Why These Frothy Times for Angel Investing are Actually Good

I’m going to play contrarian for a post.  There is so much talk right now of the angel investment scene going bananas from venture capitalists, angel investors, entrepreneurs, journalists, academics, and even lolcats.  I agree that it’s going bananas, but where I don’t agree with many people (and many people who I respect) is that it’s a terrible thing.

I believe it’s actually a good thing.

I’m an occasional angel investor.  Back in ’00-’01, I lost a lot of money in early stage investments.  Too much money.  I vowed never to do early stage financing again.  But I’ve had enough toes in the water over the past 7 years here in New York to understand where we were and where we are now.

If you are an entrepreneur, this is a great time to raise capital.  There is a ton of capital for many different reasons and access to it has never been easier.  It used to be that you had to have a top lawyer who knew people, or was asked to pitch at an angel group.  The web has fundamentally changed this.  I receive 3-4 deals a day on AngelList of companies I’ve never heard of but have demonstrable traction and already have hundreds of thousands committed.

Since there is a capital supply glut, simple economics say that it’s in favor of the entrepreneur.  Valuations are higher than a few years ago which is not in favor of the investor.  You need to put more money to work from an investment standpoint to have the same ownership percentages than just 365 days ago.

So as an entrepreneur, times are great.  If you are on the fence about raising capital, go and do it.  Cost of capital is cheap so take advantage of the opportunity.

As for angel investors, it sucks to be us.  But then again, it’s great to be us.

I spent a few hours in a board meeting today with angel investor and friend Jerry Neumann and he mentioned that the best part of being an angel means that you don’t have to do deals that you don’t want to do.  So lets use some simple logic:  if the deal terms are atrocious right now yet money is getting poured into early stage investments, then who is being ridiculous?  Us, – the angels!  No one is forcing us to put money to work in angel investing.  If the deal terms are so ridiculous, shouldn’t we be looking at other investment vehicles to generate wealth?

So why isn’t the well running dry in the angel investing ecosystem?

These frothy times will weed out the morons, or more importantly, the people who deserve to be weeded out.  Maybe the term moron is way too harsh, but it’ll weed out angels who are either a) way too green, b) investing on ego (I see quite a bit of this), c) people with no sense of simple math.  Is that a bad thing for the angel ecosystem?  Not if you ask me.

So, in 365 days from now, hopefully the froth has died down, angels who have no business being angels run out of capital earmarked for angel investments (but hopefully they saved for their children’s 529s), and more entrepreneurs than ever have startups and are dominating the world.

  • http://about.me/clouvi Christien Louviere

    I like your use of the word froth because it’s definitely not a bubble. I agree that’ll be a slow decline back to a “normal” level not an all out hard fall like some “experts” are predicating.

    Back in ’01 I was not as active in the start-up space like I am now, but I can say that I do see a disconnect in the valuations. I feel like I hear angels asking for much more than they’re being offered because of the current ecosystem.

    • http://www.bacomputersolutions.com Mike

      Thanks for sharing your experience… I love avoiding the word bubble, spot on!

  • clouvi

    I like your use of the word froth because it's definitely not a bubble. I agree that'll be a slow decline back to a “normal” level not an all out hard fall like some “experts” are predicating.

    Back in '01 I was not as active in the start-up space like I am now, but I can say that I do see a disconnect in the valuations. I feel like I hear angels asking for much more than they're being offered because of the current ecosystem.

  • http://twitter.com/ericfranchi ericfranchi

    :) at the 529 comment.

    • http://www.darrenherman.com dherman76

      Having kids puts a perspective on things.

  • http://twitter.com/ericfranchi ericfranchi

    :) at the 529 comment.

  • http://www.darrenherman.com dherman76

    Having kids puts a perspective on things.

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  • Bhalliburton

    That's great cappuccino art!

  • http://www.bacomputersolutions.com Mike

    Thanks for sharing your experience… I love avoiding the word bubble, spot on!

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