I just finished watching the first 4 episodes the so-called smackdown on TechCrunch featuring Dave McClure and Dave Hornik pissing at each other about the validity of the Super Angel vs. mainstream VC investment models. Frankly there isn't much difference and my conclusion is that it was "much ado about nothing." I think both models can work if they are scaled appropriately for the opportunity space and are well run by thoughtful and skilled professionals.
The mainstream venture model evolved over 40+ years to the point where huge firms investing huge funds became the norm. The industry is massively overbuilt. Returns have been negative for 10 years. There is, and will continue to be, major downsizing. Most (greater than 50%) of the mainstream firms will go away. Many of the remaining firms will look to invest overseas. There will never again be the kind of returns generated in the 90s because the technology industry is more mature, there is less white-space to conquer and paths to market are dominated by large and successful firms who extract a lot of the value. Mainstream venture capital is a significantly tougher business than it was in the 1990s. It will probably be 2015 or later before the industry is right-sized and modest positive returns start to reappear across the category. Conclusion - nothing wrong with the model if it is sized to the opportunity space.
Super-angel funds are, in-fact, nothing of the sort. Angels are investors invest their own money and, overwhelmingly, they made that money by being successsful entrepreneurs themselves. Super-angels are really just micro VC funds. They raise money just like mainstream VCs. They just raise less money, invest in deals at lower valuations and look for exits in the sub - $100M range. They also make the claims that they are "seasoned entrepreneurs" and provide special help to their portfolio companies (Hmmm - maybe). Oddly this model looks EXACTLY like a the mainstream VC funds of the early 1980s. Duh!!
There is a current opportunity for these funds because the mainstream firms have too much money under management to support small scale investment and small scale exits. This space is nowhere near as overbuilt as mainstream venture capital so there is less of a supply/demand disequilibrium. It is also supported by the ecology because the larger technology firms are having trouble innovating and are looking to buy early-stage innovation at early-stage prices. Early-stage exits are a defeat for mainstream venture firms. They are a victory for super-angel firms. Conclusion - probably a better space in the short term for companies, limiteds and investors who are happy playing on a smaller chessboard and not committed to changing the world.
What both firms have in common is that they exist to buy and sell equities. They both buy from entrepreneurs and they both sell to acquirers or (very infrequently these days) to public shareholders. They are, at their very core, traders. Their job is to buy low and sell high. This fundamental truth about the venture business informs every action they take whether mainstream or super-angel. It also informs the culture of the businesses they create. Everyone is looking for a pot of gold at the end of the rainbow - the life changing - all consuming - EXIT!! The nature of their business model demands it. These are close-end funds. They have to return money - cash - to their investors and they have to do it in a fixed period of time.
In this blog over the next several months I am going to explore another - even more ancient - model for company creation. This is art and practice of building and running a business for POSITIVE CASH FLOW. Before there was venture capital and before there were EXITS, people built businesses to make money so they could pay their bills. I will argue that re-discovering this model drives a corporate culture which is much healthier, more robust and more survivable than the EXIT-focused culture created by the venture capital model. I will also argue that the cash flow model can engage the employees, the critical human capital asset of every business, to significantly greater efficacy than equity models. Lastly, I will argue that we can modestly scale this model to the point that it can become a significant factor in new business creation.
We will follow the early success this model has had in a couple of businesses and, with luck, the later success it will have as the effort proceeds. The first part of this adventure will start next week.