Here I am in Berlin at 7 AM Sunday morning listening to Scott's podcast streamed using the hotel broadband connection. Not shocking, just a reinforcement of what we know intuitively. But a great podcast interview.

Great show Frank; and thank you also to Scott.

Regarding Frank's comment of whether it is a great time to push forward and invest because you can get better valuations, or if it is time to pause and reflect. I say it is not one or the other, it is both. Isn't it always both in these types of economic situations?

If investors wait too long, they will continue to be part of the less attractive statistics that Scott has presented in his research. I see this all the time in our local real estate market. Real Estate is not down here in Guam USA. As the market goes up and down, at our family real estate business we always have clients that wait too long to invest and end up investing closer to the high rather then the low.

Scott had mentioned that there are fewer Angels than you think. One good thing about having a tighter market is that it allows greater focus. The tight market shakes out many of the bad apples for you, so investors will have fewer opportunities vying for their limited time. This allows investors to narrow their focus on fewer industries and fewer types of products.

This narrower focus is a plus to those entrepreneurs and those angels that are already active in those categories that survive the shakeout. Entrepreneurs in those categories benefit from Angels not being able to or not wanting to diversify into other categories. Angels in those categories benefit from attracting angels from less popular categories to help them on their deals.

I understand Frank's point about investors having less to invest. But with fewer good opportunities presenting themselves right now, it could mean that greater collaboration will occur between angel groups, or that it must occur for certain deals.

It may be past time for some diverse angel groups to update their websites to express their current focus for investments in the current economic environment. They may also need to reevaluate where their individual members stand. What individuals are willing to invest in now, may be different from their previously stated positions.

The dynamics of the groups within the group may need to change. But of course you might run into the problems of horse trading that Scott had mentioned. Some may not support the new dynamics, if they are looking for additional support for something they have previously invested in that does not jive with the current thinking.

Mat

Frank, one of your best and most important interviews in a while.

The interview is a sobering look at the reality of angel investing.

Based on your prior comments, I would think that you may want to give some thought as to whether you want to have your wife hear this interview.

The easy answer for those investors who want to push forward to take advantage of the current economic environment is to focus on those technologies that continue to do well in bad economic times. These technologies may explode as the economy stabilizes.

An easy example is the smartphone industry. Even in the current economy it continues to experience impressive double digit growth every quarter this year.

The wireless age has been with us long enough for us to see that every time there are financial problems, such as 9/11, stock market lows, and the high gas prices, things like telecommuting, teleconferencing, and smartphones, become more popular.

Investors in these times will do well to look for investments that allow people to make more money and or take home more of the money they make.

The opportunity that I offer is a good example. You can read about it at singlehandtextentry.com

Am working with a UK based fund in buying a couple of hotels (most hotels now selling at 20-40% of replacement value).

Fund manager ($500 million fund) said in Europe trend is towards late stage vc acquisitions and away from 2nd and 3rd round angel investments.

Also working with a fund out of North Carolina (Hatteras, invests for UNC endowment). Mgr. said endowments now screen alternative investments to only look at investments in at least year 3 of revenue with mgrs who have had successful exits).

Although the investment world seems to be changing, suspect there will be just as many opportunities now as in the past

I am listening to the interview.

One thing that TCA has managed to do, probably better than most angel groups, we have attracted follow-on VC funds at a consistent 10X rate. Despite this additional capital, we have weak historical ROIs.

The exit issue is hurting the category. Fewer IT buyers, and few IPOs. TSX is not going to do much for us.

Frank: I've called the present situation a "one-two punch": no exits and now no hope for exits, while our net worth sinks 35%

John: I may be dreaming but deal syndication and web casting could eventually help the industry. There are few VCs outside of several metro areas. Most smaller networks are doomed.

There is an underlying thread in Fool's Gold that the media or angels themselves are claiming that angel investing is more important that it is. Professor Shane goes on to describe angel investing in the US (p35) as the pursuit of about one-quarter of a million investors, funding 50,000+ companies annually with over $20 billion, in good agreement with the same numbers as those Professor Jeff Sohl quarterly at the Center for Venture Research. Apparently there has been no exaggeration, at least by Dr. Sohl.

