Super Angel versus Venture Man

December 17, 2010 at 10:58 am Leave a comment

There has been much noise recently about who’s the better investor: the newly minted Super Angels, or the traditional venture capitalists of Sand Hill Road.

The debate has been carried out rather openly, and the borders of straight-talk, self-promotion, and honest reflection have become somewhat blurred.

The basic question is whether it’s better to take a limited amount of money from Super Angels – say between $100 thousand and $1.0 million, or shoot for the moon and go to Sand Hill Road where a self-respecting Series A starts with $5.0 million. Super Angels are loosely defined as business angels with more money making a lot more investments.

I give Dave McClure credit for kicking off the fight in his signature R-rated rant (and coming-out piece as a Micro-VC) asking traditional VCs to HURRY UP & DIE ALREADY.

Representatives from both sides finally square off in the informative and entertaining ”Super Angel/VC Smackdown” on TechCrunch TV.

The arguments of the Super Angels boil down to the following:

– Start-ups need less capital, get to revenue faster, and get to an exit faster. No need for the big pockets of a VC. The discussion almost exclusively centers on consumer-focused internet and mobile startups. Life-science, clean tech, and semiconductor may very well be very different.

– Traditional VCs invest too late, once market traction is already established, and hence overpay. The right way of early-stage investing is to invest BEFORE market traction, and double down if the company takes off.

– Exits are smaller: there aren’t those billion dollar IPOs out there, anymore. For the return metrics to work, those smaller exits need smaller investments. (We talked about this in this past post.)

The VCs counter back:

– Super Angel thinking is small-scale thinking: entrepreneurs will be trained to think small, try to flip a company in a couple of years if not months for a couple of million dollars, and won’t be building the next Google or Facebook: big thinking needs big money.

– Super Angels are merely hedging their bets, investing in a LOT of start-ups, and there is no way they can add value to the hundreds of companies that they invest in. It is better to focus on a select few and make them successful.

But the dollars aren’t always greener on the other side, and it seems to me that the whole discussion is focused on the wrong premise.

1. Investment adequacy

Some start-ups will need little money, other will need a lot. Some start-ups will drive towards a smaller exit, others won’t. There are plenty of start-ups that will do just fine by taking little money and having a fast, reasonable exit that makes all stakeholders happy. Matching the right start-up with the right financing strategy is difficult. Too much money will spoil a company’s strategy and an investor’s returns; too little money will constrain and jeopardize the business plan. But there should be ample room for plain old Business Angels, Super Angels, and VCs. A lot of these arguments resurface in the recent discussion about fat and slim start-ups.

2. Value added investing

Early-stage investing should always be about more than money: open doors, help find strategic partners, and find the next investors. VCs may have been complacent in this respect, but the danger of offering “just money” and waiting for the start-up to develop is especially present with Super Angels who stretch their investment dollars among too many companies to be effective mentors to each one of them. Super Angels right now ride the wave of “we understand consumer internet investing”. Early stage investing is a numbers game, and a lot of the early investments will blow up. That’s not good for the reputation, especially if the perception switches from SuperAngels being able to pick winners and make them successful to spreading money indiscriminately and waiting to see who survives.

Venture Capital investing has been around for a while. It has shown that it can be very successful. In the last ten years, it has also shown that it can be quite unsuccessful. Super Angel investing hasn’t been around that long. Given the time frame and ups and downs in this industry, it yet has to prove itself right (or wrong). But in the big picture, more investor competition is usually a good thing; giving entrepreneurs choice and requiring investors to focus and differentiate from each other.

Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst designation, and a member of the National Association of Certified Valuation Analysts. Gunther is Chairman of the Software/IT Industry Group of the German American Business Association (GABA).

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