Monday, April 18, 2011

Angel investment hurts the VC market

This is something I've observed as well, and highlights another problem for the traditional VC industry:
I bumped into a friend last week who sold his company a few years ago. He spent the required time with the buyer and then left. He's been spending his time since starting a family with his wife and investing in startups. He told me he's not sure he'll make a lot of money angel investing, but he's hoping to at least breakeven. So he's not doing it soley for the returns. He's doing it to stay connected to startups and support other entrepreneurs. I am certain he's not alone in his approach to angel investing.
It's fun to found a hot startup, and then cash out. The problem is that now you are no longer the founder of a hot startup, you're the guy who founded a hot startup a while ago, and then cashed out. So, after time, the conference invitations dry up, you're no longer the center of attention at parties, and Wired magazine isn't emailing you asking for your vision of Web 3.0 (or whatever)?

So what do you do? You become an angel investor, and even if you aren't the guy founding hot startups, you're the guy funding guys funding hot startups. So, now you get invited to conferences again, people want to talk to you at parties, and Wired magazine is once again asking for you to grace their pages. It's all great so long as the money keeps flowing.

Discussion question: Is the above dynamic likely to fuel bubbles, or not?

2 Comments:

Blogger nazgulnarsil said...

investment has its own version of the laffer curve where too much investment creates non-value-producing companies and too little leaves potential value-producing companies on the table.

9:05 AM  
Blogger Brian said...

Better question: is the above dynamic likely to fuel significant bubbles?

VCs and Angels target different sizes and types of companies. Angels, especially technology focused angels, as a total % of AUM, are so tiny as to be insignificant in effecting other valuations.

Regardless, the type of Angel Investing Mr. Wilson describes is better thought of as a technology focused, private version of the public grant infrastructure supporting scientific and medical research.

12:27 PM  

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