Following is a post on super angels I wrote yesterday for PEHub.
In the beginning, there were angel investors. And it was good. As individual angel investors made more and more investments, they became super angels. One day a super angel woke up and thought to himself, “Gosh, I could do a lot more investments if I had a fund.” And so the super angels became micro-VCs (or “institutionalized super angels”). Everyone was excited and on the seventh day they did another deal instead of resting.
I’m a huge fan of the super angel movement. Some of my best friends are super angels and I’ve put my own money where my mouth is in funds like Chris Sacca’s, Dave McClure’s, Jeff Clavier’s, Roger Ehrenberg’s, and David Cohen’s. Not only am I an investor in these super angels, I love to have them on board with our investments at Foundry Group. And whenever they bring me something they’ve been working on, I always pay attention–as I know they know what I like to invest in.
But recently the super angel mantra of “traditional VCs suck” has reached a fevered pitch. What started out in Silicon Valley as a new wave of angel investors has evolved into a belief that “VCs are lousy seed investors” and “no one needs a VC–just raise your money from super angels and go to town.”
Fred Wilson from Union Square Ventures recently wrote an excellent blog post titled “The Expanding Birthrate of Web Startups.” As with many of Fred’s posts, the comment section was as useful as the post, and early-stage investors such as Mark Suster, Charlie O’Donnell, Roger Ehrenberg, and Anonymous Coward weighed in. The comments ranged from the now cliche-ish “VCs suck” to “What happens when super angel-backed companies need a new round” to “Companies will never need more capital. It’s a new world out there.” As I read through the comments, I kept pondering the same thought: “What happens in five years?”
Let’s consider a few situations. Take a typical super angel. Assume success. Investors (LPs and individuals like me) want to invest money with the super angel. The super angel probably creates a fund and raises a lot more money. Now the super angel is a micro-VC. Continue to assume success. More money is able to be raised. Now the micro-VC is a mini-VC. Does this keep scaling, or does the mini-VC succumb to the same challenges that $200 million funds ran into when they turned into $1 billion funds?
Now, take a super angel with a 20-company portfolio. The super angel is hyper-connected and works closely with the entrepreneurs he/she invests in. Suddenly he/she has 100 investments. Are the entrepreneurs getting the same attention from that angel–especially when they enter year three of their life, hit a bunch of speed bumps and need a lot of help? Or does this super angel just turn his/her back and say, “Well, that’s the breaks.”
Finally, take a super angel who is used to making $25,000 to $100,000 per investment. He/she becomes a micro-VC, raises a bigger fund, and now invests $500,000 per deal. Is there a difference in his/her behavior with regard to the $25,000 investments vs. the $500,000 investments?
I think the super angel movement is awesome, but the generalization that all VCs suck at seed investing doesn’t make sense to me. Correspondingly, the idea that entrepreneurs only need super angels doesn’t make sense either. There’s a renewed focus and interest in early-stage investing going on in the United States, and it’s being stimulated by a lot of factors. It’s a powerful thing that will continue to evolve, change and challenge all of the participants.
I got a note from Nivi, the creator of AngelList, over the weekend saying that he’d put up a special page for angel investors in Boulder. He’s looking for the local Boulder angels to add their names to the list. Gang – let’s get ’em up – if you are an angel investor and based in the Boulder area, sign up!
There’s been an enormous about of blog and news chatter about angel investors, especially seed investors and the emergence of super angel / micro VCs, in the past few months. I’m a huge fan and supporter of the super angel / micro VC phenomenon and have watched with delight as it has built momentum.
However, in the past few weeks I’ve started to see a rant start to emerge that I’ll simplify as “VCs suck as seed investors – the only path to happiness are angels or super angels or micro VCs.” This rant bugs me as I think it’s incorrect and isn’t very helpful to entrepreneurs. While I know many VCs that I would categorize as terrible seed investors, I know plenty that are excellent seed investors. And while I know many angels who are terrific seed investors, I also know some who are abysmal.
The thing that started to bug me last week wasn’t the discussions about the characteristics of what makes a VC a bad seed investor, but that the comments, including some from super angels, were becoming generalizations that all VCs were bad seed investors. As I read through them, they started feeling like statements of “hey entrepreneur, trust me, I’m just trying to save you from Mr. Evil VC and here’s the answer, the answer is me.”
As a VC who has been a very active angel investor (I’ve made over 75 angel investments), an active seed investor as a VC (I just counted and 7 of the 25 investments we’ve made out of Foundry Group since we started our fund in Q4 2007 are seed investments), a co-founder of a “mentorship-driven seed stage investment program” (TechStars), and an investor in several super angel / micro VC funds, I believe both angels and VCs can be excellent seed investors.
There is a lot more transparency than there ever has been, the structural dynamics of early stage investing are moving around a lot, and entrepreneurs have more clarity on their choices, ways to figure out who is good and who is bad, and ways to get access to great choices than ever before. Fred Wilson wrote two excellent posts on this over the weekend titled Angel vs. VC and The AngelList as well as an earlier post titled Some Thoughts On The Seed Fund Phenomenon. Until last week I didn’t feel like I had a ton to add to the discussion, but I felt like it was time to weigh in as I saw the tone shifting to “VCs are bad seed investors.”
While I completely agree with the phrase “many VCs are bad seed investors” especially around VCs simply trying to create option value for themselves or the issues around signaling risk, I felt like there wasn’t enough discussion about why and when VCs were effective seed investors. So I thought I’d take some of this on over the next few weeks. Hopefully my perspective and examples will be additive to the conversation and helpful to early stage entrepreneurs, especially first time ones.
In the mean time, if you are a Boulder angel (or seed) investor and you are still reading, sign up on AngelList already!
We recently invested in a Seattle company called BigDoor Media. The founder/CEO Keith Smith wrote a wonderful love story about the deal which was picked up by the WSJ VC Dispatch in a post titled A Summer Romance Between Founder And Venture Capitalist. Yes, I’ve fallen in love (in a very non-sexual way) with Keith, his co-founder Jeff Malek, and BigDoor.
Over the past year I’ve become increasingly obsessed with the idea that the computers are going to take over. I’ve even begun to think that we are already working for them. So – why not have fun while we are at it? By using a light weight API approach, BigDoor enables any non-game publisher to quickly integrate game mechanics such as points, badges, levels, leaderboards, virtual currency, and virtual goods into their web and mobile applications. They’ve already rolled out integrations with Cheezburger Networks and BuddyTV and have a pile of additional publishers launching in the next 90 days.
BigDoor straddles our Glue and Distribution themes. While Glue may be familiar to you, Distribution is a new theme that we’ll be talking about soon when we re-segment Glue into a couple of new themes to more clearly delineate what we’ve been investing in over the past two years.
I’ve already been spending plenty of time in Seattle due to Gist, Impinj, TechStars Seattle, and some other good friends that I have there. In fact, according to Daytum, I’ve spent 14 nights there in the past eighteen months. I expect I’ll be spending plenty more there soon, including a few next week on my way to Alaska.
If you are a web publisher, take a look at what BigDoor can do for you. And, while you are at it, check out Lijit if you haven’t already incorporated the slickest publisher search on the planet – now with an ad network and a fresh $6m – into your site.