Mike Arrington broke a story about a secret meeting of some of the big names of new super angels trying to figure out how to create "buddy networks" around early stage deals.
My immediate reaction was no way that would happen. But after digging around, turns out, it is true. I have predicted the train wreck of super angels for a year, and it’s happening now. The Silicon Valley venture community is at war, and that makes for quite a crisis for entrepreneurs.
According to sources close to the situation, a collusion among super angels was in fact going on. Additionally, this wasn’t the first time a secret meeting took place. There was another secret meeting between super angels trying to create a system to compete directly with existing venture capitalists.
This trend is very bad, and I am hearing directly from limited partners (the guys who invest in venture funds) that they are backing away from the super angel venture model.
Here is the problem going on with super angels. This is about egos, and not the entrepreneurs. The voice of the entrepreneur is lost in this discussion. Having super angels fight and create conflict in the VC community only hurts entrepreneurs. In fact I have heard from tier 1 VCs that they are walking away from deals funded by super angels. This SCREWS the entrepreneur. This is BAD.
The business is early stage entrepreneurship is about value add–not value subtract. This trend of individuals acting like VCs is problematic because they are spread so thin that it’s difficult to add value; never mind trying to remember the names of the entrepreneurs that they back. I’ve also heard first hand that some big name super angels don’t even know the name of their founders who they invested in.additionally, I hear deals are being done over BlackBerry messaging, without even meeting the entrepreneur or knowing about the opportunity. This, folks, is a BUBBLE.
The bubble is bursting and the big problem is that super angels don’t have a lot of money. Fact is, they don’t have much for following financing. This is bad if you’re an entrepreneur because not only are you going to be blocked from bigger VCs but the super angels don’t have the ability for follow-through on financing. Failure will be a big part of the super angel movement.
Early stage startups is about chemistry, so this super angel collusion also known as buddy investing isn’t good because it crowds the cap table which creates a toxic effect for follow-on financing. The best early stage deal is about a small team that plays well together and moves the needle verses some popularity contest.
At the end of the day the yardstick should be about entrepreneurs success and value creation. This new revelation will create a toxic affect around those involved.
Entrepreneurs should be careful. Your future, your company, your family, and economic value is at risk.
It should be about the entrepreneur and value creation not ego and how many deals that some guy does. I hope this bubble pops right now
About Angel Investing
Angel investors have been a big part of the technology investment landscape. An angel investor is defined as a wealthy individual–usually a retired entrepreneur or executive. Traditionally, the angel investor will invest very small amounts of money, invest close to their home, do a few deals per year, and spend enormous amount of time to add value to the young, emerging startup.
The main value-add activities of an angel investor is to 1) provide small seed money to the entrepreneurial team, 2) provide technical or business advice so they don’t screw things up early, 3) provide introductions to possible business partners and customers, and 4) help “Sheppard” the startup to the institutional investor – the venture capitalist.
What’s Happening Today With SuperAngels
There has been a ton of activity in the entrepreneurial landscape. First, companies are being funded for much less than ever before — especially Internet companies. Second, it is well-documented that the venture capital industry has been upside down in terms of returns since the dot com bubble. This has allowed the emergence of smart guys who are “cashed out” and too young to retire.
On the overall trend in venture capital and SuperAngels in particular, there is a gap between the structured seed rounds (25k-500k) and venture deals (>500k). However, it’s not like this “gap” has been a secret, or suddenly appeared in the past couple of years. Up through the year 2000, angels stepped up to larger amounts and VCs stepped down into smaller rounds filling the gap.
After the bubble burst the angels went away for a while and the gap remained. That said, many are correct in saying that there is a new class of start-up which requires less capital to get off the ground and show some progress typically consumer Internet focused.
Super Angels Flash In The Pan – Or New Type of VC
Like a lot of new people entering the start-up investing biz these days, SuperAngels seems to be taking the approach that pandering and flattery are the best ways to establish credibility with founders. This is no doubt a great way to develop a large following, because there is a decent sized demographic out there who had a bad start-up experience that involved VC’s. It’s great marketing for the new guy to please the crowd. Articles and rhetoric that bash VC investing are always well received.
New, trendy incubators are hot as well. With respect to these new incubators likeY-Combinator for example, the ratio of pitched to funded companies is roughly 50 or 100-1. Therefore, it’s fair to assume the ratio of people with a “good” experience are far outweighed by the “bad” ones, so again, the audience for this stuff is out there. Most of this kind of activity is just normal entrepreneurship startup stuff.
With respect to VCs, there are weak VCs out there and there are idiot VCs you should avoid, which is true of every asset class that exists, including angels and SuperAngels. However, there are really good VCs who understand the nature of the venture investing business. Specifically the funding dynamics and the cycles VC go through. It is important to note that there are VCs who understand the value add game. These are the guys that the serious entrepreneurs go to. Often times these “tier-1” VCs don’t’ grandstand and blow sunshine up and down Twitter. They let their game (good investments and good returns) do the talking.
I talked to many venture capitalists over the past year. All feel the same way. They all welcome the new value add guys. However, there is serious concern for is known as the “tourist investor”. A SuperAngel is a person who is “Super” and is an angel – an individual who can add significant value, not just one with lots of capital. Creating wealth and value is "Super" by Silicon Valley standard.
According to a VC that I spoke with, he said “I’ve never had a problem following ‘Super’ angels into a deal and paying a higher price to invest – if they are adding real value to the company and helping it in the early stages of development with their TIME and MONEY, it is worth marking up the value to recognize this.”
Is SuperAngel A NewType of Venture Investment?
Some of the ventures and growing businesses will not require significant capital to succeed, and may never go past angel money, which is fine. Others will require millions of dollars to reach success, and will pursue the venture route at some point. According to another top tier VC, he says “I don’t think the angels are any better at picking winners than venture firms, so lots of the angel funded deals will fail in the angel phase, and the one’s that don’t will migrate either to larger rounds where groups with more capital are needed, or will make it through without needing additional money. I suspect the latter case to be uncommon but partly dependent on the market.”
My Angle On Silicon Valley Going Forward
Silicon Valley is a evolving ecosystem, and is known for adjusting to the flows of the market. Silicon Valley is an innovation hotbed and will survive. The model of Silicon Valley is one of innovation and discovery where the power brokers both young and old follow innovation. The losers follow investment trends also known as herd startups and herd investing. That’s the way it’s been for many years.
A SuperAngel is a person who is “Super” and is an angel – an individual who can add significant value, not just one with lots of capital. Creating wealth and value is "Super" by Silicon Valley standard. Limited partners who are conservative don’t like conflict and hate losses. Therefore, expect the limited partners to flee the super angel market fast.
The entrepreneurs need to understand that the super angels are not all that great to have in your deal when the super angels focus on themselves and not the success of the entrepreneur.
It’s a value add game and that is the benchmark of success. The measurement of success is how well super angels do helping entrepreneurs build companies: NOT how many deals they do.