Sunday, October 12, 2014

How To Become A Super Angel, Part Two: How To Spend It

In the first installment on how to become a super angel, we reviewed the seven steps to achieve liftoff and raise the first outside funds. This second installment takes a look at the subsequent evolution of the super angel cohort.

  1. Put the outside money to work quickly. A $10 million fund will spend $4 million over the first two to three years, and keep $6 million in reserve for follow-on investments. The $1 - $2 million annual spending can still be used to pray and spray approach, but, more likely, the angel will write bigger checks to double down on initial investments. Given that the angel has made a significant number of investments over many years, deal flow should not be an issue. And if it is, there is always the option of creating one’s own accelerator, or leverage AngelList.
  2. Increase the investment size.  At this stage, super angels typically still invest on their own time. Previous investments are taking up some of that time, and therefore super angels will very likely have to increase the size of their investments going forward. However, angels typically still do not lead investments and don’t take board seats at this stage. Their ability to provide timely advice may also be impacted.
  3. Raise the next round. To take advantage of the momentum and the afterglow of the early successes, angels again need to raise as quickly as 18 months after the first round.

  1. Hire some junior partners. Now that there is more money to spend, there are many more investments to be made. At this stage, the super angels run out of time and need to start leveraging their time.
  2. Create a following among VCs. An analysis of micro venture capital firms by CB Insight shows that many investments of Chris Sacca’s LowerCase and Aydin Senkut’s Felicis Ventures are followed by blue chip venture capital firms. On their web site, Felicis notes that they have had 51 notable exits, evidence of an angel investor who he is highly networked with venture capital firms and with serial corporate acquirers such as Google and Facebook.
  3. Adapt the business model. Quo vadis, super angel?  
  • Become a micro/boutique VC. The bigger micro VCs like SoftTech VC and Felicis have raised in excess of $100 million and seem well on their way to becoming a traditional venture capital firm. Because they now lead rounds and are board members, they have hired and promoted additional partners.
  • Build an accelerator. 500 Startups in particular has combined an accelerator with seed, early stage and later stage investments. Dave McClure has put in place a whole ecosystem of investments, events and global sourcing of entrepreneurs.
  • Stay small. K9 Ventures seems to pursue this path where Manu Kumar remain a sole operator of a $40 million fund. According to Crunchbase, K9 has made 32 investments in 23 companies as of October 2014, two years after raising the second fund.
  • Be opportunistic. Chris Sacca of LowerCase has been a master of doubling down on prior investments and leveraging his network. He first raised an $8.5 million fund from high net worth individuals he had built real relations with, and then raised additional funds just to buy Twitter shares as people were leaving.
  • Start a syndicate on AngelList. Jason Calacanis and other angels have used their network and name recognition to launch nano funds. The committed amounts are still significantly below $10 million, but can eventually lead to larger investments from Limited Partners.
There is no public information available about the performance of any of these super angels and their funds, many of which are still relatively young. There is some anecdotal evidence that the returns of some the funds are below the water mark, but similar to venture capital firms, success stories tend to be told and re-told, and losses swept under the rug called survivorship bias. For the time being, proxies like the CB Insights network centrality and investment follow-on analysis have to suffice to provide Limited Partners with insight about the potential returns of these newly minted super angels.

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