Angel investors have been the primary source of small business funding in America over the last few years, especially since venture capitalists shifted to more conservative investing habits in response to the recession.
Angels – venture capitalists can’t live with ‘em, can’t live without ‘em.
On one hand, angel investors are increasingly sparking tension in the venture industry. They’re sparring with VCs on blogs and conference panels over the value they offer entrepreneurs, while battling with them behind the scenes for access to the hottest start-ups. In some cases, well-connected angels are banding together to form large pools of capital, blurring the line between them and VCs.
On the other hand, these two sets of investors feed off each other. Angels need cash-rich venture capitalists to do the heavy lifting once their companies begin to mature. And venture capitalists lean on angels to take some of the risk out of newly formed start-ups, while also co-investing with them in seed deals.
Earlier this week, five venture capitalists in New York gathered at law firm Cooley LLP’s office to in part discuss this phenomenon, which exists mostly in capital-light sectors such as Internet and software.
Here is an edited excerpt from that discussion, which was moderated by Cooley Partner Bo Yaghmaie and included Fred Wilson of Union Square Ventures, Habib Kairouz of Rho Ventures, Rick Heitzman of FirstMark Capital, Mike Brooks of Venrock, and Drew Lipsher ofGreycroft.
Yaghmaie: How do you view the rise of angel investors in New York? Some of your firms make seed investments and are directly competing with angel investors.
Wilson: I think it’s terrific news for New York. That’s always been the empty white space in the venture market in New York—there hasn’t been enough seed money to help entrepreneurs get off the ground. That’s the seed corn for everything that we do. So if companies can’t get seeded then they can’t build companies that we invest in.
Yaghmaie: But some of your investments are likely to fall into this [seed-stage] category.
Wilson: Well, the thing about the venture business is that every single one of these guys up here is a co-investor with us at times, and beats me on deals. That’s the way the venture business works. One day we’re competitiors, the next day we’re co-investors. So, yeah, we’re sometimes in that market doing seed investments, sometimes those people are beating us for deals, but I don’t think that’s a bad thing.
Lipsher: I agree with Fred. The organization of the angel community has helped the market – it’s grown the number of companies getting seed-stage capital, and I think the role that an institutional investor plays versus the organized angel really comes down to style and discipline. At least from Greycroft’s perspective, we are very due-diligence heavy. The “super angels” are very due-diligence light. They’re willing to write a check based on much less traditional diligence than we are. But I think they play a significant role, and I think how they‘ve organized themselves into these collectives has helped ensure that the companies are getting the benefit of a bigger number of people – whether it’s introductions, strategic experience, deal experience.