The Future of Angel Investing
On the show today: Hans Severiens Award winner Bill Payne, Tech Coast Super Angel Dave Berkus, the NVCA's John Taylor and Seattle's Dan Rosen, Chairman of the Alliance of Angels - that's a power panel!
John brings the NVCA 3rd Qtr report and the angels chew on the implications. "[A] deliberate industry shift towards a longer term venture capital investment strategy." We all know what that means: longer times for angels to exit. Is there an alternative to 8-9 year terms before exit? That's when things get lively!
Is the future of angel investing about to change?
Today many angel investments are the first round in a series of capital raises that will eventually include venture capital. But venture capital "resets the clock" according to Dave Berkus and can keep angels in the deal for a lot longer term while they seek a billion dollar exit. Bill, Dan and Dave have read Basil Peters' Early Exits and we discuss an alternate future for angel investing.
Show #253 (43:56) Listen
Comments
It is a good one Frank
Posted by: Ray Chan | October 21, 2009 08:46 AM
Seems like the best thing angel organizations can do, especially large angel organizations, is make use of their strengths:
1. Accept the fact that it is probably best to invest without VCs and use the network members to coordinate ongoing support of companies (both financially and mentoring).
2. Accept the fact that you'll do fewer deals: if the network is going to be the sole funding entity, you can only support so many deals. Only invest in deals that are supportable by this model (i.e. no capital intensive deals).
3. Accept the fact that criteria for investment must change to focus on companies that will only take angel money and have a visible horizon for exit that is realistic and relatively short term (3-5 years max?).
As Basil Peters talks about in "Early Exits", the eventual exit for a company must be managed from the initial investment by someone outside the company, let the management focus on growing the company.
It may well be seen that some deals gravitate to VC investment eventually anyway because "stuff happens" that is unexpected along the way, but maybe these become the exception rather than the norm.
The best part about this model is that assuming both entrepreneur and angel investors are on the same page from the beginning, this model of investing aligns their interests and maintains a higher percentage of the company on average than a VC investment would, for the entrepreneur.
Posted by: Tom | October 21, 2009 11:09 AM
Fantastic show Frank! Compelling listening and your panel's honesty was great to hear.
The numbers tell the story; there is no magic formula for early stage deals. Otherwise, as you've said yourself, it would have been worked out long ago.
Deal criteria has to be in the spotlight with so few 'classic' deals (angels -> VC/s -> 100x exit). The VCs are picking the eyes out of angel deals and then only expecting 1 star in 10 deals, 2 positive returns with the remainder dead or walking dead. When you consider this, the probability of being in that one deal (as an angel) is actually pretty remote and probably matches the numbers coming out of TCA. Most of the VCs, based on the published returns, are not getting the 1 star which makes it even uglier.
The thing that is not said (much) is that the traditionally defined more active role of angels seems to have changed with most angels now 100% passive. I don't see / hear evidence that angels are 'bringing the rolodex' and assisting these companies according to the traditional definition in most cases. This could be symptomatic of the types of deals where it's about mass take-up (web, cloud, etc) rather than any kind of traditional product to market where the angel might have high level contacts.
Have angels stopped asking the question, "what can I personally do to make sure the investee company will succeed?" ... I am not sure.
This discussion feeds into the question of what the ACA (and associated international bodies) can do at a higher level as setting up more angel groups to do the same thing based on the same deal criteria doesn't make sense. I am not sure that everyone agrees on what the problem is, or perhaps in the case of Alliance of Angels and some others, that there even is a problem!
If Scott Shane is right and the technology sector has 'seen its day' for massive returns, there is a lot of soul searching required.
Interesting times.
Cheers,
Andrew
Posted by: Andrew Fern | October 21, 2009 03:42 PM
We need to put this kind of material on our website for our 465,000 small business members.
Frank: Please do!
Posted by: Tom Markel | October 21, 2009 04:10 PM
There's a white paper on the angel investor group returns by Robert Wiltbank and Warren Boeker available from the Kauffman organization web site, see:
http://www.kauffman.org/uploadedFiles/angel_groups_111207.pdf
This was published in late fall 2007 and has some returns from 539 angels and can be combined with the statistics of the TCA described in this podcast along with the Band of Angels returns mentioned in an earlier podcast, to come to some statistical conclusions on angel investing.
I believe the results in Kauffman report above are probably indicative of angel investing in general.
Posted by: Tom | October 22, 2009 04:18 PM