but attractive image of what it’s like to be an angel. From conversations I’ve had with casual angels, it seems that this perception—more so than the reality of the changing capital requirements and the exit environment for technology companies—is the cause of the increased interest in angel investing. In short, we are experiencing a somewhat “irrational exuberance” with regards to angel investing.
On one hand, this is good for startups as the increased supply of cash lowers the cost of capital. On the other hand, it means a lot more early stage competition without a real change in the exit environment. My advice for entrepreneurs is to look beyond the cash to what else the investors can really bring to the table. Really diligence this as some of the most active seed-stage investors are too busy to spend much time with their portfolio companies. Also, look at traditional VCs for seed-stage capital…Good VCs have a habit of actively helping early stage companies.
My advice to angel investors is to look beyond the portfolio effect. It is necessary but most likely not sufficient. It is not a panacea, especially in a world where there are more and more sources of seed-stage capital. Good deal flow and the ability to win deals will matter more and more in the coming years. Developing real differentiation above and beyond being able to write a quick check is the key.
X: In the long run, how do you see the angel-VC ecosystem playing out, as some VCs move toward smaller, earlier-stage funds?
SS: VCs have an opportunity to play a very positive role in the changing landscape if they are willing to develop new models for working with very early stage startups. If they don’t, they’ll find themselves dis-intermediated from quality deal flow, having little leverage to use against upstream seed-stage investors…The good news is that a number of VC firms I know are making meaningful changes. I can’t stress enough how much entrepreneurs are missing out by not understanding how to engage super angels, seed funds, and traditional VCs together in their early stage fundraising.
