August 28 2012
by John Backus

The Angel Bubble (or why I would rather be a VC)

Much has been written over the last few years about the poor performance of the venture capital asset class since 2000. And on average, the performance has been terrible. Median returns according to Cambridge Associates for the 2000 vintage year were -3% “improving” to -1% for the 2001 vintage year. Top quartile returns kicked in at 4% and 6% respectively. Kaufmann thinks the VC model is broken as it relates to LPs. Fred Wilson thinks the problem is concentration of money in a few big firms. Silicon Valley Bank’s research demonstrates that small VC funds deliver bigger returns than big VC funds.

At New Atlantic Ventures, we think now is the time to be doubling down in venture capital, and we laid out our reasons why in May of this year. We think Kaufmann, Fred Wilson and SVB have it right – smaller is better when it comes to venture.

Taking this “small is better” perhaps to an extreme, many institutional LPs have experimented with investing in micro-VC funds, super angel funds, and seed stage funds, chasing the earliest of the early stage. Many VCs, as well, have started their own seed programs as a carve-out to their traditional VC funds. The premise here is that angels can now fund companies to scale, and that if you are not an investor in the seed round, you will be locked out when the company goes to raise institutional capital.

Entrepreneurs, angel investors and venture capital funds have always lived in a symbiotic ecosystem, where each depended on the other for success. Relative power in the ecosystem changes over time – The bubble in the 1990s benefited entrepreneurs and VCs disproportionately, as winners were often determined by the size of their funding round. The tech implosion of 2000 gave the power back to the VCs, who too often used a heavy hand in trying to “save” companies through severe down rounds. But starting round 2006, the power moved back to the angels. The cloud drove this move, as companies could now be started with an order of magnitude less capital. Entrepreneurs didn’t need VC-scale money to start their companies, and angels could see a company get to market without too much cash.

But is it possible to be “too small” when it comes to the venture capital asset class? I ask this question because of the rapid growth in angel capital, the resurrection of the incubator/accelerator model, and the rise of the micro-VC.

I’m not sure that this new trend is a great strategy, and I won’t make a lot of friends by saying it. But the angels and the seed funds have a math problem.

The University of New Hampshire conducted a nice bit of research on the angel market, noting that in 2010, angels invested $20b in 61,900 companies (that is $323,000 per company.) TechCocktail published a great list of the top incubators, most of which are still toddler-age. And Dave McClure at 500 Startups has the loudest megaphone trumpeting micro-VC as an alternative to traditional VC, which he calls stupid, arrogant and a few other words best left to the imagination.

So I did a little digging, and asked myself, sitting here in 2012, would I rather be an Angel or a traditional VC. I gathered some data from the NVCA and the University of New Hampshire to answer the question, and the data surprised me.

I am a big believer in supply and demand, and as a VC I like the “supply” of angel funded deals that are coming my way. For every early stage company that receives venture funding, there are 40 angel-funded companies. VCs do have the pick of the angel-funded litter. Said another way, only 2.5% of angel-funded companies will ever raise venture capital. What happens to the rest? Most crash and burn. Some are acquired for their talented teams. Some become good lifestyle businesses. And a few have nice exits without ever having to raise an institutional venture round.

There is also a lot of angel money ($20b) funding these 61,900 companies. In fact almost 3X the money that goes in to Early-Stage Venture ($7.4b). And almost 1.5X the money that goes in to late stage venture ($15.8b).


But the amount of money per company tells the real story. The average angel round ($323k) is dwarfed 14X by the average early-stage VC round ($4.6M) and late stage rounds, at $8.3m are almost twice the size of early stage rounds.

My conclusion? We are in an angel bubble that will keep inflating when Crowdfunding meets Main Street in 2013. But the bubble will burst. Not tomorrow. But soon. Mark my word. Perhaps in 2014?

But the angel bubble benefits traditional VCs. And when the bubble bursts, even more companies will come looking for institutional grade venture capital. I like where I am, investing as an early stage VC. I am also the biggest fan of the angels and incubators. They make my job easier. So thank you – and keep it up!

Written by John Backus August 28, 2012


August 28 2012
by glen Hellman

The feeding frenzy nature of Angel Capital is what scares me today. Something bothers me that I can’t see or touch, but I can smell and feel danger for me as an Angel. I’ve slowed down my investments.

The bottoming out of the VC market on the other hand makes me bullish for that asset class today. That’s the contrarian in me. I invested in Venture Fund at the 2000 top and I hope I haven’t done the same as an Angel.
One other thought regarding your thesis. You can start a company today for pennies on the dollar versus 15 years ago, only a few companies will be able to get off the ground with those pennies.

The very fact that you can start a company with 2 nickles and credit card means that there is more competition than ever and in most cases the companies who have the cash to invest in sales and marketing are going to be the ones who make money.

It takes less money to start a company but just as much to make it successful.

Back in 2000 when I got crushed investing at the top in Venture Funds, I wouldn’t have been better off diversifying in Angel investing as Angels of that error did worse than VCs.

Time will tell.

August 30 2012
by John Backus


10 years ago it was hard to start a tech company and it took a lot of money. Today it is easier and less expensive. BUT, the problem now is breaking away from the crowd. It is a marketing challenge and that takes money. Here is some longitudinal angel investor numbers that might feed your angst:

In 2002 200,000 angels invested $15.7B in 36,000 companies

In 2011 318,000 angels invested $22.5B in 66,230 companies

Over ten years the number of angel investors increased by 50% as did the capital they invested. But the number of companies they invested in almost doubled. Do the math and the amount of money per company dropped $436,000 to $340,000…..

September 17 2012
by Tom Foremski

Most of the angel funded firms are designed to be sold to larger companies, they constitute a type of corporate jobs fair where the businesses are just proof that the engineers can work hard and keep to deadlines. They weren’t going to be going for VC funds.

Although less capital is required to start a company, marketing and sales is expensive. The days of relatively inexpensive viral marketing are coming to an end for most companies because of the noise level. Venture funds are needed for marketing and sales and these costs will be higher in the future because of the multitude of channels and the escalating struggle to be heard.

September 24 2012
by S. Ryan Meyer


Greetings from Santa Monica.

Your analysis of the current state of affairs is dead on. It simply does not pay to be an angel investor, as the success rate is dreadfully small and in the cases where there’s a success, the angels or participating family members are usually diluted exponentially by the additional rounds (unless the angel is sophisticated enough to ask for a cap).

Our thinking diverges when it comes to crowdfunding, specifically on your two last points.

1) The coming bubble – I don’t see a bubble forming in relation to crowdfunding meeting Main Street. Yes, there will be a huge amount of interest and probably some small level of fraudulent activity, but I trust in the abilities of Main Street investors to detect authenticity in the projects and companies they fund. And crowdfunding by default increases the data set for funding decisions. This isn’t to say that the money flowing into crowdfunded companies won’t perhaps create an economic bubble, but it seems just as likely that putting a whole cadre of passionate entrepreneurs to work with small amounts of capital (i.e., up to $1MM that can be legally crowdfunded per year) will structurally benefit the economy in a very sustainable manner.

2) Your job as a VC will get easier – Hmmm. Perhaps it will. But if I can raise up to $1MM per year from the “crowd” and maintain better control over my company, then there could potentially be serious competition as deal flow may be constricted!

But much remains to be seen, and it’s good to see such a lively debate emerging.

If you’re around DC this weekend, I’d like to invite you to my crowdfunding startup’s launch party at F.Scott’s in Georgetown, so we can continue this discussion in person!

Ryan Meyer
CEO, AlumniFunder

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