Don’t Confuse Getting to Market with Building a Company: Charles River Ventures’ Izhar Armony Busts Some Micro-VC Myths

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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.

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7 responses to “Don’t Confuse Getting to Market with Building a Company: Charles River Ventures’ Izhar Armony Busts Some Micro-VC Myths”

  1. Izhar…I think what you say about distinguishing finding a product market fit and building a company is very true. But I think you pin the confusion over that too squarely on the entrepreneurs. I have met several micro VC’s who have illusions of a $25-$100M company built on one small sub $1M round. They hold up the “be capital efficient” card as the only measure of success. You can kill an opportunity with a sole focus on capital efficiency, at some point.

    One investor even told me, “I only invest in companies that will never need more than $100K.” He went on to say he expected the team to basically go without pay as long as it took, and as big as the team got, to get to profitability. Hmmmm….he’s not going to find many savvy or experienced teams who are going to sign up for that. They know better…about what it takes to build a business, rather than a product.

    Thanks for sharing your smart thinking on this topic.

  2. Izhar: good points. I agree and have been emphasizing for some time that entrepreneurs and investors have be a good match for their strategies and resources. No one is going to build a network communications company on $500K or even $5M.

    I believe a lot of the attention has been going to “super angel”/”micro VC” because there’s been a real gap in the market as most VC funds have grown >$100M and in this town >$200M. There also have been more exits lately in Web 2.0 companies. Finally, consumer-oriented web companies just have more mass market brand recognition than some back-office, lower-in-the-stack, infrastructure company regardless of how valuable the latter becomes.

    We need a diverse capital market both to support entrepreneurs and to support the economy. If low-capital-to-start companies grow bigger, they ought to be able to go to the market and raise more money. We don’t have one-size-fits-all entrepreneurs and should be glad not to have one-size-fits-all investors.

  3. Amir Eldad says:

    Izhar, strongly agree; I think the good super-angels / micro-VC’s can help a strong founders team get to the point of proof of concept / feasibility, and then adding connections and some mentoring.

    The question is, for the good founders team, is it the best for their interest to take this $50K (for example) from a super-angel, or maybe get this money from other places for a significantly lower cost of capital.

    It is clear (in my mind, at least), that the next stage (after POC) is mostly fulfilled by the classic VC.

  4. EP says:

    Guys, Isn’t the statistic something like 87% of the Fortune 500 never took venture capital? Wasn’t Cisco started on a $5k F&f investment? Didn’t Webvan fail after $850M VC invested? IMHO, there are no absolutes but predominantly VC is not needed as much as patient hard working folks with some start up capital in the right market with the right offering at the right time and place, and the right goals. There are increasingly more smart brand name investors betting small $ on these types of start-ups. VC has its place as the interviewee mentioned, but my take is that these super Angels are going to make some great investments.

  5. I think it was Jean Hammond who once told me “Angels fund experiments.” That really stuck with me and the danger of the funding gap that James Geshwiler describe is that with out enough angel investment, you don’t get the luxury of doing a lot of experiments to “get it right.” Steven Gary Blank does a great job of outlining this in his book “The Four Steps to the Epiphany” (

  6. Len Williams says:

    Great article. There are some advantages for micro finance investing, such as a smaller risk, achievable profit targets, cashflow return after 1-3 years. For innovation the advantages are that more and more emerging companies can quickly and cheaply launch their products. But, whether they succeed or fail – that is going to be visible quickly, as well.But, as you said, to build significant businesses you need investors with deep pockets, as these micro vcs are not able to support subsequent investments on their own. So, there could be a positive evolution of micro-funds, also useful for startups, but the “old-school” venture capitalists are still to be considered. Not everybody’s business is going to become as successful as Facebook, but every entrepreneur should have high aspirations, that are not only connected to immediate high returns.