Serious Questions For Super Angels

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.

  • javierrincon

    Indeed the super angel movement has created such a buzz due to the fact that its real entrepreneurs that are now making bigger investments, its the guys that have already gone through the trouble of making companies and know the challenges that are on the other side. The fact that not only are they empathetic with the entrepreneurs, but that the value they add is in such synchrony with the entrepreneur that they have become such a topic, not only in the valley, but worldwide.

    Much of this happiness in the movement is due to the previous unhappiness of many entrepreneur with VCs. Does this mean that VCs such at Seed Investing, no, it might just mean that there are people more adecuate to take care of such startup stage than them. Let´s not forget that the funding process is one of waterfall, and that angels lead to VC's. Self-sustainable companies that are made after just 1 round is most unlikely. They will go after VCs money at a later stage if they are successful enough.

  • hdemott

    You hit the nail on the head with the issue of scaling the angel business.

    Like anything that is people and time intensive – the ability to grow it depends almost solely on the ability of the funds to continue to add other great investors to the team.

    This worked fine when the business was built around larger deal sizes, and you could average $50M in investments per partner – probably spread over 10 active investments. That's $1M in fees less expenses (associates, etc…) so it is a great living – with tons of upside optionality.

    Look at the Super Seed model.

    It is more like $10M per partner spread out over 20 investments. That's $200K per year – but you have to cover expenses out of that – which shouldn't be high, as most of these are built around existing personal networks – and a lot less partner time per company.

    So to make this work logically, you need to band together as a group of Super Angels, with like minded individuals and investors so that if you trust Chris Dixon, or Chris Sacca, or one of the other prolific high profile super angels, you can invest alongside them – and not give any time to the investment (or very little) – while you do the heavy lifting on other investments.

    What actually may be excellent about the super angel model – is that it turns the business from a fee based business (where partners could literally not contribute for the better part of a decade and get paid well to show up alive) to one where performance is all that matters – since current income off of smaller funds is the only way to benefit as the GP with the Super Angel model.

  • http://www.bostonvcblog.typepad.com Jeff Bussgang

    Great post, Brad. I'm also a huge fan of the angel movement and love the energy and enthusiasm, but the start-up business requires entrepreneurs and investors to plan in 10 year cycles (I'd argue more than five!) and so forecasting things out a bit and thinking through the implications is important for all constituents.

  • http://www.facebook.com/paramendra Paramendra Kumar Bhagat

    Well said. There sure is much fermentation at that early stage. http://goo.gl/fb/TWuBv

  • http://www.mikehartcxo.wordpress.com Mike Hart

    Angels>super angels>micro VC> mini VC – it is like building a company. Some will do better than others who will fail miserably. I'm encouraged by the super angel movement because they fill a gap in the investment cycle for entrepreneurs. Going from angel to VC is a big step. I'd like to see some super angels get really good at what they do and stay there because it could result in more orderly step ups and actually increase the number of new startups.

  • http://twitter.com/IBAssociate @IBAssociate

    It's already happened – Vinod Khosla – understanding that he worked for a big (the biggest?) VC fund and was uber-rich before investing his own money through Khosla Ventures – now he has a billion dollar fund.

  • http://twitter.com/fleckman @fleckman

    Hi Brad,

    I'm responding partly because of our exchange of tweets this morning and also because of your great post here. I think what were seeing is a misguided focus of an Us vs. Them mentality. Start-ups vs VC or vice-versa.

    Start-ups should completely understand the entire investment supply chain and realize that at certain points in their evolution they will come in contact with angels, super angels, VCs. So to say "traditional VCs suck" is an indication that there is not an understanding of the investment supply chain or worse yet, an indication of a personal self-serving agenda.

    Now VCs should come to grips with the fact that the traditional model they used to invest in startups in the 90s is not an effective one now. You have to have a crazy bubble with IPOs/M&A being the lead motivator.

    As you said, there are examples of a new and better model that you, Foundry, USV, First Round, and True have been developing and using. That is the collaborative model in which it's not an Us vs. Them mentality but a We mentality. It's a proactive rather than reactive practice. It's a practice of start-ups and investors understanding each others strengths and weaknesses and capitalizing on both to produce effectiveness and success.

