Entrepreneurial

VCs, meet the new sheriff

June 11, 2010

Relatives of victims of the June 5 fire at a day-care centre wear angel wings during a protest against federal and local authorities in Hermosillo, in the Mexican state of Sonora. REUTERS/Alonso CastilloMove over venture capitalists, there’s a new sheriff in town: the angel investor.

As VC and private equity firms pulled back from the number of deals they made with entrepreneurs during the recession, it appears angel investors – wealthy individuals funding startups on a much smaller basis – have moved in to pick up the slack.

Last month Fast Company ran a blog titled, “Angel investors more powerful than VCs“, wherein author Brian Javeline, the founder and CEO of MyOnlineToolbox.com, stated angel investors “who used to promote entrepreneurialism have been acting more like traditional VCs.”

Javeline, who raised nearly $2 million from a group of angels who each contributed “between $100,000 and $350,000,” argues that because most angel investors were formerly entrepreneurs that they “naturally understand how to participate in operational decisions without the desire to micro-analyze a spreadsheet for every decision.”

PEHub.com editor Dan Primack, who spoke recently at the Angel Boot Camp event in his hometown of Boston, told Reuters TV that increasingly entrepreneurs are looking more to angels as a source of funding over VCs.

“If you bring in a really big name in your industry that can actually provide you more credibility to your market than does a traditional venture firm,” said Primack, who felt it was a trend that would continue to grow going forward, especially in the VC stronghold of Silicon Valley. “Angels are indeed the new black. A lot of startups would rather get a couple big-name angels, people like Mike Maples or Chris Sacca, than they would get a traditional venture capital firm.”

Maples and Sacca are part of a new class of angel investors dubbed “super angels,” who have raised their own small investment funds and take a far more hands-on approach with the companies they invest in.

David Cohen, an angel investor who co-founded popular startup incubator TechStars, said super angels typically do more deals and invest larger amounts – $100,000 to $250,000 – than traditional angel investors.

“What you’ve got now are syndicates of angels that are much more organized and connected and can easily do a million-dollar round,” said Cohen, adding traditional angel funding rounds in Colorado, where TechStars is based, never got much greater than $300,000. “Now you’ve got this new class of investor that if you get one of them they can easily do $1 million or even $2 million in a seed round. So that’s sort of boxing the VCs out a little bit, because I think to a large extent entrepreneurs would rather take angel money.”

Terry Cross, who teaches entrepreneurship at Wayne State University in Detroit and who has been investing in companies for more than 40 years, said he has noticed the trend of angels banding together to do deals, whereas in the past they likely would have acted individually.

“An angel investing alone is a ‘finger in the wind’ and angels investing together is a process,” said Cross, adding this is a necessity if angels want to do a larger number of deals. He also noted that angels grouping together is a way to protect their investments from VC firms that join in later funding rounds and squeeze the smaller angels out the picture. “Angels are finally realizing they will have the ‘cram me down’ target painted on their backs forever unless they aggregate and have group leverage.”

All this talk of angels has Cross nervous, feeling that angels could be approaching a “bubble state.”

“It’s all I hear about at cocktail parties and I made my first ‘angel investment’ in 1962 when that term was not in existence.”

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