Thomson Reuters and the National Venture Capital Association. Unsurprisingly, this is a big drop (about 70.9 percent) from the same period in 2007, when venture firms raised $11.7 billion, and also a substantial decline from the $8.4 billion raised in Q3 of 2008.

In my previous post, A Time for Change in Venture Capital, I’d guess-timated that a 50% reduction in the total money going into venture capital is not inconceivable, but a 70% decline is even more severe. I would still hazard a guess that Q4 2008 was by far the worst economic time for venture fund-raising — primarily because the LP portfolios were so battered that no one was really in the mood to talk about new commitments to venture (and even especially given that the returns on venture capital have been nothing but disappointing for most LPs). Depending on how 2009 shapes up, chances are that the 2009 numbers will perform better than the 70% decline for Q4 2008. Very curious to see how this year plays out for the venture industry.

Jason Mendelson, co-founder and managing director of Foundry Group has a brilliant (brilliant in the sense that I agree with it 100%) guest post on VentureBeat: FAS 157 is stupid. It is a must-read post in which he discusses the new accounting rules (FAS 157) in effect regarding valuation of portfolio companies in the venture industry. Jason makes the point loud and clear about the “stupidity” that this represents.

In a well-intentioned but thoroughly misdirected effort to correct the accounting practices that occurred in cases like Enron, legislators and regulators have succeeded in doing little more than making the system even more obtuse, arcane, onerous, and, of course, “stupid.”

Peter Rip, General Partner at Crosslink Capital recently authored a post on his blog EarlyStageVC that has been getting a lot of attention. Peter’s post “The Coming Venture Capital Boom” presents a view that is hard to find these days. I had a mixed reaction to Peter’s comments. To a large extent I agree with him that there will be another boom in venture capital. After all, the industry does move in cycles and the boom and bust cycles are essential for survival of the ecosystem. This was best described in a quote by Kanwal Rekhi, Managing Director of Inventus Capital Partners: “A recession is like a forest fire. It frees up resources for the newer generation of companies.”

So I agree with Peter that there will be another boom coming in venture capital — it is inevitable. I would add though that before that boom happens, and before venture firms can benefit from this upcoming boom, there need to be some changes. The current environment provides enough momentum and incentive for a change in the venture capital industry. It is my opinion that there needs to be a clearer distinction between which firms are doing “early-stage” deals and which firms are doing “growth-stage” deals. The practices in venture have evolved but the nomenclature for stages of deals has not — for example, is Series A really the first round of funding for a company? Not any more.

Peter also makes the case for “great restart and late-stage opportunities.” Though that may indeed be the case, there are more companies that will go under because they cannot raise new capital and their existing backers do not want to participate. There will be some companies that may go through a restart; but a restart is really a softer way of saying re-cap. The re-cap benefits the new investors that come in and do a downround, but it is very demoralizing for the entrepreneurs and the team. Downrounds might be an opportunity for VCs, but they’re not fun.

I do agree about the separation of the wheat from the chaff in this economy and an overall improvement in the quality of entrepreneurs and startups. The Darwinian nature of the environment makes sure that only those who are truly commited and devoted to making their companies succeed will persevere. I also agree with the rest of Peter’s comments, especially his three points regarding the silver lining.

I’ve maintained that “It is never a bad time and always a good time to do a startup.” Doing a startup is hard regardless of when you start and it is only “Insane perseverance in the face of complete resistance,” (:Jack Thorne) that can make a startups succeed. There will be another boom in Venture Capital — it will just be after we get through the current environment and hopefully change for the better. In the meanwhile, there are still good companies out there and there is still money out there for those good companies.

In my previous post, I claimed that “Venture Capital is a people business in every sense of the word. It is therefore a boutique industry and it cannot scale.” Let me expand on that thought a little more to qualify what I’m saying.

Unlike investing in public markets, investing in early stage companies happens before those companies have a real business, when it is just a concept and a team, and sometimes not even a whole team. What early-stage venture capital is betting on is people. VCs have to be able to sum up an individual and make an educated guess as to whether that individual has what it takes to build a company around his/her concept, his/her dream. When it comes to helping portfolio companies grow, it is the people relationships that matter most — can you open doors to prospective customers, employees, partners, lawyers, accountants, bankers and of course other investors. The biggest challenges in building a company are: People, people and people. If you buy the people argument, then it follows that it is difficult to institutionalize and scale a venture firm since not everyone in the organization can have the same people judgment and people skills. Until such time that we can clone people as adults, with their knowledge and skills intact, venture funds are fundamentally people (time and bandwidth) constrained.

