Superhero investors come to the rescue
First published in the Financial Times on 4th September 2012.
A new type of investor is bridging the gap between angels and mainstream venture capital
Superangels are zooming to the rescue of entrepreneurs – rather as comic book heroes such as Batman save the day in Gotham City. They bridge the gap between angel investors and mainstream venture capital firms, helping to fund projects that are too big for angels and too small for VCs.
These new types of financiers are invariably founders who have built companies and made fortunes from selling them. Rather than repeat the trick by starting and running another business, they become investors in the next generation of start-ups, backing early-stage companies with anything up to £1m. The Founders Forum, whose event for digital entrepreneurs in London I attend every summer, includes at least 20 such individuals who have moved from operating a business themselves to backing new talent with their money and expertise.
Among the best known are characters such as Peter Thiel, who made his first money with PayPal, and Reid Hoffman, the man behind LinkedIn. Perhaps the most visible of all is Marc Andreessen, who cofounded Netscape. His firm Andreessen Horowitz has backed Twitter, Facebook, Zynga and Groupon. But there are dozens more, not just in Silicon Valley but across Europe – organisations such as Profounders (created by Brent Hoberman of Lastminute.com), Atomico (led by Niklas Zennstrom of Skype), and European Founders Fund (run by brothers Alexander, Oliver and Marc Samwer).
Superangels tend to make decisions quickly and build big portfolios with many stakes across lots of fledgling ventures. The organisations succeed by capitalising on their networks and being seen to add value to investments. Others, such as Dave McClure’s 500 Start-ups, offer mentors, events and even accelerator programmes to those whom they back.
As entrepreneurs themselves, superangels are used to taking high risks and accept that many start-ups will fail – but that occasionally there will be big winners. They mostly focus on the seed stage, although some back every class of venture. Thanks to the internet revolution, technology start-ups need less capital – this cost deflation suits superangels, but works against VCs, which want to deploy at least $1m each time because of their overheads, resources and fee structures.
Venture capital as an asset class has not performed well in recent years. Returns, fundraising and exits have all been weaker than during the boom times in the 1990s. The lack of big gains is partly down to moribund new-issue markets in the US and Europe. Today most disposals are achieved via trade sales rather than an initial public offering.
The industry only became really institutionalised in the mid-1970s, as described in Tom Perkins’s autobiography Valley Boy and the recent documentary film Something Ventured. It grew rapidly for decades, but has slumped since the dotcom bubble burst. Yet technology, the principal engine of growth for the whole industry since Georges Doriot backed DEC with $70,000 in 1957, continues to offer perhaps the best investment opportunities of any sector. It is surely no coincidence that Apple and Microsoft are the world’s biggest and fourth-biggest corporations by market value.
Classic VCs rely on institutional investors such as pension funds and endowments – usually the managers provide only a small proportion of the capital they invest, unlike angels who use their own cash. But such institutions are allocating less to the VC sector, even though it has spawned successes ranging from Intel to Google and FedEx and been an incredible driver of innovation and progress. True risk capital is vital for economic expansion – and stock markets, leveraged buyout funds and banks do not provide it.
Luckily, the huge success of many tech firms has spawned millionaires who are willing to roll the dice again with their self-made wealth. They take the task seriously and provide a more diverse funding scene. Overall, their activities are not replacing typical VC investment but adding to it. They may not feel the need to do such extensive due diligence or take as many board seats as classic VCs, but they are in a position to empathise with an entrepreneur trying to construct a world-beating enterprise.
The coming of age of the superangel is great news for entrepreneurs, job creation and the future of invention in the west.