Farhad Manjoo, a writer for US-based Fast Company, explains how an emerging class of investors is reinventing the startup economy. Traditionally, funding for startups has come either from venture capital investors, who invest other people’s money usually in batches of $500k and above, or from “angel investors”, who are individuals, usually former-entrepreneurs, who put their own money down to help startups succeed, and operate in smaller investments, from $10k up to $500k.
A “super angel” is somewhere in between. They raise money from other investors, just like VCs, but invest in a more personalized, more one-on-one, and more flexible manner. Investments can range from $10k to millions of dollars, what is important is that the “super angel” investor provides value-added knowledge, networks, and services to the company.
Folks in Silicon Valley are fond of attaching friendly, anodyne labels to forces that seem bent on world domination (hello, Facebook). So it’s no surprise that the latest group of alleged tech marauders goes by a name that might be better suited to a Japanese cartoon boy band: Beware the super angels!
These crafty interlopers represent a hybrid between the two investing models that have long ruled the normally placid world of startup funding. Super angels raise funds like venture capitalists but invest early like angels and in sums between the two, on average from $250,000 to $500,000. By being smaller, faster, and less demanding of entrepreneurs than VCs, super angels are getting first dibs on the best new ideas. Mint, Digg, and Ustream are three of the prominent super-angel-funded companies with traction.
[…]By streamlining and downsizing venture capital, super angels may be pushing Silicon Valley toward accepting something that has long been missing in these parts: economic rationality.
For too long, tech funding has operated like a moldering Reno casino. VCs place dozens of million-dollar bets every year and fully expect to lose almost all of them; the strategy is that for every hundred Cuils (a one-time presumed Google killer), one Google-size payout (or a few) will put them in the black.
But treating business funding like roulette often pushes new companies to act unwisely. In order to get acquired or go public to satisfy their VCs, startups raise too much money (Brightcove), expand too quickly (remember Webvan?), and give away products for free (Ning).Over the 10-year period ending this past June, the VC industry “returned” — 4.2%.
Super angels give startups much less money than VCs, but they expect a lot less in return. Typically, they don’t take a seat on the startup’s board; they take a small stake in the firm and hand over their funds in weeks rather than months. This frees up entrepreneurs to work on building great products rather than worry about satisfying their funders — which, after all, is the only way they’ll succeed.
Illustration by Frank Chimero
A version of this article appears in the February 2011 issue of Fast Company. For the full article, please visit FastCompany.com
