#CVCA11 The Death of Series A and Rise of the Super Angels

This afternoon, in the Grand Ballroom of the Westin Bayshore Hotel in Vancouver, a group of panelists discussed the myths and realities on modern-day venture capitalism, including the rise of angels and super angels, at this year’s CVCA Conference. Has the game changed? And if so, in what ways?

The session, titled “The Death of Series A and the Rise of Super Angels: Myths, Reality and is it Really Different in the VC Business now?” went in-depth to tackle what many have touted as a major shift in the way startups raise capital.

Moderated by Bill Bryant, Venture Partner, Draper Fisher Jurvetson, the event was presented by Chris Arsenault, Managing Partner, iNovia Capital Inc.; Jeff Clavier, Founder and Managing Partner, SoftTechVC; John Ruffolo, Senior Vice-President and Head of Knowledge Investing, OMERS and CEO, INKEF Capital; Amar Varma, Managing and Founding Partner, Extreme Venture Partners; and Boris Wertz, CEO, W Media Ventures (who is an investor in Techvibes Media).

Capital-efficient business models drive many of today’s most promising technology start-ups, triggering a new wave of “deal flow” across North America’s tech clusters, from the west coast centres of Silicon Valley and Vancouver, to the eastern clusters of New York, Montreal, and Toronto. Born is a new breed of super angels and smaller VC funds have rapidly emerged as key players in the early-stage investment scene.

There is no doubt in the minds of the panelists that the startup ecosystem has changed. An increasing number of startups are able to utilize capital-efficient models, spurred by lower costs triggered by the rise of the internet, and reach high revenues with minimal investments. This is where angels make a killing—so is there still a place for big-time venture capitalists?

While it’s true that a lot of venture capitalists have shrunk their capital pools, injecting less money into more companies (thereby reducing risk, increasing return potential, all for the same cost) has become a popular method. Still, large venture funds do serve a purpose: not every company can get started on $25,000 or even $200,000, especially not the ones that want to reach the billions in revenue.

The crucial point to realize, argues one panelist, is that starting a company costs one tenth of what it did, but growing a company costs up to twice as much. Consider Facebook. The earliest investors that cut the smallest cheques reaped the biggest rewards, but also took on the biggest risk of losing everything. And as Facebook grew, it still needed to raise hundreds of millions in capital, and this doesn’t come from angels, super angels, or micro VCs.

Plus, returning even 4x on an investment as big as $50 million is remarkably lucrative compared to return 20x on $100,000. In Skype’s instance, investors made roughly $150 million in as short a period of two years. So as for opportunities to make big money, it still exists. And it’s still through big-time venture funds.

And, of course, VCs still offer entrepreneurs and startups with invaluable knowledge and experience. From leveraging connections to providing advice, VCs typically have deeper pools to draw from than angels.

But even so, angels skyrocketing at a remarkable trajectory. Smaller investors can mingle with smaller startups and create incredible companies. 

The panelists believe that many companies will exist at lower average valuations than 10 or 20 years ago, but everyone, from entrepreneurs to investors, will still be happy. Why? Because it cost everyone much less to reach that valuation, so return margins are actually higher. One panelist says this is arguably the best time for VCs and angels to invest ever.

Companies like Facebook and Zynga have created the potential for a bubble though, and made a lot of entrepreneurs think it’s easy to reach billions in revenue in just a couple of years. Still, they say there are much more evident and large bubbles than anywhere in the startup or tech space (such as gold commodity, notes one). The one bubble panelists note may exist within the startup space would be employee salaries, particular those of engineers, who can make up to $120,000 straight out of school due to demand outstripping supply, with companies like Google buying up companies simply for their internal talent.