In the U.S. startup community the month of September 2010 generated a lot of increasingly hot and acerbic verbiage about the wisdom of entrepreneurs taking money from "super angels" versus venture capital firms. TechCrunch lived up to its reputation and generated a lot of the stimulus, including a crash visit into a meeting of angels up to what was reported as colluding on keeping startup pricing low.
After reading and watching I reached the conclusion that "there is nothing new under the sun." That was written about 3000 years ago by the writer of Ecclesiastes in the Bible. The phrase is generally attributed to Solomon, king of Israel during its most glorious days. Yet it fits what is going on today.
Collusion has been and remains the most dangerous activity facing the (very loosely regulated) venture community. So far no great scandle has been taken to legal levels.
Super angels are touted as a new breed of startup investor, one with power capital that generates shock and awe in first time entrepreneurs.
So what do I suggest the founder of a new business do about all this controversy? Here is some of what I wrote in response to an Ace founder who asked that question:
= Generalizing from small samples of rare giants is always dangerous (and very easy to do by someone labeling himself as a startup/angel/VC expert). The giant startup winners used by bloggers are statistically rare. The mainstream startups do not conform to the valuations and circumstances leading to the giant startup successes. The result is that the media, including bloggers, mislead the masses when they use the stars to navigate through the dangers of raising startup capital. Using startup “outliers” to guide your life is like using a rock-star/famous-person to guide your personal life: it is fraught with lack of reality.
= Seed capital deals in the current market are easier to do, get higher valuations, if a working prototype is finished and a core management team (good for six months) is at work. That is not new and makes common sense. This attracts hoards of entrepreneurs racing to do ten lines of code, demo and try to get gigantic valuations for the seed round. It is remarkably the same as the first wave of software applications written for the Apple/IBM personal computer first years of the 1980s boom. Investors that survived waited for code to be demonstrated and then invested (after personal savings and angels paid for the first code writing).
= “First to get it right” is the principle guiding VCs and related angels. That is why they are looking eagerly at everything (but investing in few). The lure of the next (name of the usual suspects) great gorilla makes the potential investor vulnerable to lust and thus to error. That the clever entrepreneur can take advantage of (e.g. know what the valuations have been for recent great seed and follow-on rounds).
= If you believe you have the idea for The Next Gorilla, you have to have power on your side to get the best deal. That starts with owning something the investors will lust after (“It will get away from me!”). That power includes having enough cash to survive the time it takes to convert their “Not on this round, thank you” into “Where do I send the check?” Those are basics to serial entrepreneurs, not a new revolution.
= Company valuation stats are easier to get and they aide the entrepreneur marginally more than the investor. But serial entrepreneurs figured out long ago how to find out valuations, deal flow and the other “insider” and “back channel” former secrets. That is one reason for the Tables at the end of High Tech Start Up and why smart entrepreneurs talk to a lot of startup CEOs.
= There are more alternatives todayfor getting funding for a startup -- if yours is in the right phase of the un-avoidable boom-to-bust startup cycle. As each new wave begins, money sources appear out of the bushes, competing (wisely and unwisely) for the next Facebook. Entrepreneurs can take advantage of that eagerness and get alternative sources competing for their deal. Super angels are one of a new breed of such investors.
= The “super angels” are to me a new label put on an old model. The great VC partners of the now-great VC branded firms all began with a small amount of money to be responsible for investing, had real management hands-on related experience and were eager to dive into a startup. They helped the new business move from a maybe to a great. If you look at my book The Power of Unfair Advantage, you’ll see such VCs are in the first two levels of VC firms that I discussed in the final section of the book. Smart entrepreneurs are telling me they want such investors because they receive “unfair share of mind” from experienced business people who can do wonders with their minds when applied to the startup.
= The Fad Wave is ever present. The “new investor stars” exploit it. It is what makes deal flow move to people like the Marc Andreessens. Branding is very powerful to such investors, as they combine good luck (funded a Gorilla), skill and experience. Entrepreneurs with power on their side can create feeding frenzies among such “hot” investors, leading to high valuations for early rounds of funding.
= The American IPO market void does make liquidity a problem for everyone. It works in favor of the gorilla entrepreneur who has the power of an amazing startup going for him. He can demand things such as liquidity that lesser cannot. Again this is an example of how dangerous it is to generalize.
= Quick Time to Sale is on the lips of all investors in the current startup capital market. Google is buying startups daily, as Cisco did early in its rocket climb in early days. VCs on the boards of directors are driving the purchases. It is part of each new wave. Lesser entrepreneurs often give a sigh of relief when such liquidity events happen (even if it means giving up on the IPO dream).
= Central to the power of the entrepreneur is the entrepreneur. His skills in “telling his story” are remarkably central to getting the money at amazing valuations. Real VCs see the founder as the source of value for the new enterprise. You are a standout in this regard. It is difficult for lesser beings to duplicate.
= New alterations have come upon the startup capital market and will continue. Savvy entrepreneurs will exploit them.
BOTTOM LINE: Super angels are individuals with a lot of money to invest in startups. There are more of them than in the past in some places like Silicon Valley. There are fewer of them in other parts of the world where rich people subsitute for them. When you understand what they are looking for, you can work to build your unfair advantage power before seeking capital from them. VCs are looking for the same thing in what you are offering in your startup. There is little new under the sun.
I wish you The Best on your Adventure!