Deviled Angels

This is not the post I’ve been promising to write on Super Angels.

The blogosphere has been abuzz, a part of it anyways, about journoblogger Michael Arrington’s expose of an invitation-only meeting of angels, where apparently some collusion may have been going on. Or not. ‘Collusion’ is a big, scary go-directly-to-jail-do-not-pass-go-do-not-collect-$200 kind of word.

Ron Conway, the Super Super Angel, weighed in with a keep-this-confidential (nudge, nudge, wink, wink) e-mail in which he tsk-tsk-tsks those who were at the meetings, even including a light scolding for his partner at SV Angels, David Lee.

So now the cat is out of the bag (or the genie out of the bottle, depending on your cultural metaphorical background). Angels get together and talk about the companies they are thinking of investing in. This is real news! Stop the presses! Oh, wait, there are no presses any more. Then someone please stop the Internet! We have something important to say.

The original article sounded to me like just so much sour grapes – “hey guys, what, you havin’ a party without me?” Varying opinions, ones I very much respect by the way, either took the angels to task, or explained the content of the meetings away with a wave of the hand and a “pffffft”.

I don’t think any of this really matters to entrepreneurs. Angels, I’ll let you in on one of our little secrets: we know you talk about us – we expect you to, that’s how other angels get into the deal. We know that you discuss deal terms – supermarkets routinely send scouts into other supermarkets to record prices, it keeps the market competitive, and that’s good for consumers.

Valuations are rising, and that’s good for entrepreneurs – to a point. Here’s what I mean: if you go back to my post on the “seed bubble”, you’ll see that I say that there is no bubble as long as the next class of investor is able to invest at the next (higher) round. As early-round valuations get pushed to the next valuation level seed investors won’t be able to do follow-on investments to stave off major dilution. The entrepreneur who pats himself on the back at doing an early raise at a high valuation is probably doing a disservice to his company and investors when it comes time for A or B rounds as institutional investors most likely won’t be able to, or want to, invest at the valuations which would then be required.

There is a sweet spot for valuations at each stop along the funding path – I won’t even try to suggest numbers, but this is something each CEO should already have in mind when negotiating any round. A number that keeps the investors interested and keeps their attention. Investors – the same applies to the founders: if their stake in the company post several rounds of dilution is not going to be large enough, they will also lose interest or start to look at other opportunities (although, and this is pure supposition, I think that this may be true more of the first or second management layer of companies who are watching their options sink underwater).

I’ll admit that I don’t get the little jab at seed accelerators Y Combinator and Tech Stars. With each iteration these programs should be able to put out better and better companies for angels to invest in, and therefore valuations should be going up (see limitations above). I’m not tuned into the backroom dealings around the seed accelerators, but if the angels are feeling that they are being left out of quality deals, perhaps they should be asking themselves why.

Funny that all this happened around the Day of Atonement. Angels – introspect. Founders – be careful out there, but you already know that.


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