Shifting Plates Bring Earthquakes

VA Angels’ CEO Randy Thompson writes a column for the Calgary Herald. Here is one of the articles.

April 6, 2013. 5:33 pm • Section: Business, Technology

It’s not hot news that the angel and VC world is in a state of restructuring. In fact when media tries to identify the inflection point for this flux they may well look to almost three years ago when the rise of super angel funds and the development of tools like AngelList started to appear.

On the VC front, the transformation elicited the media to cry “The Series A is dead”, referring to the first round of venture capital in the $3-6 million space. This “death” forced the venture community to shift its focus up or down the funding continuum as staying left very few options to make returns. However, over the last five years the VC community hasn’t been the only space where transformation has been reshaping the way we raise money. What isn’t fair to the VC community is that from 2006-2010 the angel community also began a very painful transformation of its own – it just wasn’t as public and happened earlier.

During this five year period, angels were going through their own navel gaze where they too were forced to go up or down the funding continuum. Furthermore, the financial crisis meant a lot of companies needed more seed capital to get to the institutional capital round. The get this increase in capital angels began to pool together. They formed Angel groups, responded to cash calls (sometimes three or four times), and (at times) raised between $5-10 million from non-institutional sources.

For all of you entrepreneurs, both of these evolutions are important to understand as you go out to raise money in the new capital environment of shifting sand.

Take the chart at the top of this article as a reflection of the investment continuum; the circles reflect where angels and VCs have landed on top of each other in the struggle for deals. Two interesting facts – first, the largest funding in VA Angels history was a $2 million round by a super angel. Second, the smallest VC term sheet I have witnessed was $200k.

Most VC’s will tell you the angel model isn’t healthy, and here are the top four reasons you will hear:

1) Too many investors make it hard for VC’s to operate effectively

2) Angels push the valuations too high

3) If the VCs didn’t pick up the deal earlier, the company should have been mothballed instead of taking more unsophisticated money

4) This type of money doesn’t get to an exit

On the angel front, the reasons given not to bring in VC’s and keep striving forward are

1) VC’s don’t really add value, they only add a board seat

2) The VC model is broken, so the valuations they need are unrealistic

3) VC only knows Internet, and we are a _____ company

4) VC needs to sell the company to have a return and we see other options for a return on capital

The two winners in all this?

Obviosuly, the entrepreneur. In fact I cannot think of a time where it has been easier to raise private capital. The toughest choice for the entrepreneur is to choose hemlock or Arsenic… Essentially you must pick a poison and go with it, because once you have started down a path it is hard to shift over.

The second winner is the super angel. This individual can fund a deal themselves, work with the Angel collective, or work with the VC’s. But in truth all deals at some point probably try to pitch the “swing vote”. This person can be the lone person on a cap table for a VC deal, a debt bridge to other institutional capital, or the individual who can top up the round that other angels leave vacant.

It’s interesting times and all the plates seem to have landed in the $500,000 to $2.5 million section of the tech funding ecosystem. This can’t last forever, but the longer it does the more likely entrepreneurs should be able to find capital. Interestingly, the laws of evolution would suggest that when all these deals mature, the good ones will need a round of capital between $5 and $10 million and therefore we will see another shift in the funding ecosystem.

My observation in Alberta is that this “co-opetition” hasn’t been super healthy for the investor community. There has been a history of not sharing deals with each other, and I think the last three years has exacerbated this trend, not broken it down. It will be interesting to see how the shifting plates impact the small Alberta tech funding community. Not all earthquakes have to be fatal.

–Randy Thompson

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