Venture capitalists (VCs) have long been seen as the top of the pyramid for startup funding sources. But, in fact, angel investors now fund over sixty times as many companies, according the Center for Venture Research. A new class of Super Angels, or micro-VCs that invest their own money, provides a major chunk of this activity.
Examples of some leaders in this space include Ron Conway in Silicon Valley and Brian Cohen, chairman of the New York Angels, who each may have over five-hundred startups in their portfolio. What characterizes them is the number of companies they invest in, as well as the size of their investments (less than $250,000), and the seed or startup stage where they specialize.
Based on the best evidence I can find, the genesis of this trend comes from several evolutionary changes in the startup investment industry, and some innovations driven by the recent recession:
- Venture capital funds are still recovering from the recession. Institutional venture capital dispensed thus far in 2014 has been up significantly over the last few years, but is still less than half of the peak hit way back in the year 2000 (over $100 billion). Individual angel investors have been filling the gap, and now match VCs in total amount invested.
- The cost of entry for tech startups continues to go down. Twenty years ago, it cost several million dollars to launch an e-commerce startup, which can be done today for a few thousand dollars. Mobile and web software apps may cost even less. The large investment amounts preferred by VCs are no longer needed to launch winners.
- Some VC firms are bogged down by their own weight. Many have disappeared and others have forgotten how to be agile and innovative. They have too many highly paid partners, fat fees, aging corporate infrastructures and difficulty raising money from institutions. Super Angels are individuals or small teams using their own money.
- VCs are committed to servicing existing portfolios. As lifecycle investment partners, they have become weighted down with portfolios still recovering from the economic downturn. Like big corporations with a heavy investment in existing product lines, it’s hard to stop linear investing to look for innovative new opportunities.
- The investment model is changing from hard selection to “spray and pray.” The conventional VC approach of giving a big boost to a few good startups doesn’t seem to work anymore. Now the model is to seed many good teams with a smaller amount and find out which ones can execute.
- Super Angels have greater scope to match talent with a startup. Because of their high visibility and huge portfolios, this new class of investors can match the right talent to the right startup quickly and efficiently with introductions and mergers. This helps the startups with the most opportunity move forward quickly to greater success.
Of course, every new direction has some challenges, so the Super Angel model isn’t perfect. Here are a couple of concerns and possible negatives to avoid:
- More startups left in the funding gap. Angels of any size are usually not as capable or interested in multiple rounds of investment, leaving good startups that are not superstars stranded without funding after an initial round or two. VCs tend to carry their partners much longer, in hopes of a big public offering (IPO) that could produce a windfall.
- Super Angels sometimes drive up valuations. Perhaps because of their focus on building a large portfolio, or their competitiveness, these angels sometimes accept valuations that cause later friction while moving to VCs, or even other angel groups. This can cause early investor dilution, lower ultimate returns or leave the startup stranded.
Yet, in my view, every early-stage entrepreneur should be exploring this new funding alternative before approaching VCs. It’s the right way to get money without giving up too much equity or control of your business. Yet, it is important to remember that the most optimistic Super Angel looks for a proven business model, rather than research and development, or just an idea.
Image credit: CC by Hartwig HKD