    That brings me to my tweet where I said: "I would submit that VCs can't deploy small $ effectively to biz that r still trying 2 find their biz model." It was a generalization as only Twitter in 140 characters could do. What I wanted to convey was that until and unless start-ups AND investors truly become proactive in everything they do then you can invest money in 100 different startups and if a majority of those startups are still looking for a business model then you can bet that the $ invested will not be efficient in the overall scheme of things.

    There are a minority of others, including you who continue to innovate. It's an exciting time for all.

    I'll finish with your quote:

    "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."

  • http://www.infochachkie.com John Greathouse

    Agreed. Few things in life are truly binary. Some traditional VCs do suck and some add tremendous value to the ventures in which they invest.

    The Micro-VC movement is not surprising, as it is where the entire industry began. Starting in the early 1950's, Georges Doriot and his brethren placed relatively small, long-term bets on early stage companies and worked closely with the management teams to grow self-sustaining businesses.

    They didn't fund burn rates hoping a greater fool would eventually take the deal off their hands (e.g., dot com IPO). Smaller, early-stage investors are well suited to help their portfolio companies win, which is good for the entire startup eco-system. It will even indirectly help those traditional VC who truly do suck.

  • ann

    > > "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.”"

    Wouldn't the other angel investors, like your good self, be able to step in and help in this scenario?

    • http://www.feld.com Brad Feld

      For starters, I'm a VC investor.

      Theoretically yes, but if the other angel investors have large portfolios also, then they'll have to decide where they want to spend their time. And – I'm differentiating between angels and super angels – the super angels tend to have much broader networks and/or are positioned as experienced entrepreneurs who can help when things run into trouble.

      This is actually one of the benefits of the super angels investing in packs – there are more of them around the table in each deal to potentially help the entrepreneur if things go sideways. But that still means that one or more of the super angels is going to have to step up.

  • LenWilliams

    Great article. Indeed, ss javierrincon also reminded us, angels lead to VCs, not viceversa. It may be diffcult for them to really get involved with advise and expertise even when they have 10 companies in their portfolio, as their lives do not restrict to that; funding 100 companies, as you said, makes absolutely impossible to focus on all of them and promptly react with help and solutions, unless you also hire about 10 specialists for this purpose. Vcs are excellent at seed investing if they decide to also fund smaller businesses, which don't aim at becoming the next Google. Maybe various articles in the news are discouraging entrepreneurs from even thinking about a chance to be funded by VCs (stating that their small business would never get the attention of traditional venture capital firms) and are encouraging super-angel movements, as a consequence. I think there's enough "room" for everyone, really, from entrepreneurs to investors, we'd better be more positively thinking and focusing on what's really important, that is, making things work and get better.

  • Ravi

    What are the typical economics of Super Angel funds? Are they also likely to be a 2/20 model or because of the smaller size of fund, and potentially lower leverage, LP's negotiate better deals like 1.5/15 ?

    • http://www.feld.com Brad Feld

      It seems to but most seem to be between 2/20 or 3/30.

  • http://twitter.com/tom_semantic @tom_semantic

    Great post and dialogue, thank you all.

    What I am surprised is not part of the thread here is the effect the changes in the exit have done to the money supply chain you've described. My premise is that our country's ability to drive innovation is a collaboration between the entrepreneurs and their investors, both willing to take risks that are inconceivable to other cultures. As the IPO bar has been raised, exits all become M&A driven shutting down the creation of innovative new companies (as opposed to products). If a company is not ready/willing to sell, where and how do the angels get exits and how is that affecting deal terms?

    I believe the larger VCs are focused on BRICs, as are "our" large companies, and that leaves us with a new generation of entrepreneurs/angels leading us out of the economic mess we're in. If that comes together we need to build a new IPO market with reasonable entry points so the angel financed company can go straight to a public marketplace that makes sense.

    Thanks to those of you who are super angels. We start 700,000 new businesses every year in the US and VCs fund maybe 2,000 deals per year. Since entrepreneurs can't second mortgage their house anymore, angels are going to have to carry the load.

    Tom

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