No Longer Flying Solo, Big Investors Attract Others to Juice Start-Ups
By PUI-WING TAM And SPENCER E. ANTE
Much of the venture-capital industry is undergoing a shakeout. But a growing
breed of start-up investors dubbed "super angels" is rapidly raising new
money-and ratcheting up competition with established venture capitalists in
Aydin Senkut, a former Google Inc. executive, plans to announce that he just
closed a $40 million super-angel fund from institutional investors and
wealthy individuals including hedge-fund manager Peter Thiel. His fund
follows a $20 million super-angel fund by start-up investor Ron Conway in
May and an $8.5 million fund from by former Google executive Chris Sacca in
Meanwhile, former PayPal Inc. executive Dave McClure is raising a $30
million super-angel fund, according to a regulatory filing. And super-angel
investor Mike Maples, who raised a $33 million fund in 2008, is raising a
new $73.5 million fund, according to a regulatory filing.
Many super angels started out just as mere angels, wealthy current and
former Silicon Valley entrepreneurs and executives who invest their own
money in technology start-ups.
Aydin Senkut, in his office in Palo Alto, Calif., last week. plans to
announce a $40 million super-angel fund.
What elevates super angels into an unofficial upper class generally is the
magnetic effect their participation in a deal has on other investors-a main
reason entrepreneurs like to do business with them.
And for super angels, investing has evolved into something more than a
hobby. These players are now raising funds with outside money, investing
full time and competing with VCs.
While their funds tend to be small, super angels have had an outsize impact
on Silicon Valley. As many traditional venture capitalists retreated after
the tech bust last decade, super angels filled the gap, investing small
amounts of $25,000 to $1 million in dozens of new start-ups such as Facebook
Inc., Mint.com and Zynga Game Network Inc. Super angels also work with
established venture capitalists to bring them new deals.
As these micro-cap venture capitalists now raise their own funds-giving them
more ammunition to participate in later financing rounds of a start-up-they
are siphoning off more investment deals and fund-raising dollars from larger
Judith Elsea, a managing director at Weathergage Capital, a $250 million
fund-of-funds firm that invests in venture funds, says she recently invested
in Mr. Senkut's new super-angel fund and has also put money into Mr.
Maples's super-angel fund-at the expense of traditional venture funds.
"It's been pretty spotty" performance from regular venture funds, says Ms.
Elsea. So "we have material exposure to several of these [super angel]
Investing in super-angel funds can pose risks in that they typically invest
in far-less-proven start-ups than venture capitalists do. And unlike venture
capitalists, who have hundreds of millions to invest, super angels generally
don't have enough money to fully fund a company to fruition.
Still, super angels are increasingly jockeying with established venture
capitalists for stakes in start-ups. Geoff Yang, a venture capitalist at
Redpoint Ventures, which closed a $400 million fund earlier this year, says
his firm has been "squeezed" into a smaller ownership share in some
investments because super angels wanted a bigger slice of the deal. While
angels have brought many new start-ups to Redpoint's attention, "every
[venture capitalist] is trying to figure out what their strategy is" with
them, he says. "Are these guys friend or foe?"
Some start-up entrepreneurs say super angels have thrown them lifelines they
couldn't secure from venture capitalists. Ryan Howard, chief executive of
San Francisco online health-care start-up Practice Fusion Inc., says venture
firms turned him down in 2008. They "want no risk," he says.
Super angels wrote Mr. Howard checks for $25,000 to $100,000, so that he was
able to raise $1 million by early 2009. "Their network is mind-blowing,"
says Mr. Howard, whose firm raised a venture round from Morgenthaler
Ventures late last year.
The super-angel activity contrasts with the rest of the venture industry,
which is winnowing out after a decade of poor returns amid a lackluster
initial-public-offering market for start-ups. The number of active venture
firms is nearly one-third less than the 1,326 in 2000, according to research
Super-angel Mr. McClure says he tends to make dozens of small start-up bets
and can comfortably make money if just a few of the start-ups are bought by
larger acquirers for less than $100 million.
In contrast, big venture funds-often sized at several hundred million
dollars and up-need bigger paydays to turn a profit on their huge funds.
"We have a whole different set of exit criteria," says Mr. McClure, whose
biggest exit to date is Mint.com, the financial website that Intuit
bought late last year for $170 million.
Mr. Senkut, who has invested in more than 60 start-ups as an angel investor
since 2005, says he raised a super-angel fund because he wants to shift from
being a minority investor in start-ups to taking majority stakes more often.
With the new fund, the 40-year-old is growing from a one-man shop to a
larger operation by hiring two staffers.
Having seen 10 acquisitions of start-ups in his portfolio over the past
year-including Mint.com to Intuit and social search service Aardvark to
Inc. for $50 million in February-Mr. Senkut says he is exiting from his
start-ups three months to three years after the initial investment. By
contrast, most venture-backed companies now either go public or get sold
after a median time of 9.4 years, according to VentureSource.
Write to Pui-Wing Tam at email@example.com