Apparently, Early Stage Investors Aren’t Endangered – Quite The Contrary!

You may recall my earlier post from a few weeks ago entitled “Are True Early Stage Investors An Endangered Species?”  After laying down some background, I took the position that super-angel funds and incubators/accelerators (e.g., Y Combinator, TechStars, DreamIt), had the best chance of solving the early stage funding gap and that capital efficiencies and bootstrapping might help temporarily fill in some of the other holes.  Since I wrote that post, there’s been a lot of online traffic surrounding this issue.  Much of it was ignited by conversations emanating out of Y Combinator’s AngelConf on July 29th.  All of the new super-angel funds popping up in the past few weeks just add to the fervor.  Just today, the WSJ put out a piece noting that Aydin Senkut (former Googler) is closing a $40M super-angel fund, which follows Ron Conway’s $20M super-angel fund, Chris Sacca’s (former Googler) $8.5M super-angel fund, Dave McClure’s (former PayPal’r) $30M super-angel fund and Mike Maples’ new $73.5M super-angel fund.

Here are some of the articles that popped up since my last piece:

  • What’s Really Going on in the VC Industry?  What Does it Mean for Startups? (Mark Suster) – I put this post first for a reason.  In Mark’s usual style, it kicks ass.  He covers so many valid, timely points that I’d rather just link to it than have written about them on my own.
  • Angel Investor Ron Conway:  Every Entrepreneur Should Get Funded (Anthony Ha – VentureBeat) – Ron believes there still aren’t enough angels out there.  On the other hand, Mike Arrington was quoted as saying that angels are training “an entire generation of entrepreneurs who are building dipsh*$ companies” that sell to Google for $25M.  This division shows that not everyone agrees with the direction the market is taking.  I can see one of the points that Arrington was making and it is going to be the basis for my next post on the “fat/lean” start-up and how all the talk on that subject hasn’t necessarily filtered down to the entrepreneurs in the correct way.
  • It’s Still Expensive to Build a Great Product (Redfin) – I like this article because it helps give some context to the capital efficiencies everyone keeps talking about.  I’ve heard the saying lately (which I think can be attributed either to Brad Feld or Fred Wilson) that it’s cheaper to start a company today (I’d re-phrase this piece to limit that to Web 2.0-type tech companies) but it costs the same amount to grow it.  This article helps flush out that issue.
  • Moneyball for Startups:  Invest Before Product/Market Fit, Double-Down After (Dave McClure) – Dave hits many issues using his lively fonts, colors and language.  What I like about Dave’s posts is that you know where he stands, which you cannot say about most people.  Part of his post is devoted to his assertion that the traditional VC model is dead and that the super-seed/super-angel model will prevail.  I hate saying anything is dead, because there are no certainties in life, just cycles in my experience but Dave has some valid points.
  • The Buzz on Angel and Seed Investing Continues (Brad Feld).
  • Thoughts on the Seed Fund Phenomenon (Fred Wilson).
  • The Rush to Early Stage Seed . . . (John Boyd).
  • Understanding a VC’s Seed Funding Policy is Crucial (Mark Suster) – this is an important article to read for those of you debating between super-angel funds and raising full-on VC funding but at the seed stage.  If a VC fund puts a small seed investment into your company in order to preserve a “toe-hold” for down the line, understand that if that fund opts not to do a follow-on investment with you it could be the kiss-of-death.  Others will wonder what the VC fund (being a current investor) knows about the company that others don’t and why they opted not to invest.  They might have opted out for the most mundane of reasons, but the crowd will assume the worst and it could hurt your fundraising.  Of course, the same might be said of super-angel funds unless people begin to believe that some of those funds just don’t have the bandwidth to follow-on in all the deals they would like to.
  • Why Micro-VCs are so Damn Friendly (Gregory Huang – Xconomy).
  • Y Combinator’s Paul Graham:  Say Goodbye to Traditional Venture Rounds (Anthony Ha – VentureBeat) – again, I don’t believe in the “this is dead” assertion, but I do see many changes in the works.

Not only does it appear that super-angel (or micro- or super-seed) funds are filling some of the gaps and taking early stage investors off the endangered list, it may be that the pendulum is swinging back in the other direction.  Some are now forecasting a seed-stage bubble in the near future.  See the article by Liz Gannes on GigaOm, the article by Gary Whitehill, the article by Paul Kedrosky and the article by Chris Yeh at VentureBeat.  The theory goes that if too many companies receive seed stage funding, there will not be enough VC funding down the road to move those companies along to the next level and thus they will flame out due to lack of follow-on funding.  This is very similar to the bubble that occurred in the early 2000’s as a result of the ramp-up in VC funding that occurred mid-90’s to end of the 1990’s.

Comments and questions welcomed.  Thanks.

Chris McDemus is founder of VC Deal Lawyer, a blog devoted to providing insights on start-up and emerging growth companies.  Chris is also founder and owner of MCD Law Partners, LLC, a boutique corporate law firm serving start-ups,  early-stage and emerging growth and middle market companies.


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