Posts Tagged ‘Venture Capital’
Thursday, January 20th, 2011
Fast Company recently reported on “the latest group of alleged tech marauders,” super angels:
These crafty interlopers represent a hybrid between the two investing models that have long ruled the normally placid world of startup funding. Super angels raise funds like venture capitalists but invest early like angels and in sums between the two, on average from $250,000 to $500,000. By being smaller, faster, and less demanding of entrepreneurs than VCs, super angels are getting first dibs on the best new ideas.
According to Smeal’s Anthony Warren, Farrell Clinical Professor of Entrepreneurship, super angels are nothing new:
The granddaddy of all angel groups, the Band of Angels,was founded in 1994 and has for many years had pre-committed funds available for investing in hot deals. This structure avoided the horrendous task of getting to a decision when the group members have conflicting requirements and are on a 24/7 schedule. As Wally Buch, one of the early members of the group, explained to me, “It’s like herding cats.”
The Fast Company article also implied that super angels are a purely Silicon Valley phenomenon, but such groups have operated nationwide for many years. In Pennsylvania, for example, BlueTree Allied Angels in Pittsburgh has been successfully investing in life science companies for several years. There are nearly 30 companies in its current portfolio.
We are seeing a growth in super angel groups inserting themselves at the early stage of company foundation before VCs get involved for a reason not really addressed in the article. The Internet has enabled young companies to grow with less need for cash. They can operate virtually, using experts as required from anywhere in the world without the need for full-time hires, and use social media marketing to enter markets. Business models using such capital efficiencies are opening up more opportunities for super angels at the expense of the VC firms, which have to put larger amounts of cash to work.
Monday, August 2nd, 2010
Smeal’s Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, weighs in on the micro-lending trend and what it means for venture capitalists:
In the business section of The New York Times on July 28, reporter Kristina Shevory describes how so-called “micro-lending” is being taken up by small businesses in the United States that are starved for cash in the current uncertain economy. Micro-lending originated in India. Small amounts of money are loaned from special banks such as Grameen, under terms that are much less onerous than those at established commercial banks. The loans are given based more on trust than on financial analysis. And a little money can be made to go a long way by frugal entrepreneurs once given the chance to develop their dreams.
The article however did not mention another underlying driver of micro-finance. The Internet has made it much less costly to build a company. No longer is it necessary, in many cases, to build expensive sales forces, hire experts full time, or spend fortunes on broad advertising campaigns. The Internet allows small companies to “bootstrap” their growth without spending a lot of hard-earned dollars. They are what is now being termed “highly capital efficient.” Having websites designed in Croatia, using Twitter and Facebook as free and “viral” marketing channels, buying highly targeted advertising from Google one hit at a time, and getting access to specialists only when needed from anywhere in the world for an hour’s advice have become the norm rather than the exception.
Alongside the emergence of micro-lending banks, we see new micro-equity funds such as DreamIt Ventures in Philadelphia and YCombinator in the Bay Area. These provide small amounts of cash, enough to pay one or two founding entrepreneurs minimum wage for three months while accessing a network of volunteer experts who guide the foundlings through the difficult early stages of a new venture. At the end of this incubation, the new companies are ready for bigger things that may not demand large amounts of investment.
These new sources of micro-cash are a threat to the conventional early stage venture capital sector which is still in a multi-year downtown, unable to return any profits to their own investors. The VC model has been based on raising large amounts of capital and investing several millions dollars in each portfolio company often leaving little ownership and motivation for the founders. Managing large funds provides high management fees to the venture capitalists of course, but if companies become far more capital efficient there is much less need to take the expensive VC funds at all. Micro-lending and micro-equity are moving in to provide the early stage funding and thereby reducing the need for vast amounts of venture capital.
Tuesday, July 7th, 2009
The New York Times reports today that venture capital firms are rethinking their strategies due to the lower returns they’re seeing lately. Several venture capitalists quoted in the article are concerned about overfinancing in the sector and argue that VC firms need to scale back their investments and revert to strategies used decades ago.
However, Smeal’s Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, contends that “saying the VC industry must go back to basics misses the point because the basics have changed,” due in large part to angel investors.
Business angel investors have gotten more organized and wise. In the past, they worked more as individuals on a hit-and-miss basis, and when a company eventually sought venture financing, the angel’s stock ownership was wiped out by the low valuations imposed by the richer VCs. Now angels hunt in packs, and are able to take a company all the way to an exit without facing the valuation pressure from VCs.
Previously, angels were a source of deal flow for the VC funds taking the early stage risks. But the lessons have been learned; angels now avoid taking good companies to VC firms. If the VCs try to compete with angels by going down in deal size, then they will be unable to maintain their cadre of highly compensated partners. Even today, a startup rarely gets the attention of the best partners in a firm, with a junior partner being designated to the board. This will only get more prevalent.
In addition, it costs much less to build a company now. The growth of broadband Internet has drastically reduced the cost of marketing and distribution, which were a drain on expensive VC money in the past. Techniques like viral marketing, partnered supply chains, etc., have changed the fundamental business models for a startup. In the past, $20 million was a typical cash need for a startup; now it can be as low as $2 million.
We now teach students how to grow a company without venture capital funds rather than how to raise venture capital. This is a much more realistic approach in today’s economy.