Tuesday, December 4, 2012

Are Moron Angel Investors Causing a Series A Crunch?

“Let's All Shed Tears For The Crappy Startups That Can’t Raise Any More Money,” says Dan Lyons . “And raise a glass to the moron angel investors who created this mess.”
So who is Dan Lyons and is he really toasting us?  Are French words best for describing both entrepreneurs and agent provocateurs?  And is there really a Series A Crunch?  In his excellent commentary today, the ever-insightful Dan Primack replies:

“Lots of tech startups that raised seed funding can't get follow-on investments from venture capitalists, thus causing the companies to disappear. It's being called the "Series A crunch" (®Sarah Lacy), and has sparked the type of schadenfreude usually reserved for a Kardashian divorce.

Be seeded, be resented.

“To be clear, I'm a firm believer in the idea of entrepreneurial meritocracy. The best companies should continue to get funded, and the lousy ones should fold so their employees can move on to more worthwhile pursuits.

“What I don't quite get, however, is why so many people believe venture capitalists are infallible arbiters of what rocks and what sucks. These are many of the same venture capitalists who helped inflate the dotcom bubble before it burst -- getting its recessionary goo all over America. And the same ones who slowed down their investing pace in the middle aughts, when companies like Facebook were just getting started. And who gave absurd late-stage valuations to companies like Zynga. And who let Andrew Mason cash out all of that Groupon stock pre-IPO. And who do you think first put money into Solyndra?

“My point isn't that venture capitalists are dummies. It's that they can make mistakes. Just take a look at the companies that Bessemer Venture Partners admits to having passed on. Every firm has regrets, and it's not unreasonable to think that certain quality startups fall through the cracks. Or that some undeserving companies get to move forward. In fact, the "Series A crunch" likely means that more errors are being made, rather than fewer (since VCs are sorting through an increased number of seed-funded deals, without getting more hours in the day).

“One more thing: Before insulting all those "dopey angel investors," it might be worth understanding why they backed so many companies in the first place. Research has shown that angels have the best chance of producing positive returns by investing in more, not fewer, startups. And I don't mean five rather than two. I mean 50 rather than 10.

“But don't let me ruin the fun of feeling superior to all those folks in Silicon Valley who foolishly chased their dreams (or who helped others to do so). I'm sure that venture capitalists will make everything work out okay..”

A Moron’s Diary

Living once again in the Northeast, I don’t believe I have heard anyone use the term “moron” since I left Texas.  In Houston, it was pronounced “moe….raawn”, accents on both syllables, and was frequently and loudly  applied to motorists of whose driving habits the speaker disapproved.  Conflict often ensued.

To apply the term moron to persons who give generously of their time, energy, experience, and savings to help give the other guy a chance to start a business and be successful, to advance technology, and to contribute to the regional economy seems a bit mean spirited. Perhaps, in these difficult times, the world would benefit from a few more good morons.

From my perch, the Series A crunch is far from proven.   Right now, seed valuations are rising, more VCs are entering the angel investing space, and our regional angel groups have joined forces to have greater control over their own destiny.

So who are we quoting today? 

Dan Lyons is Editor-in-Chief of ReadWrite. Previously, Dan was Technology Editor at Newsweek. Before that he spent a decade at Forbes, covering technology. Dan was the creator of "The Secret Diary of Steve Jobs," a satirical blog written in the persona of Fake Steve Jobs. Want another sound bite from him:

“ For the past few years we’ve had people calling themselves “investors,” who have no experience investing, swanning around the Valley, slinging money at people calling themselves “entrepreneurs” who have never held an actual job, let alone run a company. How could this have ended in anything but a train wreck?”

Dan Primack, Senior Editor, Fortune, writes a daily newsletter, TermSheet, covering the latest news on private equity, M&A, deals and movements — from Wall Street to Silicon Valley. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

Exceeding thanks go to Dan Primack for allowing us to quote extensively from today’s issue of Term Sheet. We’ll reserve our thanks to Dan Lyons until he tells us who is paying for his toast. Like the toasts at many of our youthful marriages, this one may end up costing us a great deal in the long run.
In times lang syne, Pogo cartoons proclaiming “We have met the enemy, and he is us!” once lined the Infinite Corridor at MIT.  My friend GK suggests we nominate Lyons for an Anti-Pogo Award: “We have met the enemy, and he is anyone but me!”

The illustration above is reproduced only in low resolution and is used to support our argument. We believe this qualifies as fair use under copyright law.

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