Angel-gate and its Implications

I have been sitting on this one for a while, but I am finally ready to weigh in on “Angel-Gate” – at least from the perspective of what the implications of its existance mean for entreprenuers and early stage investors.

First off – why does every scandal have to be called “Something-gate”?  If the DNC had been using the Mayflower instead of the Watergate would we be calling this “Angel-flower”?  And besides if the scandal is named after the location where the event occurred (you know, like the original Watergate scandal) shouldn’t it be called something like “the Bin 38 Affair”?  Sigh… Yet another example of the lack of creative energy in SV – can’t even come up with an original name for its own scandal.. and we wonder why we end up with so many copycat companies funded out of this culture?

So while there has been lots of intrigue and brouhaha over the initial disclosure of the Bin 38 meeting – I have yet to see any analysis of what this event means.  Well, at least beyond the obvious cry of – “Hey this is wrong”.  So let me take a shot:

  1. That this Meeting Occured at All is an Important Indicator of the State of Investment in the Valley: 
Basically we are seeing angels beginning to adopt some of the same behavior as venture firms (e.g., foot dragging to drive down valuations relative to risk, working on ways to keep best investments to themselves, how to combat outside players that might siphon off quality investments, etc.) – maybe a bit more brazenly in their execution – but the goal is the same – risk management – not return creation.  This is not good for entrepreneurs – as its this shift to “fund management” within the VC community (primarily to protect fee revenue) that is the root of much of the dis-satisfaction within the entrepreneur community with the current state of VC funding.Ben Graham, the father of modern security analysis, had at the core of his philosophy the idea that the easiest way to to make money investing was to avoid losing money on any one investment.  And while the concept of early stage investing is essentially the reverse of this – you expect high failure rates and make up for it with a handful of big wins – most of what was reported as discussed at Bin 38 is about cutting risk more than improving the quality of investment opportunities or driving bigger exits or creation of better companies.So why would Angels care about risk management?  That in my mind is a big indicator of the changing environment.  First, Angels are now beginning to invest as funds rather than just individuals.  And while the Angels themselves might be in this to help entrepreneurs – the fund investors are about making money.  This alone shifts the dynamic of risk taking – as an individual only need answer to themselves regarding investment selection.

  • The Angel Business Model is Getting Assailed on Both Sides.  
    Its obvious that pressures to keep VCs out of investments points to pressures in the VC market to generate return from their best investments points to VC return pressures being forced down onto Angels – at the same time the concern with competition from “outsider” Angels and microVCs is pressuring the model from below.As Adam Smith, a Xobni founder, points out – the world for early stage money is beginning to flatten out – meaning that alternative sources of early stage capital are growing in their importance and viability as an alternative to traditional SV angel funding. This alone is not such a big deal – there has always been alternative sources of capital.  But combine this trend with the trend toward lower and lower capital requirements for start-ups and this becomes an issue of concern.  a.) it limits number and size of bites at the apple for any one opportunity – fewer and smaller opportunities to invest in the best ideas need to be made up somewhere.  b.) it increases the odds that a competitor to an investment emerges from unlikely sources – capital access is eroding as a barrier to entry for protecting investment companies from competitors.
  • This Validates the Value of the YCombinator Model – Or At Least the Opportunity in that Segment.  That YCombinator (or TechStars for that matter) is able to identify opportunities ahead of Angels with high rates of success, and that those ideas then go onto command premiums from Angel investors points to the growing importance of these players in the early stage market.  I still contend that these micro-VC players have tapped an opportunity that is so underserved that its difficult to determine if their success is due to the value they create in guiding start-ups or because they are able to cherry pick the best of the best ideas at this stage.  Either way its ironic that the very industry shifts that are driving Angels to be concerned about controlling risk, and by extension concern about the influence of microVCs, is generating behavior in the Angels that enhances the value that microVCs create by driving out risk in any one investment (for both the Angels and other later stage investors as well as entrepreneurs).
  • The Value that Angels can Create for Entrepreneurs By Means Other than Capital Is Increasing Relative to the Value of the Capital.
    This is particularly true given the shrinking universe unique ideas in the SV “bubble” and increased competition for those ideas.  Angels aren’t well suited to the necessary outreach to find ideas outside of this ecosystem – the business model lacks the scalability to allow for that to occur.  In the past this wasn’t a real issue – but today anything of value that finds its way to SV for funding, or is created within the SV ecosystem, is certainly going to
    have multiple options for funding.  How well investors can serve those entrepreneurs – actually create value for the company – will become more and more of a deciding factor in who gets to invest. There are already examples of companies choosing less money and lower valuations from alternative funding approaches over taking VC money – Angels run the risk of ending up in the same boat.

Are Angels between the proverbial rock and hard place that many VCs find themselves?  Not yet, but the Bin 38 meeting underscores the fact that the trends working against VCs are beginning to impact Angels as well – and it remains to be seen if they will be willing or able to effectively adapt to what is most certainly a new world order.


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