Is There a Super-Angel Crash Looming?

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.

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