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It’s easy to look around at the consumer Internet and see that things are hopping, but it’s not so easy to get data regarding the small investments that get companies off the ground. The private investment research firm CB Insights today gave us a stat to work with: 26 percent of all early-stage deal flow in the first quarter this year came in the form of seed investments.
With the costs of starting a web business and creating a web-based product dropping dramatically over the last few years, it doesn’t take much funding to at least see if you have something worth doing. That’s probably the leading factor in the rise of angel investments. There are also motivations on the part of angels themselves — including the desire of newly minted entrepreneurs to give back after their startup has been bought, as well as the drive to get in early before a web service goes big and everyone gets priced out.
I wrote a longer post recently about the frothy state of angel investing in web startups, which seems obvious from an industry observation standpoint but was hard to get data on because so many angel deals go unreported. CB Insights was the only company I asked that was able to offer me anything in the way of numbers; it said U.S. angel investment deal flow was up 33 percent year-over-year in the first quarter of 2010.
Now, CB Insights has delved into the numbers a bit more deeply, coming up with data that shows 26 percent of all early-stage deal flow in the first quarter this year was for seed investments, with the remaining 74 percent for Series A. That’s up from 4 percent of early-stage deals in the first quarter of 2009 being labeled “seed.” The firm notes that this is not just a matter of semantics; median deal sizes for seed rounds are still around $1 million, while median deal sizes for Series A rounds are about $3 million. (We’ve also seen anecdotal evidence that seed-deal prices are going up, but that’s not reflected in CB Insights’ data.)
Angel investor Chris Dixon says he thinks seed funding may account for an even greater portion of overall Internet financings, saying that of the 10 or so deals he’s funded in the last two months “less than half are known about.” What’s interesting is how the rise of angel funding and so-called “super angels” will affect the traditional venture business. In a story last week headlined “Angel investors as the new rockstars,” peHUB’s Dan Primack noted:
Angels, like rock stars, are feared (and sometimes resented) by their elders. As IT startups get cheaper and cheaper to build, some traditional venture capitalists are beginning to feel disintermediated. If you only need $250k, why raise it from a VC firm that treats it like an option and presents a boatload of signaling risk? Plus, do those old guys even get it?
The typical VC response is to emphasize past experiences. But that’s a lot like an accomplished 60-year-old jazz musician complaining that Kurt Cobain only knew three chords. It just doesn’t matter because, sometimes, three chords are all you need to rock.
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