The other form of scaling in venture capital is that of the size of the venture funds. Limited partners invest in venture since it is supposed to be a high-return investment. Lets assume that Shylock Ventures is capable of producing a 20% IRR on a $100M fund. Those returns do not (and cannot) scale with the size of the fund! If Shylock Ventures were now to raise a $500M fund or a $1B fund, it probably will not be able to maintain its IRR. The historical returns were created by investing certain amounts of capital in companies at a certain stage. It isn’t possible for Shylock Ventures to simply put more capital to work in a company at the same stage — that would be over-capitalizing the company. At the same time, Shylock Ventures can’t easily find that many more quality investment opportunities because it is people (time and bandwidth) constrained. The only alternative is for Shylock Ventures to begin doing later stage deals that have an appetite for more capital. However, later stage deals have a very different flavor — they require a different set of skills and expertise to evaluate them and execute on them. Can the same firm that is doing early stage investing develop a competency in doing late stage investing overnight? While some very unique firms may be able to build/hire the competency needed for this, I would argue that most venture firms simply cannot scale the size of the funds without substantial risk to their strategy and returns.

Venture firms are like skilled artisans. Their products — successful companies — are most valuable when the firms remain small and have their own unique style. When you try to mass-produce this product or just try to make it really big, it loses its value. For sake of analogy, think of it as the chef at a top restaurant or the conductor of a fine orchestra — for each there is an ideal size and trying to scale it beyond that ideal size results in a degradation in the quality of the product. Venture capital is, and should remain, a boutique industry.

In my previous post, I talked about some of the reasons I felt that the venture industry was broken and needed reform. This has been something that I’ve been thinking about for a long time now (~1.5 years or more) and became the basis for me starting K9 Ventures. The logic there was that instead of just identifying a problem, do something to solve it. In the words of Mahatma Gandhi: “You must be the change you seek in the world.”

However, before I start writing about how I would want to change things, it is necessary to address the current economic climate. The bottomline is that this is the worst time in history for the venture capital industry. The stories of doom and gloom in the venture business are everywhere. Here are just a couple that I’ve come across recently:

• TechCrunch: The End of Venture Capital As We Know It?
• WSJ: Venture Capital Hits a Cash-Call Crunch
• WSJ: As Cash Stops Flowing, Venture Capitalists Get More Creative
• VentureBeat: Report from AlwaysOn Venture Summit: We’re not dead yet!
• Paul Graham: Could VC be a Casualty of the Recession?
• VentureWire: LPs, Firms expected to fall by the way side
• BusinessWeek: What Will the Crisis Mean for Venture Capital?
• GigaOm: VCs Must Woo Unhappy Investors, Too
• NY Times Dealbook: Beyond the Ivied Halls, Endowments Suffer
• BusinessWeek: College Endowments Deserting Venture
• NY Times Bits: I.P.O. Crisis Could Have Lingering Effect on Startups
• PrivateEquityOnline: Bankrupt WaMu Parent Defaults on Capital Call

If that isn’t enough doom and gloom so far, I’m sure you can dig up a lot more. There are several reasons for all this doom and gloom. I’ll try to list at least some of them here:

• Lack of IPO and M&A exits: Q2 2008 was the first quarter in 30 years in which not a single venture backed company exited via an IPO (see NY Times article). The blame is attributed to adverse incentives of legislation like Sarbanes Oxley and the bad financial markets. Mergers and acquisitions have also been down, especially the large deals. What does this mean? Well, VC firms have not been able to get exits; money that was invested in venture capital is locked up in illiquid private investments in portfolio companies and cannot be returned to Limited Partners.
• The Denominator Effect: The big endowments, pension and retirement funds, charitable organizations, family offices and high net-worth individuals who are the Limited Partners in venture funds have all seen their portfolios take a severe hit. Several of these funding sources have managed asset allocations, meaning that their investments in venture capital are supposed to be a certain percentage of their portfolio. However, when the value of the overall portfolio (the denominator) decreases, the percentage of the portfolio allocated to venture capital increases. The commitments to venture capital are therefore now a much higher percentage of their total portfolio than they originally started with.
• Deferred/Unmet Capital Calls: Portfolios have taken a beating in this market. For any LPs that were not sitting on cash, and few were, a capital call in this market would typically require them to create liquidity by selling some of their holdings. However, with the market this depressed, no one really wants to sell in the down market. Therefore, several of the large LPs have advised their venture funds that they really don’t want to see any capital calls in the near future. This ties the hands of venture firms. To make sure they have enough money for their existing portfolio companies, they first start reducing any new investments. In some cases, LPs have actually defaulted (see WaMu) on their capital calls.
• Venture Asset Class Performance: Venture capital as a asset class has produced disappointing returns. In fact, most venture firms actually lose money! It is only the top tier venture firms that are able to maintain good returns year over year. And in the current climate, even that is suspect. But, venture is a long term play. LPs have to give it at least 10-15 years to see see what the returns on venture will be like. Well, a lot of LPs have now been in the business that long and they’re not happy with the high-risk low-return performance of venture capital. To the extent that several LPs are considering pulling out of venture capital altogether.
• Stock Market vs Venture Capital: If you’re sitting on a pile of cash right now, would you rather invest it in the depressed stock market, where several publicly traded companies look like they’re in the bargain basement, OR would you rather invest it in a highly risky, completely illiquid venture investment in a private company? The stock market is liquid, typically less risky than a startup (though some would argue that) and if and when we pull out of this recession, the returns from the stock market may be even better that most venture investments. This applies both to angels and to the big money LPs.
• The Trickle-Down Effect: The total venture investment in 2007 was around $29B dollars. If the stock market has declined over 40% in the current year, and if we hold the asset allocation numbers constant, then next year the total money going into venture capital will be down by at least 40%. Add to that that several LPs are pulling out of venture capital altogether, it means that the total money in venture capital will be reduced even more. Without doing a full scientific analysis, I’d say a 50% reduction is not inconceivable. That equates to hundreds, if not thousands, of startups that will no longer be funded simply because of the effect of trickle-down economics.

