300 Angel Companies and Not a Venture Capitalist to Be Found

I was speaking at an international conference on angel capital last year and the panelists listed off the number of companies they or their angel groups were in.

It was a fantastic number: 300-plus.

This showed me that the angel movement is really picking up steam. What was truly impressive, though, was that three of the panelists were from what would politely be referred to as “non-startup hotbeds.” I remember a time in the late 90’s when said panelists had done maybe 30 deals. And the mandatory “Valley guy” in the group did three-quarters of those deals.

There is a lot in “The 300” that I started to think about…

  • More deals are being done for sure, but how does the quality rate?
  • How many of the 300 are VC-backed?
  • Where are we going to find exits for all these startups?
  • If angels get good exits on 15% of the 300, do they start doing larger placements again?
  • What if they don’t get exits?

Let me break down my thoughts on these five points one by one.

1. In my own world, the quality of the companies in my portfolio from 2009-2013 are far superior to the ones still hanging around from the early days. Anything I get a return on from pre-2009 will be a salvage of maybe “a two times capital” outside of the two exits I did get. I don’t see any of them ready to exit this year, so that means my IRR gets measured over eight to nine years and it isn’t impressive.

Is it because I’m learning to be an investor instead of just an entrepreneur with money? Probably has something to do with it, but I think the startup community has matured as well.

2. In my portfolio, less than 20% is venture backed. And the majority of the venture deals are mobile or Internet based. It’s probably worth a discussion – Is venture being pushed into simply being an Internet, mobile and maybe biotech diagnostic source of capital? If this is the case why do they still get so much attention? It truly feels like VC’s spend more money on marketing themselves then investing in portfolio companies.

Having said this, the one company I truly expect to make up for my early sins as an angel is VC backed, and we need it. I am not a VC basher as is the new normal (see Dear Dumb VC), but I think Entrepreneurs need to understand that VC’s truly are a capital niche as opposed to the capital norm for most industries, including the ten million mobile app and 20 million web platform startups.

3. The one thing the VC industry did over the last 30 years is create relationships with strategic buyers. Angels, angel groups, and angel funds haven’t cultivated that culture… yet. I predict this will be the new trend. First, we are seeing angels gather around groups, funds, and accelerators. They are trying to formalize, and with the development of “fund type” infrastructure, will advance the need to create exit paths. In other words, angels are becoming VC’s. I mean once you create a formal relationship with Google, why would your angel fund look at any other deal that didn’t get you to an exit with Google.

I think the other trend we will see is either the rise of the Boutique MA firm (i.e. meaning more of them willing to look at $10 to $20 million exits) or the angel aggregator. This individual will take the four enterprise software guys who have run out of money but have customers (i.e. growing concern companies, but not exit companies) and vend them into one entity, forcing an exit but also an industry consolidation. In other words, not all of ”The 300” are going to make it through Series A to a B funding placement, but all of the 300 will need a home.

4. I think the negative trend from “The 300” is the size of the placements from angels. As a risk mitigation exercise, a lot of angels, including myself, are doing much smaller placements than they did pre ‘09 and instead doing more, but smaller deals.

The VC backed deal I mentioned earlier has placements all the way from $10k to $400k and a Cap Table of closer to 50 investors rather than four. To be honest, if I get some good exits from my portfolio, my placement size might go up slightly, but if the “drip” approach brings on better exits and a closer relationship with the companies I am in, why change the strategy? I am more likely to move towards acting like a fund then I am to giving you more money up front.

5. What if there are no exits? Well in about 10 years, I fully expect to read an article called “Dear Dumb Angel Investor.” Of course I will be doing something else by then and probably miss the article.

Originally published in June 2013.