For those of you who don’t live in Silicon Valley, or who do and just don’t care about the “inside baseball” goings-on of the start up investing world, a super secret meeting of “super angels” occurred in San Francisco earlier this week and has the Valley in a tizzy.
First, some terminology. In the world of start-up investing there are basically four species of investors: angels, super angels, venture capitalists, and private equity investors. Angels are basically rich people who make small investments (usually between $25K and $500K) in very early-stage start-ups. Most angels are retired entrepreneurs who enjoy working with start-ups and of course would like a nice return on their investment. Super angels are like angels, except that they are much more serious about their investments. They typically invest in dozens of companies, they may raise some money from outside investors, and they often have staff to help them with picking companies.
Venture capital firms are established companies with venture capital funds from outside investors. These firms will typically have anywhere from $50 million to many billions of dollars to invest, and their investments usually start around $2 million and go up from there. And finally, private equity investors are like venture capitalists, except that their investments usually start after a company is pretty well-established, and they like to put in $20 million or more in a company.
In the early days of the Internet, venture capitalists had a lot of power. It was difficult to really start a company without $5 or $10 million, which meant that you were too big for an angel and too small for a venture capitalist (and too risky for a bank). Since that time, the cost of launching a start-up has plummeted – largely due to open-source software, outsourcing, and better, faster and cheaper technology. Suddenly a lot of companies only need a couple of hundred thousand dollars to get off the ground. This new, lower cost of entry has created the world of super angels. Whew, that was a long explanation!
So this week, a bunch of these super angels held a super-secret meeting at a restaurant in San Francisco. Michael Arrington, founder of TechCrunch, a popular technology blog, found out about the meeting, showed up unannounced, and then wrote about a grand conspiracy that he believed was taking place at this meeting – a conspiracy to collude on deal valuation and exclude people outside of the meeting from deals. Attendees denied the allegations, and then Arrington struck back by releasing an email from Ron Conway, the “Godfather of Silicon Valley” and the world’s best-known angel, who wasn’t at the meeting and condemned the attendees for their evil ways.
So now that you are caught up on this crazy saga, let me explain to you why I think all of this is interesting. I think the first interesting point here is that super angels are a really important part of Silicon Valley these days because traditional venture capital is in trouble. Indeed, Dave McClure, one of the attendees at the secret dinner, made this point quite well in a recent blog post:
most VCs are Dinosaurs, and the World Wide Web is an Asteroid that hit the planet in a slow-motion cataclysmic explosion 15 years ago. It may take another 5 years for the ash clouds & nuclear winter of Browsers, Search Engines, Social Networks, & Mobile Devices to kill all the T-Rexes, but it’s a done deal. The marsupials are taking over and in 2015 there will be a lot more investors that look like Jeff Clavier, First Round Capital, Y-Combinator, TechStars, Betaworks, & Founder Collective than any Sand Hill VC (funny how all the innovation is from non-valley investors, isn’t it?).
I think he’s 90% right – I do think that the balance of power has shifted away from VC firms, or at least from anything but the Kleiner Perkins and Sequoia’s of the world (and firms of their stature). The problem with McClure’s argument, as I see it, is the notion that “the marsupials are taking over”, i.e. the super angels. After all, if its true that right now you need $500K and not the $5M you needed 10 years ago, isn’t it also likely to be the case that in five years, you’ll only need $250K, and perhaps five years after that, perhaps $100K?
If this is true, then what we are seeing is a classic innovator’s dilemma, where existing players continue to cede marketshare to new players who are willing to take the smaller deals that they believe are beneath them, until there are no large deals and only the small players are left. To put it another way, the marsupials will give way to the rodents, who will give way to the insects, who will eventually give way to the single cell organisms. Super angels will find themselves competing with “friends and family” investors or even traditional banks or SBA loans for great deals.
Ultimately, this means that the true value investors will bring is not their money, but their connections and advice. Or to put it another way, the concept of investing in start-ups will be replaced by start-ups simply finding good advisors that can help them build a successful business. There’s no question that many super angels are successful because they provide great advice to start-ups, but their power also comes from their ability to dole out six figure investments along with this advice. Take away the financial barrier to entry and suddenly the number of potential advisors goes from maybe 20 super angels to thousands of smart, experience people in Silicon Valley!
So today AngelGate may be a big deal, but in the long run it won’t amount to much – the power is shifting to the entrepreneur, and no amount of collusion from angels or VCs can stop that.