So where does this leave us? Well, lets just say things are not looking good for the startup funding environment in the near future. The venture capital industry is getting beaten from all sides. Projections say that several venture funds (presumably the non-Tier 1 venture funds) will actually start shuttering their doors in the near future. Even the top funds are having to rethink their strategies and especially their headcounts. The “layoffs” in venture happen quietly — but they can, will and are happening in these times.

I’m going to make some bold and (I hope) controversial statements: Venture Capital is a people business in every sense of the word. It is therefore a boutique industry and it cannot scale. In my humble opinion, it doesn’t make sense for LPs to be funding multi-hundred million dollar funds and sometimes even billion dollar funds that claim to be “early stage” venture capital funds. The word early-stage has been misused to such an extent that it’s hard to even say what it means any more.

For small upstarts like K9 Ventures this is a bitter-sweet time. On one hand the macro-climate will certainly make things harder in the venture industry for the foreseeable future. On the other hand, such industry-wide disruptions are the best time to try something different. Without abusing an already overused line for 2008 I’ll say: It’s a time for change — even in the venture capital industry.

The business of venture capital is relatively young. The birth of modern-day venture capital (not considering the European monarchs financing explorations and projects as venture capital) can be traced back to American Research and Development, which was started by Georges Doriot. Spencer Ante‘s book Creative Capital provides and in-depth history of the life of Georges Doriot.

Without getting too much into the history of venture capital, which you’re welcome to peruse on Wikipedia, it seems safe to say that venture capital has really evolved as an “industry” over the past 30 years or so. However, even though this is a young industry, I’m going to posit that “early-stage” venture capital as it exists today is broken and in need of reform. I refer to this as the Venture Spiral. What follows is my analysis of why this is the case from three different points of view. I would welcome a discussion on this topic and invite any interested folks to either leave their comments below or email me directly if they prefer.

Background

Venture Firms are typically structured as partnerships. The General Partners (GPs) are the operating guys. They run the show on a daily basis — sourcing dealflow, evaluating opportunities, making investments, serving on board etc. The money that the GPs and other employees of the firm invest comes from Limited Partners (LPs) — typically the big university endowments, retirement funds,  charitable organizations, family offices and high net-worth individuals. In return for the operational role the GPs play, their firm receives a Management Fee. Industry averages for the management fee are expected to be around 2.5% of the size of the fund. In addition, there is a performance incentive — the Carried Interest or Carry. The carry is typically around 20% of any gains on the fund. Here’s an example:

Shylock Ventures invests $10M in Little Fish and gets say 33% of the company. A couple of years into it, the friendly neighborhood search giant, Big Kahuna, shows up and decides to acquire Little Fish for $100M. Glossing over preferred rights and preferences, Shylock Ventures’ take would be $33.3M, a gain of $23.3M over the initial investment of $10M.  So the carry for the GPs would be (20% of $23.3M) $4.66M and the balance would be the return to the GPs ($10M + $18.64M).

But, the carry only kicks in if the investment returns money. And the data suggest that most VC firms don’t return the money. Then why be in the business? Well, for one, you have to try and secondly, the management fee makes for a nice perk. Lets see how that plays out:

Let say Shylock Ventures raised a $500M fund. At 2.5% annually that equates to a management fee of $12.5M per year. The fee is generally paid throughout the life of the fund (generally 10 years, though some fund structures will reduce the fee after the “investing life” of 5 years). In total, over a period of 10 years, the management fee is going to be a whopping $125M.

Now that’s nothing to snicker over, especially considering that well-reputed and established firms could often have multiple overlapping funds. These partnerships last for a long time and are hard to unravel. The management fee becomes an “accelerant” in the firm’s incentive to raise bigger funds.

