Last week Usher’s “Oh My Gosh” was bumpin’ from the radio of a grey rental minivan heading to San Francisco for Dorsey & Whitney‘s “Are we all blowing another bubble?” event at Pier 38. Well, it was bumpin’ only until the phone belonging to the minivan’s driver made a sound. Every time it buzzed or rang, he and his two programmers shrieked “Holy shit!” and immediately turned off Usher.

They were obsessed with the phone because they had interviewed with Y-Combinator earlier in the day. It was only a matter of minutes before they would find out if they had been accepted into the June 2010 program. A phone call would mean they were accepted; an email would mean rejection.

To save you the suspense, they ended up getting the email later that night. But there’s a story to this minivan ride that’s much bigger than them. (Trust me, they’ll be fine.)

Between the reckless driving, hot radio beats and girly shrieks, I wondered:

When’s the last time a big early-stage VC firm got entrepreneurs excited like this?

Seriously. Take a look at these firms:

Not to pick on these 7 firms (we just randomly selected them) but all of them claim to be “Early-Stage” VC firms.

Can you name more than a couple of their portfolio companies?
Can you give me specific examples of what they’ve done to help early-stage entrepreneurs and strengthen the startup ecosystem?
Can you tell me why one of these firms is better than any of the others?

Neither can we.

Why can’t we answer those simple questions? All of these firms have hundreds of millions under management. All of them are involved with cool companies we care about like Pandora, Posterous, UStream, YouSendIt, and oDesk. I’m sure that all of them have great people doing excellent work for those companies too, but we haven’t heard any of their stories. In fact, very few (if any) of us early-stage entrepreneurs have any idea who the people at those firms are and what they care about most.

In contrast, look at the look at the logos from these venture capital firms:

What are the first things that come to your mind now?

All of these firms have less than $50m under management and are taking large chunks (6-12%) of great early-stage companies for less than $50k of investment with few strings attached. Nevertheless, many great young technology teams are literally weaving through traffic, killing hot radio beats, and shrieking in anticipation of giving chunks of our companies to them.

Why?

The answer is branding. We wrote a post recently on startup leadership and how people don’t buy what you do; they buy why you do it. This idea is important for every entrepreneur to understand as they seek out new customers and talent. It is also important for every VC to understand when they ask themselves why early-stage entrepreneurs don’t care about them and they are getting beat by the VC’s who do understand marketing like Fred Wilson, Chris Dixon, Brad Feld, Charlie O’Donnell, and Dave McClure.

The VC firms that are struggling right now will tell you that their funds are too big. They’ll tell you that there aren’t enough good companies out there to put their LP’s money to work.

In reality, demand for venture capital is not lacking. If anything it’s growing and we’re actually getting better at building more companies in which more VC’s (like, say, Redpoint’s Satish Dharmaraj) want to invest:

If there are so many fundable companies out there, every early-stage VC firm has a tremendous opportunity in front of them to make a killing right now. They shouldn’t have a problem putting all of their capital to work, albeit in smaller chunks because it costs less today (especially for consumer internet companies) for us to get started than ever before. Though the size of each individual investment and payday is shrinking, the total amount of  money to be made is getting bigger, and it’s out there for the taking.

But the firms that are not actively pushing their brand through the startup ecosystem are missing out on all of this. They will never show up on the radars of the next generation of disruptive companies as interesting funding options.

Their cash might as well be on the sidelines. No one will want it unless they know who they are and why they want to use it.

YC is the golden example here. We’ve all read Paul Graham’s essays, applied to Startup School, and submitted content to Hacker News. Their community has become our community, and it’s paying off. Other firms are sorting through their rejects, fighting over their alumni, and claiming that there aren’t enough deals out there to put all of their LP’s money to work.

The size of your fund isn’t your problem; it’s your branding.

Unfortunately, this branding problem hurts everyone in the startup ecosystem, not just early-stage VC firms. For every VC that chooses to shed capital instead of addressing their branding problem, some fundable companies won’t get funded. At the same time, other fundable companies will keep giving away big chunks of equity for a bridge-round ($10-$20K) before spending more time raising another round (instead of working on their product) to give away another big chunk. That’s a big drag on efficiency, incentives, and quality-control for an ecosystem that’s crucial to the health of the recovering American economy.

So, instead of downsizing your fund, laying-off employees, or going into stealth-mode, here are some tips for finding all of the lucrative early-stage opportunities waiting for you:

