Early-Stage Capital
The existing venture model arises out of the explorer/exploiter paradigm. This paradigm presupposes that the skills and mindset which enable an “explorer” to envision the next new product or idea are different than those which enable an “exploiter” to extract value from the product or idea. Both are required for success. In addition to capital, the venture investor is supposed to bring the skills and mindset necessary to help the founder bring his or her idea to fruition.
The trick, especially for early-stage companies, is to keep a balance between these two forces.
The traditional venture investment model has been remarkably successful over the last 30 years in stimulating the creation of successful new businesses and wealth. This success has pushed up-market many of the venture firms which formerly funded early-stage companies. Established venture firms have raised tremendous amounts of money, creating pressure for them to increase the minimum amount of investment in each portfolio company.
There is also a paradox inherent in the traditional venture model which becomes more pronounced as funds become larger and more institutionalized. Although most venture firms were started by entrepreneurs or entrepreneur-friendly investors, many firms have built teams comprised of financiers and large company executives who lack relevant early-stage operating experience. Gradually, as fund sizes have grown, these firms have become more dependent on quantitative or academic analysis increasingly distant from the subjective or experiential judgment which entrepreneurs rely on during the early stages of their growth.
In addition, the standard terms of venture investment have over time become increasingly one-sided, determined by venture firms with disproportionate economic power negotiating with themselves. As the size of the minimum investment gets larger, the terms more one-sided, and the investment process more institutionalized, obtaining funding from a venture investor begins to appear more and more like secured borrowing from a bank except that, in effect, the founder/borrower is permanently transferring the “security” to the bank. Many early-stage companies no longer qualify for this kind of venture investment, any more than they would qualify for a bank loan. Companies that fit this profile are particularly well-suited for Arena’s unique approach.
