Q&A with Chris Douvos

Micro venture funds are becoming increasingly common. The two-GP shop Floodgate Fund recently closed on $73 million, super angel Aydin Senkut has raised a $30 million fund for his Felicis Ventures, and Dave McClure, who has managed seed investments for the Founders Fund, is out trying to raise $30 million for 500 Startups.

Limited partner Chris Douvos says he has been investing in super angels and micro VC funds for about five years as a managing director for The Investment Fund for Foundations. Dan Primack, Editor-at-large of VCJ, recently spoke to Douvos to get his insights on the trend.

Q: How do you define a micro VC fund?A: To me, what initially attracted me to the space is that it was about people who had found that the arithmetic was on their side. They were recognizing some really meaningful trends at certain types of startups—capital efficiency and the fast cycling of ideas at IT/Internet companies—and were typically people with some sort of entrepreneurial background with a bit of investing experience thrown in.

Q: Lots of traditional VCs are now launching seed programs. Are you worried that they’re going to overcrowd the seed market?A: Warren Buffett famously said that innovators are followed by imitators followed by idiots. Every interesting financial play has that dynamic. We saw a lot of innovation in 2004 to 2006, and now there are a lot of people imitating. Many of them can make lots of money doing so, and are good in their own right. What I worry about is getting to the idiot stage, where people without the right qualifications or backgrounds try exploiting a perceived availability of capital.

Q: Where do you come down on the “micro VC bubble” argument?A: Without sounding too Pollyanna, I think that the competitive dynamic has changed, but I don’t think there’s a bubble yet. And I think it would be difficult for there to be a bubble because the environment is so target-rich. … [Plus,] the arithmetic of the micro-VC space is such that you can have outstanding venture returns with extremely modest exits.

Q: Is it possible that many of those current targets are only there because the larger economy sucks, thus creating many entrepreneurs who otherwise would have corporate jobs?A: In our experience, we typically see more people who are really committed to entrepreneurship than refugees from large companies who feel the opportunity cost of their time has gone way down. If you look at the portfolios of our micro VCs, the crazy ‘walk through walls’ gene is over expressed.

Q: Have you seen any micro VC funds that involve biotech or cleantech or any other non-IT sector?A: The value proposition is IT, because of the macro trends we discussed earlier. But we are seeing folks across the spectrum pay a lot more attention to capital-efficient companies. We’ve seen capital-efficient cleantech funds and capital-efficient health care funds. So it’s definitely a pervasive thing in the atmosphere. But I think it’s most dynamic and most fluid in the IT world. … [Another consideration is] how fast you can test cycle ideas. That’s hard to do in biotech, where you have the regulatory gauntlet to run, or cleantech, which has long sales cycles with large concentrated end users.

Q: Is there a proper amount of money for a micro-VC partner to manage?A: The answer to that question is a function of their stance toward follow-on investing.

But there’s an emerging consensus of $30 million per partner. Is that the right number? I’m not sure.

One of the challenges is that we’re in the second or third inning of this ballgame. We really don’t know what the right strategy is, and there may be multiple right strategies. Some will invest early and not follow on aggressively. Others will want to protect their ownership, and will need more capital per deal per partner.

A lot of these guys are going to have to seriously think about reserves and ownership and community. This is not a community that’s been marked so far by sharp elbows, but in time it may become a feature of the landscape.

Q: You have been active in this space since about 2005. Who do you consider the archetypical managers?A: Well, the main one is someone we actually haven’t given money to: Ron Conway. He’s created a fantastic ecosystem. But we’ve backed some of the people who have taken types of things he does and refined them a bit. For example, one of our earliest investments was in First Round Capital. We think those guys have brought an aggressively thoughtful approach to the challenges of investing in seed stage companies.