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Wednesday, January 12, 2011

The Problem with the Super Angels

from Jim Armstrong





There is a lot of talk these days about the growing number of angel funds and super angel funds, that is funds that quickly invest 250k to 2MM (roughly) into a company and remain very hands off. To be sure these super angel funds do indeed properly fit into the new trends around company creation. At Clearstone, we have also launched a super angel fund and strategy.

What I worry about is the path that most companies take to success and the staying power of this capital. In my 15 years plus in venture I can think of only two portfolio companies, Overture (goto.com) and Rubicon, which were able to flawlessly hit their launch plan. Overture pioneered the pay for placement search market and raced to $100MM in revenues. Rubicon hit the market just right with a publisher centric advertising solution. Otherwise, all of our other successes, a dozen IPOs and an equal amount of large M&A exits, took a very crooked path to success.

In each of these cases, what was needed was conviction and a belief that the company and product we were building was going to be needed and valuable in the marketplace -- eventually. What was needed was smart, educated capital that had been heavily involved with customers and products and other, more nuanced sources of credibility around the growth of the company.

It is rare for any "1.0" version of anything to work just right. More often than not products, and the messaging and marketing around them, need lots of reiteration and market testing to hit their inflection points. The same is true with companies. In my experience the super angel money has been "hot money" that develops "alligator arms" and runs when the hat is passed in a conviction round. In addition, the small amounts of capital available from these funds put unnecessary and complicated restrictions on the already difficult business of making a start-up venture successful and driving it towards a large exit.

The success rate of start-ups is low and experience can make it higher. However, my experience tells me that capital providers that are small and hands off are by definition seeking (i.e. "hoping for") a quick hit and start-up success rarely works that way.

Jim Armstrong is a Managing Director at Clearstone Venture Partners. Jim's work at Clearstone is focused on information technology investments, with particular interest in consumer internet, application software and internet enabled business processes. Jim has been recognized as one of the top 50 Venture Capitalists in the United States by Forbes Magazine. Jim blogs at socalvc.blogspot.com.


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