Wednesday, June 26, 2013

Entrepreneurs Court New Super-Angel Investors

David-S-RoseIt is no secret that the world of venture capital (VCs) was turned upside down by the recent Recession, and many other changes in the marketplace. I see now emerging a new wave of investors, popularly known as “super-Angels,” micro-VCs, or “super-seed” investors. Every early-stage startup should explore this new funding alternative.

Examples of some leaders in this space include Mike Maples in Silicon Valley and David S. Rose in NYC, who each make up to ten investments a year of up to $250,000. Business Week ran a more thorough analysis of this movement a while back, which I have updated below. I would conclude that the genesis of this trend comes from several forces, including the following:

  1. Less investment capital available. Venture capital dispensed quarterly to startups actually declined again in the first quarter of 2013 to $6.3 billion, the lowest quarterly total in more than two years. Due to the struggling economy as well, traditional individual Angel investors haven’t been able to fill the gap.

  2. New “up-and-comer” VCs focus on early-stage companies. VCs are finding that they don’t need the “large” funds of $100M to $500M to support a portfolio, if they focus on early-stage startups. It’s higher risk, but higher return, to pick the big winners early, before Angels have set unreasonable valuations and restrictive terms.

  3. Technology costs are plummeting, meaning you can do more with less. Twenty years ago, it cost $5 million to really launch a high-tech startup, when the same thing can be done today for $500 thousand. So, in effect, VCs need to come in at what was formerly the Angel stage to grab the gems and hold them.

  4. Many old-line VC firms have grown too big and unwieldy. More are realizing that they have forgotten how to build innovative companies, so they are going back to their roots, when firms were smaller and more nimble. They can plant more seeds, and place less dependency on the big win.

  5. Being “lifecycle investment partners” has a downside. As venture funds grew bigger during the dotcom bubble, and sized themselves to invest in every round of selected startups, they found it was very hard to stop investing in the underperforming companies. That model doesn’t seem to work any more.

  6. Great companies are made, not born. Conventional wisdom is changing from startups being born a winner (execution doesn’t matter), to being made a winner (more chances and more help early on). This means smaller amounts given to more entrepreneurs who get a chance to prove that they can build great businesses.

Of course there a couple of potential down sides to this movement:

  • As more startups are funded, without the big VCs on the other end, more companies will be looking for growth dollars and may languish trying to differentiate themselves in a crowded, but slow spending, consumer marketplace.
  • More sources of funding for early-stage startups may drive up valuations on these deals, which will lower the returns for the Angels and super-Angels willing to do these deals. That could cause this bubble to burst and hurt everyone.

I applaud the direction of investors who want to re-invigorate venture capital by taking it back to the real entrepreneur who needs help getting his venture off the ground. Too many founders today face the conundrum that they need capital to get started, and even Angels defer until after you have your product built, business model proven, and a real revenue stream.

Startups with connections or warm introductions to super-Angels should count themselves lucky. These Angels typically don’t demand board seats, and are not as heavy-handed as VCs. Check them out, and find others, so maybe you too can be super-blessed by a super-Angel.

Marty Zwilling


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7 comments:

  1. Thank you for bringing more information to this topic for me. expert advice

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  2. My experience with VC dates back to the nineties - but with such small investments VC continues to show their inability to recognize anything but trivial technological innovations. By their nature these investments in simple technologies are gambles with a low probability of success as competitors may come up with the same concept - possibly a better one or even a touch earlier.

    More complex concepts would require VC's use of at least University faculty that is able, for example, to work through sometimes complex concepts, such as numerical/mathematical or statistical evidence. Even top firms, in my experience, have not made use of sophisticated resources for evaluation or at least to consult with advisors or collaborators of the inventor as it relates to the domain of the venture idea. Instead VC's advised "the next time you better come with a simple idea" (that they can understand easily w/o dependency on "outside" information).

    Well, still - good luck to all of them!

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  3. I'm interested in VC capital but not into throwing away my company to greedy investors...any suggestions?

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    Replies
    1. With that attitude, you probably won't find any investors you like. You should look for the right investor just like you look for a life partner - there are plenty out there that are not greedy, but are just looking for a win-win deal. Do your own due diligence to find them.

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