“VC” is a state of mind

There is a lot of debate going on these days about VCs and super angels. When is an investor a “super angel” vs. a “VC”? Does it matter? If so, why? I tweeted earlier today about joining the VC World, and one of my partners chimed in that we’re not a VC. He’s right of course. So, that got me thinking about what the term “VC” really means these days.

Wikipedia has a comprehensive definition of venture capital that is worth reading, but let me boil VC down to what I consider its essence:

Venture capital is an industry where professional investors invest other people’s money in early stage growth companies in the hopes of generating superior returns over other asset classes for their investors.

Lets look at the key elements:

Professional investors: You are paid to do this (more or less) full time.

Other people’s money: You have limited partners. They are ultimately taking the risk.

Early stage growth: Nominal or no revenues. High growth potential through a combination of great product and large market opportunity.

Superior returns: All early stage investors are after great returns that make it worthwhile to make such risky, long term investments.

Under this definition, anyone who invests other people’s money is a venture capitalist. So, we need to look elsewhere to find a useful distinction between super angels and VCs.

I think that distinction lies in the 4 “S”s.

Stage: Super angels should be first money in before significant traction. VC on the other hand should be about accelerating something that has market validation.

Strategy: Depending on fund size, VC is all about the home runs while super angels can take a dual track approach. They also love the home runs but can make great returns on more modest exits (more on this below).

Size: Super angels have funds that are small enough to make returns with modest exits and small enough to be flexible in how they dole out capital. There is no minimum amount of capital to be “put to work”. VCs on the other hand don’t have this flexibility.

State of mind: Today’s entrepreneurs know that there is a new group of lean investors. They are naturally drawn to the Chris Dixons of the World. So, ultimately, whether someone is a VC or a super angel or a whatever comes down to their state of mind: do they get this new World order? Do they know how to add value to a lean startup?

This last point is a subjective one. But to paraphrase Jay Levy from Zelkova Ventures: “[super angel] is like pornography, you know it when you see it!”

For more on this debate check out the “super angel / VC” smackdown: