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Summary:

The frothy state of web angel investing has changed the early lives of many companies in the past year, but it’s not clear how much staying power today’s leading class of “super-angel” investors will have. Is this a lasting new class of investors or not?

The frothy state of web angel investing has changed the early lives of many companies in the past year, but it’s not clear how much staying power today’s leading class of so-called “super-angel” investors will have. In many ways, these savvy, accessible and easy-to-relate-to thought leaders seem likely to be a lasting new class of investors. (Should a web business really take money from someone who doesn’t tweet?) But on the other hand, a sudden swarm of investors is enough to make any skeptic ask if too much funding for too many companies is a bad thing.

Paul Kedrosky, senior fellow at the Kauffman Foundation and an early-stage investor himself, put up a rabble-rousing post over the weekend in which he contends that seed funding is bound for a crash:

Unnoticed by almost no-one, the startup financing landscape has been transformed: a combination of ease of entry, lower capital requirements, failing incumbent venture capital (VC) firms, and general fervor has driven the emergence of a host of new “super-seed” firms. These small-ish outfits — usually running less than $20m — specialize in seeding a bazillion companies, following on in very few, and generally trying to be fast-moving and networked.

Now, however, the super-seed crash is coming.

That brought out the comment section in full force, with notable angel investors like Chris Dixon and Chris Sacca taking issue. Dixon disagrees with Kedrosky’s contention that valuations are bring driven up by an increasing number of investors in early-stage companies, writing:

As someone who has been doing a lot of seed deals, I find this totally inconsistent with my experience. It’s hard for me to think of a seed deal lately that wasn’t in low single digits valuation. The coinvestors in these deals are the usual prominent seed investors so I know they are mostly getting similar valuations. I have almost never seen seed investors compete with each other since our check sizes are small enough that we can simply all coinvest together.

But even though the scale is still small, the available indicators show deal sizes are going up. Angel investor Keith Rabois told us in a recent video interview that introductory seed round amounts have recently shifted to $750,000 from $500,000, and individual investors’ contributions to $75,000 from $50,000.

At the same time, many angels like Sacca are now raising funds of their own rather than just investing their own money. Robert Roger Ehrenberg of IA Ventures has a good post up about the challenges he’s faced in learning to be focused and disciplined as he transitioned from angel to VC.

The question, then, is what exactly a “super-seed crash” would consist of. The most obvious thing would be a bunch of companies failing, then angel investors who’ve raised funds would fail to satisfy their own investors, and go out of business themselves. That could happen all at once given that so many of today’s investments come from common packs of angels. In the meantime, some indicators will be the pace of deal flow, as well as whether or not angels invest in their portfolio companies’ second rounds.

Still, any super-seed bubble would have a baby-sized impact on the greater industry. Sacca contends the game has changed, that smaller exits are successful exits, and “companies these days just do not run out of money” because of how cheaply they can operate.

But early-stage investors aren’t just cheerleading their own cause out in the blogosphere. Rob Go of the newly formed “micro-VC” NextView Ventures writes today about the pros and cons of the super seed:

“The bad thing is that the Micro-VC strategy by definition means a higher pace of investments than the typical 2-deal-per-year pace of VC’s. So something has to give. “

In many ways, what these guys are saying is that they’re just smarter, and as such will outlast all the copycat and wannabe seed funders as well as the stale VCs with a fresh coat of paint. But then — Kim Kardashian is the only one who can make a living tweeting. At some point it will be quite obvious whether the super angels’ investments and strategy succeed or fail.

Related content from GigaOM Pro (sub req’d):

What the VC Industry Upheaval Means for Startups

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  1. Phil Michaelson Tuesday, June 29, 2010

    you have to look at the math and estimate if the exit environment support the investment going in in order to keep returns attractive.

    as you say, it’s not a lot of money going in. and there is enough cash on public tech companies balance sheets to provide liquidity to the angel investors. so, it’s not a bubble yet. see some estimates of inflow and required return here: http://www.philmichaelson.com/fundraising/is-there-a-seed-bubble/

    it also doesn’t hurt that there are major catalysts supporting lean startups:
    * social networks provide lower customer acquisition cost
    * mobile software plays don’t require carrier deals
    * hosting/servers/programming is cheaper

    so, enjoy the angel-funded media startups, and the fun they provide :)

  2. Kevin Johansen Wednesday, June 30, 2010

    Hi All,

    This SBA white paper – http://www.sba.gov/advo/research/rs331tot.pdf – is somewhat dated, but the numbers in it speak mostly to the activity at the base of the pyramid, and these #’s aren’t being captured in this conversation.

    By example:
    * In 2008 the approx. 7K accredited investors that were members in the http://angelcapitalassociation.org/ network of 474 angel networks invested about $228,000,000.
    * However, there are about 1,000,000 accredited investors out there currently involved in angel deals, and these folk invested over $20,000,000,000 in 2008.
    * Plus, more than half of all angels are not accredited.

    So ‘super angels’ may get the headlines, but the regular types do +99% of the investing. This suggests the larger problem is w/ educating the masses and helping them keep between the lines.

    Best,
    Kevin Johansen
    @AngelCapital

  3. Marcos Polanco Monday, July 12, 2010

    We’ll see about that crash. Followers of Basil Peter’s Early Exits thinking would say to forget about the follow-on, and possible head straight for the M&A. What we really need is a reformulated investment bank capable of exploring that thesis, a scalable version of monty.com.

  4. Video: Chris Sacca Helps Founders Cash Out Shares Early Thursday, July 15, 2010

    [...] interview about the sustainability of the “super angel” model (something Sacca has been outspoken on) and his financial model for success as an investor, and he walked through a few deal scenarios [...]

  5. Seed Stage Investments Jump Sharply in Q2 2010 Thursday, July 15, 2010

    [...] increase in investment activity, especially around consumer web and mobile applications has been spurred on by the rise of super angels, who have emerged as a dominant new economic force in a rapidly changing startup ecosystem. The [...]

  6. Are Most VCs Dinosaurs Who Need to Hurry Up and Die? Friday, July 30, 2010

    [...] VCs, a debate that got a boost recently when venture advisor Paul Kedrosky said there was an angel crash looming. But McClure — whose preferred blogging style consists of lengthy rants filled with capital [...]

  7. Silicon Valley & The Scent of Money Thursday, August 5, 2010

    [...] is a good time to start a company and look for funding. But, to others such as Paul Kedrosky, this is a sign of a looming bubble/crash. Recent Internet and Digital Media M&A deals (Click the image to [...]

  8. Chris Dixon to VCs: Act More Like Startups « Tuesday, September 7, 2010

    [...] and the flaws and weaknesses of traditional VC firms — not to mention the question of whether there is a seed-funding “crash” [...]

  9. This is just another example of biased voices using bloggers to talk their book.

    The shrillness you hear in chicken little’s voice is a reflection of the disruption he is suffering and fearing.

    Of course the old guard doesn’t like its gravy train being disrupted and will cry out from the pain of forced change.

    The good news, for startups (web and mobile, especially) and their new-found funding sources, is that the game is changing, the balance of power is shifting.

    Keep up the good work. In fact, amp it up even more! Out with the big, old, slow VC, in with the big, new, fast Micro.vc!

  10. Eric from evly.com Friday, September 17, 2010

    As with everything in life, some will succeed and some will fail. And bubbles will form, and bubbles will burst. But if there are great opportunities and money to be made, angels and super angels will be available. Lately, they’ve just become easier to find (by promoting themselves more). In South Africa, we’re still stuck 10 years behind – there are plenty of angels, but no “real” networks or groups of them, so it’s still a “needle in a haystack” method, when finding angels in SA. And yet, for evly, and for our previous ventures, we found angel funding quick and easily – as there is money available, you just need to know how to find the right money for your venture.

  11. AngelGate Goes Nuclear, Startups Get the Fallout: Tech News « Friday, September 24, 2010

    [...] Related ResearchTransient Apps: The Consumer Influence on Enterprise Mobility, Part 2 Rogue Devices: The Consumer Influence on Enterprise Mobility, Part 1 Apple’s Path to the Living Room SkypeKit: Skype’s Platform for CE-Based Communication  Dave McClure, an angel investor and startup advisor — who came in for particular criticism in Conway’s email — is just one of the “super angels” who have raised (or are trying to raise) large funds over the past few months. McClure’s 500 Startups has filed to raise $30 million, former Google executive Chris Sacca has raised over $20 million for his Lowercase Capital group of funds, and another former Googler, Aydin Senkut, has raised $40 million for his Felicis Ventures fund — and there are new funds appearing every few weeks, it seems. That much money chasing a relatively small startup field is bound to lead to pressure on prices, and to pressure on relationships between angels and other angels, and angels and traditional VCs. Some, like Kauffman fund advisor Paul Kedrosky, have even argued that there is a super-angel bust coming. [...]

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