Right now there is a fantastic debate going on in the US technology “investment” scene. Since the global financial crisis hit, there’s been a marked increase of investments by “Super Angels” and “Seed Funds”. Much of this money is coming from previously successful entrepreneurs who cashed out and are now putting some of their money to work for them investing in very early stage ventures.
There’s a great deal of logic in this if you think about it. As of late, all VCs are saying that they base much of their decision on investing in a company based on the entrepreneurs and the team involved. Well, many of these new Super Angels are themselves successful entrepreneurs, so logically, you’d think they’d be just as good, if not better at being able to spot startups and teams with positive characteristics. Also, these Super Angels, having been there before will have something tangible to offer.
The discussion has now moved onto, “Is there a bubble in Angel/Seed investing?” Some people are arguing that with all of the competition for deals among Super Angels and early stage Seed funds that valuations are being driven up due to competition. There’s a couple of really good articles on the topic, my favourite one is from Chris Dixon’s blog. Chris links to Paul Kedrosky’s piece which kicked off the debate and basically summarises the situation by saying the young entrepreneurs now have more information to make smarter decisions and that’s driving the smaller deal size which is right in the sweet spot for Super Angels and probably a bit low for most traditional venture capitalists. Lower deal sizes allow the entrepreneurs to have less dilution and when added to the fact that it is generally cheaper to get a product off the ground in the Web 2.0 world, you have a slight shift in the traditional equilibrium.
So, what’s happening in the US is that these Super Angels or small investment syndicates are driving new waves of young entrepreneurs with lower entry levels of funding. Here in Australia though, there’s almost a complete lack of dedicated angel investing in the technology startup sector. As Domenic Carosa pointed out last week there’s a gap in the market for investors looking to place tens to low hundreds of thousands of dollars in startups. Without that Angel Investment piece, entrepreneurs are more dependent on bootstrapping their ideas or seeking funding in a “Friends and Family” round.
I think this is a key problem holding back the technology startup sector in Australia. Take a business like Foursquare, they are doing something ambitious and have had access to funding that’s allowed them to focus on executing their technical plan without having to worry about revenue. That would be impossible in Australia and is the simple answer as to why Australia isn’t building more technology startups. We simply don’t have the right ecosystem of funding.
How do we fix this at a practical level? Let’s not talk about changing government policy or the tax system – what practical initiatives can we take as a community to do this ourselves? I’m open to suggestions and looking forward to your comments and feedback!
