The New Funding Landscape

Angel investing is kind of a fad right now. Everyone's doing it. My gut instinct is that it's at least a mini bubble. In 3-5 years a lot of angels are going to be unhappy about negative returns, the stock market is going to be looking stronger, and they'll shift their money back to stocks and bonds.

Surely this huge influx of angel investors has contributed to the much higher valuations early stage startups have been exacting in recent months. When many of these new angel investors wind up losing money and angel investing is no longer the cool thing to do, those sky high valuations will probably return to normalcy.

These are just my personal predictions, and I could be completely wrong. During his talk, pg said he'd wondered if we might be seeing a bubble and decided that we're not. Who knows? Either way, I think that we, as entrepreneurs, should take advantage of the current situation.

To Paul G: What's the ETA on the model convertible note you said http://news.ycombinator.com/item?id=1655585 you guys were releasing soon?

> So if some of the super-angels were looking for companies that could get acquired quickly, that would explain why they'd care about valuations. But why would they be looking for those? Because depending on the meaning of "quickly," it could actually be very profitable. A company that gets acquired for 30 million is a failure to a VC, but it could be a 10x return for an angel, and moreover, a quick 10x return. Rate of return is what matters in investing—not the multiple you get, but the multiple per year. If a super-angel gets 10x in one year, that's a higher rate of return than a VC could ever hope to get from a company that took 6 years to go public.

Very true, but this model doesn't seem sustainable to me, unless I greatly underestimate the number of companies that could provide that "quick 10x return" (or unless the amount of money invested remains small and constant year-to-year).

Imagine you start with $10M in investments this year and make 10x. To make the same return next year, you've gotta find enough companies capable of a 10x return to invest all $100M you now have. Should you succeed, the following year you'd have $1B to invest. In a very short amount of time, your limiting factor switches from the amount of money you have to invest to the number of quality companies you can find to invest in.

It seems their rate of return is going to significantly decrease, year after year, until they're forced to change their strategy to one more in line with what the VCs are doing.

Paul, I noticed some of the people posting edits/fixes (spelling, line break) got down-voted, and others wanted to argue/disagree about it. Silly. Personally, I like having others point out my mistakes; it's the best way for me to know about and fix them. With this in mind...

s/accomodating/accommodating/

I hope no offense is taken. ;)

And now, the more important stuff...

As you know, the terms often control the discussion, so kudos for your notes listing the various terms, i.e. "Super Angels" "Mini-VCs" and "Micro-VCs." Some have balked at the use of the adjective/term "super" as misleading, but the terms typically used, and their corresponding definitions don't have distinct lines. A potential resolution might be using the term "archangel" for the investments/investors beyond the typical "angel" round? Anyone fluent enough in English to know the term "archangel" will understand the implication of it being greater than "angel." --It's just a thought.

Another thought would be to break down the classifications by their most defining aspect, namely amount of capital. The lines will still be imperfect, and you have a better grasp of the numbers than I do, but the language would be generally more clear. I was thinking something like this:

seed: < 30,000

angel: 30,000 - 150,000

archangel: 150,000 - 1,000,000

vc: > 1,000,000

That would classify YC pretty much as you describe it, namely, as a "seed fund," or better said, specializing in "seed round funding." At present, I still not convinced my little idea above is any better than the currently confusing status quo, but at least it's an attempt.

EDIT: Uggh! Fix line breaks ;)

There's a startup idea in here. It sounds like super angels can be given a pitch and make a decision quickly. So, why not provide a website that can coordinate these pitches. Hell, maybe some angels would be willing to invest some small amount of money by just doing a live pitch over the web. Whatever the minimal barrier to closing a deal is, a startup should come along and automate to make it as fast and painless as possible. One could imagine a Groupon like model being applied here as well, with one super angel really going all out and meeting with the founders multiple times, and the others hopping on board with a click of their mouse after watching a less impactful pitch like a pre-recorded one or just reading the feedback from the "head" super angel.

This recent discussion of angels vs. VCs is just like the debate of hedge funds vs. proprietary trading firms. What's happened in New York (and Chicago) is that they've gone after after completely different strategies.

Hedge funds have a lot of investor capital and must hold positions overnight, so they concentrate on portfolio construction. Prop shops don't have a lot of capital, so they can dabble in high-frequency trading where the concern is taking single positions as fast as possible, and often earning rebates from the exchange to provide liquidity.

Having worked for both types of firms, I can say that "quant trading" is a pretty broad term. I suspect "investing in start-ups" will come to mean different things. (PG hints at acquisitions vs. IPOs as a differentiating investing goal.)

