Friday, September 24, 2010

Speak Up If You've Been Helped By "Superangels"

What disappoints me most about the entire "AngelGate" affair is the willingness of entrepreneurs to believe the worst of the very people who have been working so hard to make starting companies easier.

Have people forgotten what it was like to raise money before the rise of the "superangels"? Searching desperately for angel investors, or trying to pitch VCs before traction?

Like Mark Suster, I sit on "both sides of the table". I'm an investor, but I'm also an entrepreneur, and thanks to my work as an unpaid advisor, I might very well help an entrepreneur negotiate a funding round in the same day I'm negotiating one of my own investments.

Like any entrepreneur, I complain about the cluelessness of investors. Like any investor, I complain about the cluelessness of entrepreneurs. But even though we're on both sides of the table, fundamentally, we are all on the same side. We want to change the world (and make money in the process).

I'd call on all the entrepreneurs who have been funded to make their voices heard--what do they think of the men and women they've been working with these past few years? While I agree with the point of view that this is a worthless sideshow to the real Silicon Valley, now that good men are being dragged through the mud, we need to speak up.

Angel, VC, entrepreneur--we're all jerks at times. And even if we weren't human, the fact that our interests conflict (investors want to buy as much of the company as possible for their money; entrepreneurs want to sell as little as possible) would cause friction. But the answer is to work to soothe those frictions, not exacerbate them.

As I've said before in a previous post, follow the money. Who benefits from all this? If you can answer that question, you'll have a better shot at penetrating the real conspiracy.

(Originally posted as a comment to this excellent post by Mark Suster)

Thursday, September 23, 2010

Do Companies Serve The Founders Or Vice Versa?

The classic story of nice guys who can't sell against cutthroat competitors is a perfect illustration of the fundamental dilemma most founders eventually face:

Does the company serve the needs of the founders? Or do the founders serve the needs of the company?

If you're lucky to be in business long enough, you're going to discover that many times, what the business needs and what you're comfortable doing will often diverge.

At that point, you may have to choose between your own comfort and the company's success.

The tough part is that there's no guarantee that sacrificing your own comfort will work. And that's especially true if you do something like hire a new VP Sales without learning for yourself how the sales process actually works.

After years in the business, I've learned what I can and can't do. I've teamed up with a VP Sales who knows how to sell. And I know when to ask questions, and when to get out of the way and let him go for the kill his way.

(This post originated as a comment on Steve Blank's blog)

When Angels Fight, Silicon Valley Loses

The latest round of developments in the so-called "AngelGate," including alleged leaked emails and Twitter fails appears to indicate that the situation is more substantial than I thought. As a result, I'm forced to do something unusual--write a blog post without making any jokes.

I've co-invested with Ron Conway; I've co-invested with Dave McClure. I've always felt that both of them have entrepreneurs' best interests at heart, and work hard on their behalf.

If this "AngelGate" represents a rift between them, this is bad news for the entire ecosystem. The last thing any of us--angel, VC, or entrepreneur--need is a conflict that will get in the way of what we're all trying to do: Create great products and build great companies.

I'll admit to enjoying what I thought was a fake publicity stunt; if it has turned suddenly real, I feel guilty of contributing to the sideshow.

This is Silicon Valley, not Monday Night Raw. Let's leave the chair-throwing and double-crossing to Vince McMahon, and get back to work.

P.S. And if this is a publicity stunt, this time you really took it too far guys.

It's fun to generate faux controversies and rack up pageviews and comments, but not when it impacts people's reputations and relationships.

I thought we ran Valleywag out of town for a reason.

Tuesday, September 21, 2010

Yes, There Is A Superangel Conspiracy.



I have a confession to make.

There is an angel conspiracy.

It dark, it is devious, and it is far-reaching.

The conspirators number amongst them many of the top people in the Valley, including angels, VCs, lawyers, and yes, even journalists.

We have joined together despite our differences and conflicts for a single, sinister, self-interested purpose.

To get your attention.

* * *

When unraveling any crime, you should always follow Deep Throat's first principle: Follow the money.

Words may lie. Deceptions abound. But the money trail leads inevitably and inexorably to the truth.

And the truth is that we've all conspired together in the rise of the superangels for our own selfish reasons.

The motivation on the part of the superangels should be fairly transparent to all--the more attention they get, the more they benefit, both in terms of dealflow and the ability to raise funds from limited partners.

Don't think its a coincidence that the increased focus on angels was followed almost immediately by many of those same angels raising small venture funds.

The motivation on the part of VCs is a little subtler; the supposed Superangel vs. VC conflict (which I freely admit I played a part in promoting) provides cover for the fact that for the most part, angel investing activity helps venture capital by creating more companies that will eventually require VC investments.

The increase in funding and company formation also helps entrepreneurs (who have access to more capital) and service providers (who have more potential customers).

Finally, some of the most eager participants have been the journalists. As the old saying goes, "If it bleeds, it leads." Nothing generates pageviews like conflict and scandal. TechCrunch has been profiting from these manufactured kerfuffles more than anyone. TechCrunch was the first to promote the superangels; now it's the first to turn on them.

Yet the part about this conspiracy that should scare you the most is that even this backlash IS ALL PART OF THE MASTER PLAN.

What could generate more pageviews than tantalizing rumors of a shadowy conspiracy? Heck, what is this essay but yet another blatant attempt to capitalize on the American public's never-ending appetite for TMZ-like scandal?

* * *

In the end, the claims of a superangel conspiracy don't pass the Deep Throat test. TechCrunch reported that ten prominent superangels met in San Francisco to collude in driving down valuations, shutting out VCs and new angels, and quashing the use of convertible notes.

Mike Arrington stirred up the controversy (masterfully, I might add--I admire the work of a true virtuoso!) by using some key buzzwords: Collusion (and its hint of corrupt, smoke-filled rooms), and saying that the group accounted for "nearly 100% of early stage startup deals in Silicon Valley."

The truth is, both of these claims are laughable.

Even if the top 10 superangels wanted to collude (and knowing many of the folks who might appear on such a list, I doubt that any of them would participate in something they felt unethical), they lack the market power to do so.

When Major League Baseball's owners colluded on player salaries in the 1980s, it was easy for them to maintain control of the cartel since they had a monopoly, and only needed to control the actions of the 24 different owners.

Superangels simply don't have that kind of power.

Let's assume that each of the 10 alleged conspirators possessed a $50 million fund (which I guarantee is not the case). That's $500 million in total funds. Assuming those investments were spread over 5 years, that's $100 million per year in investments.

If the conspirators contributed $500,000 to the average seed round, that's still only 200 deals per year.

The SBA estimates that there are about 500,000 angel investors in the United States, and that they invest about $20 billion per year.

The alleged conspirators only represent 0.5% of the annual angel investing activity in the United States.

Even if we assume that Silicon Valley seed rounds only account for 10% of angel investing in the US, the pot controlled by the alleged conspirators only represents 5% of the local market.

I'm not saying that angels don't wish that valuations are lower (I certainly do). But there simply is no way that such a conspiracy could be effective, given the economics of the market.

As Deep Throat would say, "Follow the money." And in this case, the money leads to one inevitable conclusion: We are all part of the superangel conspiracy.