Super-Angel Networks: Seed Capital 3.0

It seems as if everywhere I turn there is yet another article about a slowdown in venture capital investing. This from today's Wall Street Journal:

Facing an uncertain economic environment, venture capitalists showed restraint with their wallets in the first quarter.

These investors sank $6.8 billion into U.S. companies across 603 deals in the period, according to data from Ernst & Young and VentureSource, a division of Dow Jones & Co., publisher of The Wall Street Journal. The deal total is the lowest since the first quarter of 2005, while the investment level is down 8% from the $7.4 billion recorded in the year-ago quarter and 9% in the fourth quarter of 2007.

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Many venture investors say they aren't overly concerned by short-term economic factors, instead looking for the next big company that will emerge as a mainstream hit in two to four years.

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Still, investors are telling their portfolio companies to conserve cash and are looking especially closely at potential new companies to make sure they have clear and strong revenue channels.

The prism through which I view the venture capital environment is quite different. I am looking primarily at the seed stage, and the volume and quality of deal flow I've witnessed has never been higher. Further, I'm aware of more people like me funding these companies, people and small groups with previous start-up experience and sometimes large-company experience. Sometimes these people invest in the context of a small seed fund; other times they invest directly with their own money. But these new friends and business acquaintances of mine have eight common characteristics:

1. Love of new technologies and business models
2. Experience leveraging internet-enabled platforms
3. Groups of friends with expertise across an array of domains that can be tapped when needed
4. The desire to be part of a syndicate of like-minded investors
5. A healthy rolodex of entrepreneurs, corporate executives and venture capitalists
6. The willingness and interest in helping managements make their companies successful
7. A focus on building a portfolio of start-up investments
8. A wad of cash that can be deployed in building out this portfolio

I call these entities "Super Angels." As Kim Rachmeler said during CI Foo camp back in February, "The network knows what the nodes know not." Translation: by leveraging networks, you can learn stuff that you yourself cannot through an insular, go-it-alone approach. Now any VC will tell you "Oh yeah, I speak to firm X, Y, Z, and expert A, B and C." But the issue is that there are always conflicted motives. Are the VCs really going to get straight, honest answers from their peers? Come on. It's a big dance, they all know some pretty girls and they want to make sure they're dancing with as many as they possibly can. Super Angels, conversely, truly value  the expertise, complementary skills and expanded networks offered by other Super Angels. They are not so much in competition with one another as they are wanting to do good deals and to de-risk them through a combination of capital and top-notch, value-added investors. But the difference between this loose confederation of Super Angels and the common angel networks is that both the nodes and the networks among the Super Angels are often far stronger. At least this is way it seems to me.

Kind of like the Internet, I think the Super Angel phenomenon is only in the first inning of an extra-inning contest, and that their impact will increasingly be felt over the ensuing years. But let me be clear - I don't see Super Angels as the death-knell of VCs. Quite the contrary: I think they can become a more efficient farm team for the best VCs than the VCs themselves can ever think of building. Where the real impact will come is with VCs who have strayed from doing traditional seed by doing larger Series B and C rounds, and want to get back to their roots. Too late. And too much brain damage in dealing with such firms. I think Super Angels have the chance to own the seed stage business, and are the best-positioned parties to prosecute this class of investments because:

1. Many have been entrepreneurs
2. Many have been buyers of the types of companies they are funding
3. Many lack LPs and don't have to nit pick as much around terms
4. Many have the skills and contacts to make a success a self-fulfilling prophecy by getting involved
5. Many have the rolodex to get the right VCs involved in the right ventures at the right time
6. Many have the money along with their networks to do both seed stage and A round deals
7. Many entrepreneurs would much rather deal with a Super Angel than a VC any day of the week

I really do think this is a megatrend, one which will become increasingly important if both the broad market and the VC market continues to tighten. A smart, helpful, highly networked source of low brain-damage capital is a valuable thing. And this is where the Super Angels are going to rock it.

Comments

[Evan Bartlett]

@Andy I agree, Its definitely a scalable model right now.

Check out the Wikipedia article, mentioning the growth in US Angel groups to over 300 groups
http://en.wikipedia.org/wiki/Angel_investor

And then check out this mention of the New Hampshire Center for Venture Research, which typically claims that the angel industry is larger than 20 billion per year!
http://www.redherring.com/Home/22847

As for the platform, we've built that already, and we're definitely seeing that the "network is more valuable than the sum of the nodes". Co-investing across groups is the first step, and then the wisdom of crowds approach can be leveraged for a lot of purposes (staffing, due diligence, etc).

Its an exciting space, and its great to see other people see the potential!

[Evan]

This is definitely a mega trend, and its in part because the model is scalable and very fluid.

Super Angels across the country are not only getting smarter, more aggressive in sourcing deals, and less geographically restricted, but they are organizing.

Most of the angel groups i deal with at Angelsoft (I'm on the bizdev team focusing on west coast/boston area angels, seed funds, VCs, etc), are lead by Super Angels. These are the guys that run screening committees, lead deals, train other angels to do that scary first investment, and use their social network to get bigger deals done across multiple angel groups.

I feel like the only thing thats missing is the marketing. Not many people know about these Super Angels or their Angel groups, and not many people understand how Angel investing works. Is this a problem, or is this to their advantage by allowing them to move freely and find deals they want?

For people that don't understand what angels are, I thought your post (http://www.informationarbitrage.com/2008/04/a-few-thoughts.html)here: was a great description.

[David Cote]

Roger,

I agree with your view on this important market transition. I would also add that Super Angels are also much more efficient than VCs for seed rounds and I believe that the free market always tends to gravitate towards the more efficient model. The dance with VCs that you note in your blog can be several weeks of invaluable time for an Entrep. that is focused on fund raising instead of running the business. I also think that the Super Angels are more attuned to really help with some of the key early decisions that each start-up needs to make. A VC can bring tremendous value to help with some operational expertise as a start-up works towards profitability, but this is only after a successful launch a number of very important smalls steps.

I for one cheer this market transition.

Dave Cote

[A Weissman]

Roger:
Happy passover.

Sounds like what you might be alluding to is that potentially there may be some scalable model around seed investing (scalable vs purely opportunistic). In other words, if you take those characteristics you list, then the network (a platform of people, knowledge, processes and investments) is more valuable than the sum of the nodes (the deals, investments solo), thus implying one could create a business model around seed investing that is apart, though complementary, to early and later stage VC fund investing.

Andy