OUTLOOK SERIES PART 1: Are the roles of angels and VCs changing?
(EDITOR’S NOTE: This is the first article in our annual multi-part series sharing the insights of angel and venture investors who are either located in East Tennessee or have a specific interest in investment opportunities here. We will be rotating the order of responses on a daily basis.)
Today’s question posed to our angel and venture capital panel was as follows: “Looking back at 2016, it appears that the positioning of angel versus venture funding has continued to evolve with the latter moving farther down the “date continuum” (i.e., later in a start-up’s evolution). Would you agree? If so, is this trend going to continue at the same pace, at a slower pace or is it going to accelerate?”
Eric Dobson, Chief Executive Officer (CEO) of Angel Capital Group – VC’s left the early stage years ago, except in Tennessee where we still have some TNInvestcos that have raised new funds. There are shockingly few true VC’s that still work in the angel space. They are essentially already gone. Angels have become the pros in the space and are carrying their portfolio companies further and further, or letting them fend for themselves on the open market, which does not go well. For Angel Capital Group, we expect to invest in two rounds in a company provided they meet our expectations for execution. Studies are showing that VC’s primarily invest in deals that have previously been invested by organized angel groups. That indicates a closer relationship coming on the horizon between traditional angel and current venture players. Regardless of your political leanings, we could see reversal of several prior acts that limited angel investing, but especially venture capital investing. Time will tell, but the next few years should be a very good time to be in the angel market with an investor friendly Securities and Exchange Commission expected on the horizon.
Andrew Goldner, Founding Partner, GrowthX – It does seem that “A” is now the fifth letter of the funding alphabet! The “A-Round” now follows friends and family, pre-seed, seed and a bridge. It’s not uncommon for an entire seed round to be filled with angel money (and no lead), though there has also been an increase in seed stage venture capital funds. The reality is that a larger percentage of technology start-ups are applying existing technology to solve new problems, rather than inventing technology. In this “Age of Applied Technology,” where products are less expensive and less complex and product talent is plentiful, founders are expected to get farther with less capital. Here is the stark difference between 2006 and 2016:
|Pre-Funding||Ideas and business plans||Launch an MVP|
|Seed Round||Prototype||Product-Market Fit|
|B Round||Product-Market Fit||Liquidity event|
Tony Lettich, Managing Director, The Angel Roundtable – At The Angel Roundtable, we are seeing increasing levels of sophistication and discipline in the investing community. This includes a dual-pronged approach on the venture funding side. Some VCs appear to be moving farther down the “date continuum” as you reference. In addition, some are either creating deeper relationships with accelerators or creating “start-up studios” in which they can actively participate earlier in the process. We expect both of these trends to continue, driven by the desire to be more effective in selecting investment opportunities in a growing entrepreneurial base and increasingly competitive market.
Kristina Montague, Managing Partner, The JumpFund – With the pool of start-ups growing, especially coming out of accelerator/incubator programs, angels are looking more and more at products and services which have customer traction vs. still in the idea stage. Very early stage capital may be harder to come by as the competition increases and more companies are able to prove out their thesis with early sales, user acquisition, or product validation via Kickstarter, etc., which makes them more attractive and better positioned for angel/early VC investment. That said, there are numerous new platforms and avenues for early stage capital beyond traditional investors, such as crowdfunding and Go Fund Me type strategies for the smaller dollars needed to launch.
Geoff Robson, President, and John Morris, Executive Vice President, The Lighthouse Fund – Morris: Venture capital is moving further down the capital continuum with angel filling the void. I think the trend will continue at the same pace. Robson: I would add as an ecosystem matures, we do see this naturally occurring. More knowledge is shared, and entrepreneurs learn quickly. As a result, they continually hone their ideas and take the necessary steps to quickly ramp up their best ideas.
Jack Studer, Managing Director, and Courtney Watson, Partner, both with the Chattanooga Renaissance Fund – Studer: Yes, as more and more “hobbyist” and non-structured capital continues to flow into early stage investments, professional VCs are moving “later”. However, these trends may not last long as these early stage “hobbyist” are likely to pull out of the market if their potentially unrealistic expectations and lack of personal diversification deflate their enthusiasm.
Grady Vanderhoofven, Fund Manager of Meritus Ventures and President and CEO of Three Roots Capital – I agree institutional venture capital investors seem to be moving in the direction of financing relatively more mature companies than angels typically are financing. I think the trend may vary based on geography. For example, as the TNInvestco’s reach the end of their active investment road, companies in Tennessee perceive less institutional capital available at seed stage and early stage, and they look to angels to help fill that gap. Companies on the West Coast may have a different perception than companies in Tennessee. In Tennessee and the surrounding region, I expect that trend to continue, which is part of the reason we are working with a number of collaborators to establish a new pool of institutional, seed stage capital.
Ken Woody, Partner in Innova Memphis – The challenge for venture investing has always been that “last money in gets the returns,” so VCs and angels run the risk of missing a good opportunity by waiting too long versus getting diluted or crammed down by investing too early. I would agree that the mainstream VCs continue to invest later in the cycle. However, I am encouraged that more angels are investing and looking for good early stage opportunities. I am also encouraged by the efforts of accelerators, research institutions and mentoring to reduce the risk in early stage deals.