What occurs to me reading this is that there's a big untapped market for super-angels in areas _outside_ of Silicon Valley. Sure, there's fewer investment opportunities (to put it mildly), but the super-angels in these areas simply don't exist, and the VCs in these areas are often buffoons.

Is this a legitimate opportunity, or would it simply not be worth the effort to find the few needles in all those haystacks?

s/hoplessly/hopelessly/

Edit: If someone who downmodded feels like explaining, please do, because I thought it was a nice thing to do to correct typos in someone's essay.

BTW, a lot of what he writes is covered in a recent presentation he did: http://www.justin.tv/c3oorg/b/272030715

I think some discussion of the changing economics of web startups would have been in order. The reason why smaller investments are becoming more common is because people can do more with less. So perhaps VC's will simply focus on other industries like biotech, which don't seem to have that "problem" just yet.

Also:

s/risk depends/Risk depends/

> Since angels generally don't take board seats, they don't have this constraint. They're happy to buy only a few percent of you. And although the super-angels are in most respects mini VC funds, they've retained this critical property of angels. They don't take board seats, so they don't need a big percentage of your company.

Though that means you'll get correspondingly less attention from them, it's good news in other respects.

Do many founders consider the additional attention given and influence wielded by VCs as an advantage of taking funding from them?

Wow, that was great. I think every entrepreneur even thinking about raising money should read this whole article. Twice.

This distills the current situation (as I've spent months piecing together through various means) as well as could be desired.

If you're at all concerned about raising money in the near future, get the scoop here and then spend your time building a great company instead of trying to figure out what the deal is with fundraising at the moment.

- Can the market really decide whether the VC value-add is worth it? Seems like it would be hard to measure, and that a lot of the information would not be public.

- If the bottleneck for VCs is board seats, why hadn't VCs already stopped taking board seats? Surely they thought of this. Implicit collusion? Entrepreneur ignorance?

- What, would the "mouse skins" analogy from the SS talk have been too distracting? Alas.

>Who will win, the super-angels or the VCs? I see the start-up companies and entrepreneurs the winners here for now. Question is how long this new arrangement with with super angels is sustainable.

> As of now, few of the startups that take money from super-angels are ruling out taking VC money. They're just postponing it. But that's still a problem for VCs. Some of the startups that postpone raising VC money may do so well on the angel money they raise that they never bother to raise more.

I'm excited that this is the case. The way I see it, a small, focused group of people can get an extraordinary amount of good work done in a short period. The constraints of lean funding, to the tune of the $600,000 Paul describes, seem like the perfect way to keep focused for the first couple of years. Maybe they're an aberration, but my hat is off to 280 North for pursuing just this strategy. Raise a bit of cash, work hard, build cool stuff, stay focused. They got quite an exit out of it, (from any reasonable founder's perspective) but that's almost beside the point that they got to do their own thing without outside meddling. But maybe there are war stories I should hear before I commit to that position.

As soon as someone is shoving several million dollars into your pockets, they're also commanding you to spend it, which always seems to mean hiring people, bloating your team and throttling your momentum. (see Digg vs. Reddit) That sounds terrible. It also lets you delay figuring out how your company is going to actually generate some money one day, which strikes me as counterproductive.

I'd rather retain a nimble position. Communication is easy, focus is non-negotiable.

Whoever they are - send some to Australia!! The funding situation over here is a travesty for anything that doesn't have a patent attached to it (in my experience, anyway).

He doesn't mention crowdfunding at all as model, though it's clearly generating enough funding for several businesses.

Ok. Negative points for my last comment justified.

Here is my dilemma:

Our company has created an online application we call "Supertrainer."

The reason we named it "Supertrainer" is because we are providing personal trainers with tools that allow them to separate themselves from all other personal trainers out there. There is a tangible and measurable difference between the average personal trainer and the "Supertrainer," and as we continue development, this concept will become even more so apparent.

My question is... what evidence actually supports the claim for "Super Angels" to call themselves "Super". What separates these guys from all the other Angel Investors I've met, and all the other VC's I've met?

It certainly isn't the amount of money they're investing and it certainly isn't the number of companies they're investing in. Are they "riskier", and if so, how on Earth could you possibly quantify such a thing?

I challenge the name. If I am provided evidence that truly separates a "Super Angel" from the other kinds of investors out there, I may be able to accept such a claim, but as of now, it seems more like an overly hyped PR move.

I love what groups like YC are doing, but calling them "Super Investors" loses credibility in my mind.