The VC perspective

Let’s continue with our example of Shylock Ventures. Assume Shylock Ventures has 10 partners who are going to invest the $500M fund over 5 years. On average, each partner needs to deploy $50M over 5 years, or $10M per year. The most constrained resource for a partner at a venture firm is time. The venture business is a people business — it’s all about meeting people, networking, evaluating ideas (and people) and making educated bets (on people). This is what makes it more difficult to scale. It requires the time and attention of the partners, but time is a funny thing – despite every effort, there are still only 24 hours in a day and 7 days in a week.

To justify the management fee, Shylock needs to deploy the capital that it has raised. Theoretically, the capital could be deployed anywhere in the spectrum of 10 investments of $1M each or a single investment of $10M by the partner. The money side is flexible. What is not flexible is time. Doing 10 investments at $1M each would mean that the partner would now have a gigantic portfolio to manage and there just isn’t enough time in the day, or week, or year to manage that many investments, serve on boards and help companies grow while still continuing to look for new investments. Therefore, the motivation is really to look for startups that have an appetite for a larger, chunkier investment. The industry average for the number of investments per partner is between 1-2 deals per year. VCs are therefore going to pick companies that can use up a larger investment.

Let’s assume Shylock invests $20M over the life of the company and ends up with about 20% of the company. For them to see a 5x return the company needs to exit at a valuation of $500M. For a 10x return that exit valuation needs to be $1B! To summarize, the incentive in a venture fund is to make sizable investments in companies that have the opportunity to become billion dollar companies, or in other words, the incentive is for venture funds to move up the venture spiral.

The LP perspective

Institutional LPs typically diversify their portfolios by investing in multiple asset classes. Venture is just one of the asset classes they invest in. LPs have invested in Venture Capital because as a class venture capital is both a high-risk, but high reward asset class. The expectation is that while venture investments are more risky than other forms of investments (though that is open to speculation in the current financial meltdown), they also typically have a high Internal Rate of Return (IRR). For what I’ve seen/heard the tops VC funds typically have an IRR of over 20%.

Institutional LPs are managing large amounts of capital, which is typically not their own money. To safeguard their investments, minimize risk and abide by their fiduciary duty, LPs perform extensive due diligence on the venture firms they invest in (just like the VCs do on the startups they invest in). Key components of this diligence is (obviously) on the team — how long has the team been together and what is their track record. In addition, LPs also want to invest a substantial amount of capital in a fund and have guidelines (that may vary considerably across institutions) for what percentage of their money under management can be invested in the venture asset class. The incentive amongst traditional LP sources is to invest in venture funds that have been around for a while and have a track record. However, as described above these day funds are the ones which have evolved to now be managing larger and larger venture funds.

If the venture firms that move up the venture spiral are doing larger and later stage investments, the LP expectation of high returns on this risky asset class are likely to not be met. Several LPs have already started seeing this effect across their venture asset class portfolios. There will be some notable exceptions here — the top 10-20 venture funds may still be able to have a good IRR on their funds since they get access to a higher quality dealflow and because of their reputation have a higher probability of investing in the quality teams and concepts that are likely to be successful. However, for the vast number of the remaining venture funds out there, the returns to LPs are going to be disappointing.

The Entrepreneur perspective

For entrepreneurs the problems occur at multiple levels. First, VCs are only interested in doing investments that have the potential to require a sizable amount of capital and also have the potential to be big markets. That means that VCs become ultra selective in the types of deals they consider to be venture fundable, leaving several otherwise great concepts and teams struggling to find venture money. As established funds move up the venture spiral, they leave behind a vacuum for true early stage venture capital.

Thus far, this vacuum has been filled by friends and family (or sometimes know as the 3Fs — friends, family and fools), angels and an increasing number of angel groups. This poses it’s own problems. First, for entrepreneurs, raising money at the very early stage becomes an exercise in herding cats — getting large number of funding sources to agree and individually contribute small amount of funding to pull together the amount of money the startup needs. This is both time consuming and sometimes frustrating for entrepreneurs. In addition, in most cases no one angel has enough capital invested in the company to be “on call” when the company hits hard times (and invariably, every startup does!). The entrepreneurs may lack access to the advice, oversight and expertise that they really need in order to take the fledgling company to the next level.

Follow-on funding for these companies also becomes an issue for two reasons. First, these sources of funding may not have the capacity to sustain the company till it begins to bring in revenue or is ready for a professional round of financing. Secondly, if the VCs are looking for the billion dollar opportunities and the company doesn’t fit that criteria, venture funding may be hard to come by at all.

The intent here is not to paint an all too gloomy picture, but to try and point out some of the deficiencies in the current state of venture capital. The design of K9 Ventures takes these issues into consideration. In the following post, I will outline how and why K9 Ventures hopes to address some of these deficiencies.