In the first eight chapters, Professor Shane seems to take delight in demonstrating that angels are not all alike. They aren't all accredited investors. They don't all read business plans. They don't all perform adequate due diligence before investing. They don't all mentor companies, in fact, not all have sufficient business skills and experiences to be qualified as mentors.

In the last four chapters (nine through twelve) Professor Shane reports that those 10,000 or so accredited investors that join angel groups (and probably an even larger number of solo angels) in the US tend to have perfected the angel investing process - processing lots of deals, completing competent due diligence, negotiating fair term sheets and skillfully mentoring their portfolio companies.

Professor Shane's exhaustive study sheds considerable light on angel investing and quantifies much of the environment of angel investing. In this work, he reports on important characteristics of the capital food chain for entrepreneurs. In particular, he shows that the line is quite blurred between two important sources of funds for entrepreneurs, namely friend & family investors and angel investors. But, with his title and style, he tends to belittle most angels who may not be applying best practices in angel investing. The purpose of the negative title and style is unclear to this observer, except to assume that this attitude is designed to sell books.

We who are practitioners have heard some wild claims but more often uninformed insights regarding angel investing. Many of us spend time attempting to inform the press, the entrepreneurial population and especially the community of accredited investors with more accurate picture of our playing field.

Angel investors make an important contribution to our entrepreneurial economy, a contribution that stands tall with venture capitalists, when looking at total funds invested and especially the number of companies impacted. None of us, who are insiders, claim that the angel investing is of the magnitude of the mergers and acquisition market impact on the US economy (a point made by Professor Shane). But, so what? Angel investing provides over $20 billion per year to about 50,000 US startup ventures annually. Let's recognize and celebrate this phenomenon in America and move on.

Man!! Your podcasts get better and better.

http://www.venturevoice.com/2007/12/vv_show_47_tom_perkins_of_klei.html

Thanks so much Frank,

I can't tell you how important your show is. I now see the cockiness in my website and presentation. Part of the problem with cocky presentations as I see it, is that there is a lot of material out there, including books from reputable VCs instructing that they are looking for things that meet their cocky criteria. I see now that a lot of this is left over teaching from the days of the bubble.

In listening to your interview of Scott Shane and the interview of Tom Perkins at Venture Voice at the link above, it really struck me just how young both the VC and Angel industries are. We've seen the teachings of what to invest in change over the years, and Mr. Perkins has a very different teaching than the common wisdom we hear on your show and from most Angels and VCs.

Mr. Perkins says he started as a VC with an $8Million dollar fund that was the largest fund for venture capital at the time. He is known for funding Google, AOL, Genentech, Sun Microsystems, Compaq, and Tandem Computers. He says the idea is more important than the person and he doesn't want to invest in an early team. He says he has had very very good luck backing individuals without experience who had a very good idea.

He says that because of the risk, an early stage investment cannot attract the best people for the team. So it is better to develop it to the point where you take some of the risk out of it and then you can attract the best for the team later on.

I found his interview to be very different from the common teaching of investing in experience, a good team, and in a venture that is already profitable. I think following Mr. Perkins teaching would require Angels to have a more narrow focus of industries they are willing to invest in, such as those Angels that focus on health care for example.

From your show we learn that the success ratio of Angels is only 1 in 25. That ratio would certainly put a car dealer or manufacturer out of business. Doesn't that ratio suggest a problem with the selection process? I wonder if that ratio holds true for Angels with a more narrow focus of what they are willing to invest in.

Unfortunately for me, according to the interview, Mr. Perkins has downgraded himself to junior partner and is no longer active, and the current industry model has evolved to refer to businesses that are already profitable as a startup or seed stage investment. Whereas those terms use to mean there was no revenue yet. In the current lingo I am now categorized as idea stage, and the word idea just doesn't hold the positive potential that the word seed holds.

I sure am having difficulty aligning my opportunity with the prevailing wisdom. At the time of the bubble, smartphones did not exist yet so I could not promise the cocky returns that were in vogue at that time. Now that smartphones exist, the bubble has burst and the cocky returns are no longer in vogue.

I am now considering doing a Regulation A offering as my best bet to get my business going.

Thanks for the education about the relatively young and still evolving industries of Angel and VC funding.