Setting a Higher Bar: The New Normal in Angel Investing

December 15, 2011

1:00 pm

I have been hearing more than a few entrepreneurs whine that venture capitalists just don’t get it.  Lately, I’m also hearing more startup founders complain that angel investors are not acting like angel investors – and I’m left wondering, “How should they act?”

So, here are some of my thoughts on that:

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

In 1997, Netscape  PSINet, and 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 but who became venture capitalists anyway.

In 2000, there were 2,800 VCs. Today, there are 700, and tomorrow there will be 699. The Dodd-Frank Wall Street Reform and Consumer Protection Act 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 ever 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 investors have finite funds to invest and they are being presented with better quality deals then ever.

The economic downturn has incentivized many displaced workers to become entrpreneurs. 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, have less money to invest, and some are even closing shop. This all results 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 seller’s to a buyer’s market. That’s bad timing for many entrepreneurs and of little comfort, unless you find comfort in the knowledge that while the bar is high now, what goes up will come down, and that these things have cycles and today’s reality won’t be tomorrow’s. The market will eventually change…eventually.

In the meantime, entrepreneurs can whine about the short-sighted vision of angels, or they can recognize that a little 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, but that won’t stop the rain.  Instead, I can get my umbrella and raincoat, put on my galoshes, and go jumping in rain puddles.

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Glen Hellman (@glehel), is an angel investor, serial entrepreneur, and works for venture capitalists as a turn-around specialist. He is the Chief Entrepreneureator at Driven Forward LLC, frequently muses on his blog, Forward Thinking, and works with entrepreneurs to help them figure out what to do and get them to do it.

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