“In fact, angels have nearly completely replaced venture capital at the seed stage, which means they are the first to form critical relationships with founders. True, this has led to an explosion in new companies far beyond the levels seen previously, which is entirely expected — lower barriers to entry to any market means more total entries — but this has actually made it even more difficult for venture capitalists to invest in seed rounds: most aren’t capable of writing massive numbers of seed checks; the amounts are just too small to justify the effort.”
In a classic case of man bites dog, mounting evidence supports the thesis that Cloud, SaaS, Open Source, and other technologies that fueled the explosive success of the current Venture Capital giants has actually transformed the startup world to the point that these same funds are finding themselves squeezed out of participation in the next generation of startup or “seed stage” companies.
In the software world at least, the cost of developing an idea to the point of a Minimum Viable Product (MVP) is now so low that it is possible for a savvy entrepreneur to develop a business to the commercial stage for a small fraction of what it would have cost even a few years ago. Because VC funds are typically subject to relatively steep fees and management costs, these smaller investment asks at the early stage are often not feasible or worth the risk. Instead, and increasingly, these smaller investments are being made by “angels” – individuals or groups that invest directly in businesses as opposed to participating indirectly through a fund. While angels generally lack the value-add of a VC, such as business development and follow-up financial resources, they also tend to be less intrusive – a big plus for some entrepreneurs.
The most successful Venture Capital firms have massive war chests at their disposal. They seem to be increasingly capable of, satisfied with, and focused on, later stage investments in companies that have a high probability of becoming “Unicorns” (privately held firms with with valuations in excess of $1Billion). Time will tell what this trend portends for the startups of today. Generally speaking, diversity tends to be healthy for a population. The test will come if and when a downturn occurs, and we see how patient this new angel money is.
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