Angel Investing

Higher Bar – Mr Cranky’s New Normal in Angel Investing

I’m hearing more than a few entrepreneurs whine that Venture Capitalists just don’t get it. That Angel Investing is not what it use to be. Lately I’m hearing more startup founders complain that Angel Investors are not acting like Angel Investors should and I’m left wondering how should they act?

So here are some of my thoughts on that:

  1. Angel Investing – Angel’s invest in their own best interest and not the best interest of every entrepreneur with a Next-Big-Thing idea.
  2. Normal – Normal is dependent on the environment.  New environments result in new normals.

In 1997, Netscape  PSINet, UUNet, went public generating profits and liquidity to fuel the next bubble.  Any high school graduate with a napkin and a sharpie was able to raise money from newly minted B-school grads with no operating experience who became Venture Capitalists on the day they were toilet-trained and weened from the bottle.

In 2000 there were 2,800 VCs. Today there are 700 and tomorrow there will be 699. Dodd Frank is making it difficult for banks to invest in the VC asset class. The downturn has absolutely hammered endowments making them less willing or able to invest in Venture Firms.  Investors that were heavily weighted in real estate have watched their portfolio values and liquidity dwindle.  Institutional Venture Capital is more dear than I can remember.

In 2000 Venture Capitalists invested $99 Billion in 8,000 companies.  In 2010 they invested a quarter of that or $23 billion in 3,500 companies.

Times change, the bar moves up and down and what was once easy to get funded is now difficult. The fact that it is more difficult to gain the attention of an Angel Investor does not make that investor evil. There isn’t a bad guy in this scenario with the possible exception of reality.

Angel investing involves people that have finite funds to invest and they are being presented with better quality deals than ever.

The economic downturn has incented many displaced workers to become startup entrepreneurs. Advances in technology have reduced the cost of starting a company resulting in more companies seeking capital. Institutional VCs are finding it harder to raise money, are closing shop, and have less money to invest. All resulting in more great companies seeking fewer investors. It’s Adam Smith. It’s the invisible hand. It’s that old supply and demand thing.

Investors have not changed, the market has shifted from a sellers to a buyers market. That’s bad timing for many entrepreneurs and little comfort unless you find comfort in the knowledge that while the bar is high now, what goes up; will come down. That these things have cycles and today’s reality won’t be tomorrows. The market will eventually change….. eventually.

In the meantime, entrepreneurs can whine about the short sighted vision of Angels or they can recognize that after a while whining doesn’t salve the pain of reality. Reality is reality and you can embrace it and adapt or you can wither away in unfunded obscurity.

Me, I’d choose to recognize the reality and adjust.  After all if it’s raining out, I could whine about it which won’t stop the rain.  Or I can get my umbrella, my raincoat, put on my galoshes and go jumping in rain puddles. Them’s the facts of Angel Investing.