1. Going only to TechCrunch’s events does not mean that you have your ear on the ground of the startup ecosystem. Get involved with Startup Weekend, Startup2Startup, Founder Dating, Hackers and Founders, and SF New Tech (and their national counterparts like NY Tech Meetup) to meet the people who are actually creating the next round of profitable companies.
2. Being a “Stealth VC” is just as stupid as being a “Stealth Startup.” Through your website and the people you send to community events, tell us what you are doing for your current portfolio companies right now and how much they are kicking ass. And if you are internally discussing doing more early-stage deals in the near future, you need to tell us NOW so you actually cross our minds later. This means that you need to be both creating (e.g. blogging, tweeting) and commenting on the content early-stage entrepreneurs consume (like the guys we mentioned earlier).
3. Reconsider the makeup of your team. Is your current employee structure optimized for making smaller deals more often all over the world? Finding great deals early requires you to have strong, physical presences in more places. This means that it might be time to replace your two MBA Analysts making $60K/year with four entrepreneurial activists who know your firm and will attend grassroots events and engage early-stage entrepreneurs by both creating and sharing relevant content.
4. Center your startup community around you. Currently, a law firm (Dorsey & Whitney) is dominating most VC firms at this. That’s embarrassing. The best way to find what you’re missing is to bring together the members of the startup ecosystem around you with a personalized event. It doesn’t have to be a big conference, just a simple dinner or drinks. Or do Taco Tuesdays, Happy Hours, or Pancake Breakfasts. We are throwing Startup Waffles and founders love it! If you don’t want to get creative, at least run an invite-only event so you can put your portfolio companies and one other company they think is cool in the same room together and see what happens. Finally, do any of you throw celebrations when something really cool happens to one of your portfolio companies? If you do, we need to know about it.
5. Hold open office hours for free advice. Let us come talk to you about our ideas once a month. You’ll be surprised by the quality of the ideas and the connections we have. We need more mentor/advisor resources that aren’t asking for cash or equity as soon as we talk in the door. The VC firm that gets out in front of this big need first will win big. (Currently, law firms are dominating VC firms at this too.)

If you fix your branding problem, it will pay off. Not only will you have more fun doing your job, but also every new deal, including the next big thing, will weave through traffic and blow off Usher just to give a chunk of their company to you just because of who you are and why you’re in this business.

What do you think are the top 5 VC brands right now?

[This guest post was written by Michael Heinrich, the co-founder of vrLocal and co-curator for the NYC [Startup Digest]. vrLocal is still in private beta but they are launching a local service provider platform to easily hire and manage providers in your area. You can read more of Michael’s thoughts at @mheinrich]

If you are an entrepreneur in New York City, you have probably smelled a change in the air, an outburst of creative energy, oh yes, the New York entrepreneurial community is thriving! In the summer of 2009 I went to a conference at which Seth Pinsky (President of the New York Economic Development Corp) spoke about Bloomberg’s economic development agenda. In the aftermath of the financial crisis, attracting additional industries, esp. technology and biotech, is a high priority. And I knew the entrepreneurial environment was going to be changing for the better. Of course, there are still a few areas that need improvement such as ample supply of great engineering talent willing to work in startups, a university network that actively supports entrepreneurship, and ample supply of smart seed funding, ample technology domain expertise, etc.. But things are slowly improving in those areas…and where else would you find this much creative energy, central park, 5^th ave, statue of liberty, old industries waiting to be reformed, great public transportation, a super diverse population, amazing night life, Broadway, and some of the best restaurants in the world? Where else would you find a strong focus on design + engineering rather than pure engineering (how could I not mention Dave McClure’s post here)?

When Carter Cleveland and I first started the Startup Digest in New York City in the beginning of this year, we started with 60 readers. Now, we are 1600+ and continue to grow rapidly, which is yet another testament to the popularity of anything related to startups. We ensure that we feature the best startup events every week and, thus, I’m happy to announce that we just engaged in a media partnership with Startup@Work (http://www.startupatwork.org). Startup@Work started Fall of 2009 and has since invited great speakers such as the founders of Kayak.com, About.com, etc. and super angel investor Ron Conway. Best of all the events are free! The host Warren Lee conducts the meetings in an interview style format with a slide deck featuring additional information in the background. Luckily, high quality events like Startup@Work are slowly becoming commonplace, which is a wonderful educational experience for established and aspiring entrepreneurs.

New York Entrepreneur Week (NYEW) @NYEWeek also just ended which featured our very own Chris McCann. A warm thanks to Gary Whitehill for organizing the event! The following 6 panels stood out:

1. “Do You Manipulate or Do You Inspire?” & “Content is King: The Art & Value of Story Building”
   1. Key message: Be authentically you–figure out the why (not the how or the what) you are starting your startup and formulate a story around your beliefs
2. “Raising Seed-Stage Capital” featuring Dave McClure
   1. Key message: Ideal angel investment process—a) get customers, b) get initial lead investor (start with low valuation), c) get more significant investor involved, d) now drive up demand by getting more investors involved, leads to more favorable terms (like higher valuation), e) close
   2. Check out this classic from Dave: StartupViagra
3. “Self Promotion” featuring Peter Shankman
   1. Key message: Helping people is self promotion and good self promotion is when other people do the promotion for you
4. “Selling for Survival” feature Rent the Runway, Spongecell, Cross Commerce Media founders
   1. Key message: Sales is about who you are and how you represent yourself à Hire attitude (great character & fun) and aptitude (raw intelligence, pattern recognition, worked in down & up market and knows how to adapt)
5. “$3BN in Value Created: Top Entrepreneurs Reflect” feat. founders of Clearspring (Hooman Radfar), Linkshare, Fuel Outdoor, etc.
   1. Lots of general advice: stay persistent, recession is a great time to start a business (less competition & more talent), be honest about what you don’t know

I would have loved to see more lean startup, customer development, user testing, metrics, iteration / Plan B focused panels, but there is always next time!

P.S. For any feedback on the NYC SUD write me (Michael@thestartupdigest.com) or Carter (carter@thestartupdigest.com or www.astatespacetraveler.com)