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Some thoughts about the future of super angels, MicroVCs, and venture capital

I’ve been struggling with writing this post for some time. I hope I can do it justice, something tells me that I won’t but I’m going to give it a shot nonetheless.

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There has been a lot of discussion about the future of venture capital especially in light of all the enthusiasm and support of super angels.

Many have suggested there is a math problem with the VC business – specifically too much money in the industry given the exits in this climate and near term climate.

That point then leads to a discussion and set of opinions suggesting the following: “traditional VC” is dead, the “asset class” hasn’t generated returns enough to support the business, and capital requirements have changed in startups and no longer needs venture capital.

So that brings us to the rise of super angels and micro vcs. These are professional (vs lifestyle) angel investors that have the capital (either their own or someone else’s) in addition to a healthy syndicate of other super angels that can finance startups in the early days quite nicely.

And the rise in super angel activity is super high and I’m quite happy about that. The three investments I’ve led this year all had super angels as co-investors.

Now, given this rise, some are now saying there will be a crash in super seeds and super angels.

So, now we have opinions ranging from traditional VC is toast and super angels are next. Oy.

Here are my thoughts about all of this in no particular order:

1. Several years ago, Fred wrote one of my favorite posts, Web 2.0 is a gift not a threat to venture capitalists. I believed it then and I absolutely believe it now. I encourage you to read it or re-read it when you get a chance.

2. I don’t believe venture capital is an asset class and I certainly don’t believe that super angels are an asset class either. Hypothetically, if there was a fund called the VCIndex that included all of the venture firms in this country or worldwide, I would not buy shares in that fund. Instead, I would only invest in the funds that generate or have the possibility of generating excellent returns. That’s why I’m an investor in my own funds and I co-invest with other firms that I like and respect. And if any of those firms invited me to invest in their funds I would likely do that as well.

Similarly, if there was a fund called SuperAngelIndex with all angel investors, I wouldn’t invest in that fund either. There are great super angels and there are many that aren’t (or don’t have any track record whatsoever as an entrepreneur or venture capitalist. As I pointed out in an earlier post you need at least one of those things.

3. To sum up this point which I’m essentially beating to death, VC isn’t dead and neither are super angels. The good ones will significantly out perform the others just like always.

4. I’m concerned about some super angels that claim they don’t do follow on investing but actually selectively do just that. It’s not fair to make that claim if you don’t follow through. I don’t want to name names, I’m just saying.

5. Not every business should raise venture capital. We are currently investing out of a $360MM fund. We are active seed investors. So far our smallest investment has been $250k and we’ve done a number of those in that range and will continue to do so. But we only do that if we believe along with the founders that if things progress we would have the ability to earn the opportunity to invest more in the company over time. This has been a successful model for us in the past and for the founders involved.

On the other hand if we meet a founder that seeks our participation in a seed financing but we don’t think they will ever want more than a few hundred thousand dollars from us then it might not make sense to take our money or money from any other VC. There are probably other sources of capital that are a better fit. Obviously its very hard to predict capital requirements upfront for many consumer web startups. So we work hard to get in sync with the founders up front about their hopes, dreams & expectations.

I’m sure I missed some things on this topic. But it’s come up in various blogs that I had to get this off my chest and on to my keyboard.