Like a young Joseph Gordon-Levitt, startup founders will soon see angels all around them.
“This decade will be remembered as the rise of the angels,” said Paul Singh at Betamore on Monday to a crowd of startup owners and fellow angel investors. Singh, a native of Northern Virginia and a partner in California-based 500 Startups, is one of 22 people charged with distributing seed investments of up to $250,000 to early-stage companies worthy of 500 Startups’ imprimatur.
Bullish talk about the greater influence angel investors wield today owes its credit to the lower cost of starting a company in 2013. No longer needed—at least in the earliest phases of building a startup—are investments worth millions of dollars. This is due to several significant, if obvious, reasons, as Singh outlined in his presentation at Betamore:
- It’s cheaper than ever to start a company. It’s more expensive, however, to “scale.”
- The world “gets smaller” as the “web gets bigger.” Or: there are more people to whom investors can distribute money, and easier ways for investors to do so. (Hello, AngelList.)
- Technological differentiation doesn’t matter anymore. Who cares if three other startups employ, essentially, the same technology as three other startups? “Traction is the new intellectual property,” said Singh. Startups: do something faster than everyone else.
- Capital is now a commodity. Dollars are more abundant than drunkenness was in Federal Hill after the Ravens won the Super Bowl.
For angel investors to retain relevance, they’ll need to adapt to a shifting landscape.
- Part of that is using data—information on AngelList, for example, or tracing cofounders’ relationships through social media tools—to perform more than adequate due diligence on a startup.
- Another part is ensuring a startup has traction, that buzzword held fondly by the startup world (and the Baltimore Angels) that is nothing more than a conditional: make sure a startup has either revenue or customers and a distribution plan for its product, and then invest.
And how much should angels invest? On average each year, for instance, 500 Startups cuts about 150 initial checks to startups for roughly $50,000 each, Singh said Monday. In two and a half years time, 500 Startups has invested in nearly 450 startups in about 30 countries.
But those initial checks represent just 30 percent of the money—or less than a 5 percent ownership stake of the company—500 Startups would ever put into a startup in the earliest rounds of funding. And of all the startups vetted by employees at 500 Startups, investments are made in the “top 0.4, maybe 0.5 percent” of companies, Singh said.
It’s what the 31-year-old investor identifies as the paradox of investing: angel investors want to invest in the best startups but, “by definition, they don’t need us,” he said. So the new model for angel investors, one that will lead to their rise over the next decade, will be to make small seed investments in great startups, and then save a large portion of cash—500 Startups saves 70 percent—for follow-on rounds of financing (Series A, Series B and so on).
“The shame in [the investing] industry as a whole: we expect [startups] to innovate, but we do what our forefathers have done in the last 50 years,” Singh said.
In other words, angels: start with small investments, cut bigger checks in follow-on rounds and you’ll set the tone for startup investing this decade.
Paul Singh’s “Rise of the Angels” slideshow:-30-
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