My Heavenly Calling -The Angel Market

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Following my disbanded quest to join the VC ranks, I kept searching for a way to successfully apply risk capital to worthy technology projects. If VC’s are suffering from too much money chasing too few deals, there are only two options: Less Money or More Deals (or both).

Because of the ways VC’s are structured they can’t really go after small cap and mid market opportunities. There are some exceptions but generally if a VC can’t see a realistic opportunity for a business to achieve a $100 million dollar exit, they won’t invest. My partner Rob and Marc Andreeson have both done a deep dive on the economics behind this but suffice it to say that Less Money is not an option many VC partners voluntarily pursue.

Which leaves us with More Deals. As a former M&A exec, I know most technology companies are acquired for less than $50 million. I also know that many scalable, digital businesses can get to profitability on less than $5 million in capital. Given reasonable timeframes (3-7 years), this formula should lead to above market returns. So why isn’t this small cap / mid market opportunity pursued more aggressively?

The Funding gap. Similar to the chasm found in mainstream technology adoption, there is a gap in the startup financing cycle. Robert Wiltbank of Willamette University, one of the preeminent early stage finance researchers, has told me that only 2% of VC deals are in the early (pre $3M raise) stage. It’s been my experience that most entrepreneurs can scrape together a few hundred thousand and defer compensation for a few quarters. Some are even willing to mortgage their house or may have access to deeper pools of risk capital. While this is often enough for the passionate entrepreneur to get things started, it is almost always insufficient capital. This leaves the undercapitalized company with a promising but not sufficiently compelling story for traditional venture capital.

Angels have historically helped fill this gap. But there are issues in this market. First, as companies have become more capital efficient, it’s not clear that investment dollars from angels are growing commensurate with the demand. Secondly, there are administrative challenges with the angel market as well. As an entrepreneur and later as an angel, I’ve seen these issues from both sides of the table. For most entrepreneurs, it takes a tremendous amount of time, effort, patience and the right connections to discover, pitch, and then close angel investors. To say it is a full time job (time not spent building the business) is an understatement. From an angel’s perspective, things can be equally challenging. Capital efficiency has increased the quantity but not necessarily the quality of startups. The volume of companies seeking capital is overwhelming, causing most to remain anonymous, thus exacerbating the entrepreneurs discovery challenge. In addition to deal sourcing and review, it’s also time consuming to negotiate, execute, diligence and most importantly manage an investment. Given that most angels are not full time investors and no one is paying them for their time, it’s easy to understand the challenges from their perspective as well. As my friend Bill Heston recently quipped, “We’re all ignoring our financial adviser’s advice.”

Despite this, I’m convinced there are unnecessary inefficiencies in the angel market. I’m also convinced that resolving (or reducing) these inefficiencies will be beneficial to angels, to entrepreneurs, to VC’s and to a local community. So, I’m happy to have joined forces with Rob Monster in trying to advance the angel market. Our goal is to profitably match risk capital with promising seed stage ventures in a partner (VC and angel) and founder friendly manner. Our approach is to combine the professional management and active involvement of a venture capital firm with the financial flexibility of an angel capitalist. This hybrid approach is somewhate novel and we hope well received in what we believe to be an underserved but promising market.

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