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Startups looking for funding increasingly have a new class of investor
to pitch: super angels. These are individual angels who have raised
money from others in the hopes that their smallish funds will serve as
the basis for an investing model that merges the best of the angel and
The value proposition to entrepreneurs looking for funding: we're as nimble and friendly as angels, but we have more money available if we decide to make a big bet. But is this all a facade?
According to TechCrunch's Michael Arrington, some of the super angels are plotting behind closed doors, and entrepreneurs, angels and VC firms are the target. Tipped off about a meeting of Silicon Valley super angels at a wine bar in San Francisco, Arrington showed up:
In the back of the restaurant in a private room was a long oval table. Sitting around the table, Godfather style, were ten or so of the highest profile angel investors in Silicon Valley. These investors, known as “super angels” because they have mostly moved on to launch small venture funds of their own, are all friends of mine.
Arrington says he learned afterwards that one purpose of this Godfather-style meeting was to discuss how the super angels could "act as a group" to keep valuations down, fend off traditional VCs and angels alike, and deny entrepreneurs favorable deal structures (such as those that contain convertible notes). According to Arrington, such behavior may be illegal and constitute collusion and price fixing.
Is Arrington's story accurate? Is it possible super angels are working together to further their own interests at the expense of the entrepreneurs and companies they fund?
In my opinion, it doesn't really matter. Why? It's no surprise that investors with personal and professional relationships would work together to further their own interests. It's nothing new, and it happens all the time. I'm not a lawyer, so I have no idea if a bunch of super angels 'strategizing' at a wine bar is illegal, but the dynamic Arrington describes isn't anything the investing world hasn't seen. It happens all the time.
Smart entrepreneurs know that professional investors are trying to get a 'good' deal, which is why they approach investors with some level of skepticism. Sure, investors can be honest and genuinely interested in helping young businesses they fund, but they're not investing for charity. Their goal: find the best investments and negotiate the best terms for them so that they can maximize returns.
That's particularly true for the growing field of super angels. Unlike angels, who play with their own money, super angels have other investors to answer to. Squeezed between well-known angels with more street cred and larger VC firms with more money, super angels have their work cut out for them. As they've a relatively new class of investor in Silicon Valley, they also need to prove that they can generate returns.
They'll fade into oblivion sooner than later if they don't. You can be sure they're not going to sit idly by hoping that the investments they want and need are handed to them on a silver platter. If anything, the alleged conspiracy to collude demonstrates that these super angels are already finding out how hard it is to invest successfully in an investment class that is reasonably already overfunded.
But I digress.
At the end of the day, entrepreneurs should remind themselves that equity financing is the typically the most expensive form of financing available to a startup. Unless you're running a hot startup like Facebook or Twitter, expect your investors to seek a favorable piece of the pie, and perhaps even a pound of your flesh to boot -- no Godfather plot required.
Photo credit: labnol via Flickr.