Are Super Angels Taking Over the World of Angel Investing?

October 13 2010 one Commented

With all this excitement about Super Angels investing in Silicon Valley startup ventures, are they beginning to dominate, dare I suggest, take over the world of angel investing?  Or, even the world of seed/startup stage investing?

Maybe in their own minds, they are.  But Chris Yeh points out that Super Angels are doing about 200 deals per year.  Let’s be generous…perhaps they are doing 500 seed/startup deals per year in the US.  Despite my sensitivity towards the inflated egos of our Super Angels, according to both Scott Shane and Jeff Sohl, US angel investors are funding roughly 50,000 companies per year, about 25,000 at the seed/startup stage of development.  Whoa…that means that Super Angels are funding less than 2% of US angel deals (Chris Yeh estimates only 0.5%).  What is all this hubbub about, anyway?

I can tell you.  Silicon Valley is an important center for entrepreneurial activity in the world…and Super Angels have been very disruptive there.  The valuation of seed/startup deals in the US is down almost everywhere in the US, except in Silicon Valley and Boston.  According to my sources, competition from Super Angels is driving prices higher for angels investing in Valley startups.  Is that good for the entrepreneurial ecosystem?  I doubt it.  Higher valuations reduce investor returns.  Reduced returns drive investors out of the market.  (Ask our VC friends!)  Fewer investors in startup ventures cannot be good for our economy. 

It’s a GREAT time to be an angel.  Find a group and jump in!

One Response to “Are Super Angels Taking Over the World of Angel Investing?”

  1. At a recent industry insider conference which was attended by a lot of Silicon Valley players from all constituencies, I asked the question outright: “OK, who is driving up the seed valuations of all these deals we keep hearing about?”

    “Not me!” said the half dozen big VCs in the audience.

    “Not me!” said the the half dozen ‘real’ super angels (ie, microVC funds) who were also there.

    “Not me!” said I, on behalf of the large number of ‘traditional’ angel groups with which I’m familiar.

    A definite puzzlement, since there was unanimous agreement that the currently inflated valuations ($4m to upwards of $15m for pre-revenue startups) not only made no economic sense, but was ultimately likely to cause significant harm to both the startups themselves, and the larger early stage ecosystem*.

    But then at lunch I was sitting next to a well-connected entrepreneur who mentioned that he, too, was an angel investor. “Cool,” said I, “how many deals have you done?” “Hmm…I’m not really sure” he replied. He went on to say quite proudly that he didn’t know how many deals he’d done, didn’t do any due diligence, and didn’t do any kind of economic analysis on valuations or anything else.

    As I sat there somewhat dumbfounded, he politely explained to me with a bit of a patronizing air that because of his connections to certain well-known angels, he was invited in to “all the good deals”, and that because it only mattered if you got into one of the five or ten “hits” that get big exits each year, the economics in those deals didn’t matter (would you care if you could buy into Facebook at $10m or $100m? I thought not.) And since the other deals wouldn’t matter at all, valuation was irrelevant in those cases too.

    The result? He was completely valuation insensitive, and would simply put in $50-$100K into any deals that his ‘friends’ sent him, regardless of valuation or anything else.

    Voila! Puzzle solved. And all I could do was shake my head and realized that he had found the secret to angel investing, and I hadn’t.