My answer to that Quora question reprinted here:
SV Angel invests in and advises startups. We make money when these startups have a “liquidity event,” which is historically an acquisition or public offering. We invest other people’s money. We invest our own money too–this is called a “capital contribution”, which is required of most funds. When there’s a liquidity event, the other investors get paid 80% of the profit and we get 20%.
This is the structure of a traditional venture capital firm (VC). But we aren’t a traditional VC firm. Traditional VCs invest in 10-20 companies per year. We may invest in 100+. Many VCs need to own a certain percentage of each company and invest more money in the companies that are doing well (i.e., “pro rata” in VC jargon). We don’t, and we rarely do our pro rata. Many VCs have a ‘higher touch’ approach with the company post-investment. Because we invest in more companies, we don’t have that approach. We try to help only when the companies ask and usually at ‘inflection points,’ which are financings, M&A, business development deals, etc.
Our approach isn’t mutually exclusive or “better” than other firms. In fact, we need to work with firms who add value in different ways. If we don’t, then ours doesn’t work. Our business model is different, in the same way that Amazon has a different business model from Google, for example. We think that we can make “venture-like” returns consistently over the long term for our investors with our approach.
When we started in 2009, our goal was to institutionalize what Ron Conway has done over his 20+ year career[]. Ron has been called a “human router” by some–he makes intelligent and helpful human connections in the tech ecosystem. We wanted SV Angel to become the human “routing layer” by making connections among and developing relationships with the best founders, investors and corporate partners. Each of these 3 constituents or sub-networks want to meet and have relationships with the others. The starting point is investing in a relatively larger number of more promising founders and companies at smaller amounts (i.e., $50-100K)[*]. Most of these companies will fail. But some will become successful and a select few will become breakout companies.
In a nutshell, we try to reduce friction in the ecosystem by making the connections that are a “force multiplier” for startups. Google and other tech companies have shown that if you can reduce friction (i.e., transaction costs), then you can generate and capture value. That’s what we’re trying to do.
[*] Ron’s role at SV Angel is described here: Is raising money from SV Angel the same as raising money from Ron Conway?
[**] We will occasionally invest larger amounts in later-stage companies if we have unique access (i.e., our investors can’t buy the shares somewhere else) and some unique thoughts on the company (e.g., through working with them from the earliest days).