The "Series A Crunch" at a glance

  

 The term “series A crunch” has been moving eastward from California, like valley girl speech, “ya know.”

The table above appeared on the front page of yesterday’s San Jose Mercury News, signifying that the “crunch,” the fiscal cliff of our innovation economy, is ascending from tweet and blog status into the mainstream.  The entire infomercial is titled “ 'A-Round crunch' worries Silicon Valley startups looking for funding to grow beyond seedstage.” You can probably guess the contents.

Check their premise: “Widespread consolidation in the venture capital industry means there are fewer places than ever to find big cash infusions.” Calling what is happening in VC a consolidation is like calling the Titanic a consolidation in the cruise ship industry.

The News fails to grasp that the seat of investment power has shifted and that today the angel community contributes more funding and support to entrepreneurs than venture capitalists.  Putting on my analog hat (the one with the propeller on top), I read from the chart that, in the first six months of 2012, 900 new enterprises received seed funding while only 380 received a series A round.  The numbers from my favorite source, the Center for Venture Research at UNH, show that in that same time frame, 27,280 ventures received $9.2 billion in funding from 131,145 individuals; these numbers had all increased over the previous year. If you redraw the chart using these numbers you will fear much less the “class A crunch.”

Feeling feisty today, I wrote to the author of this article, Peter Delevett, complaining that he should have also interviewed a spokesman from the angel community.  He replied that he had interviewed Naval Ravikant, the founder of AngelList. Not knowing Ravikant, I was previously unaware of his truly stellar angel qualifications. "Companies that assume the next round after seed is a $5 million 'A round' are poorly positioned," Ravikant said. But because it costs less to grow a tech company than in years past, thanks in part to the ability to "lease" rather than build key infrastructure like data centers, Ravikant said the traditional boundaries of seed and A rounds are shrinking. 

Well said, but I think the article would have been better if Delevett had also included a spokesman from the Band of Angels, the Tech Coast Angels, or a similar group that is active in the Angel Capital Assn.

As for the VCs, before Chris O’Brien left the News for the LA Times, he wrote an article “Venture capital: Is this a down cycle or a death spiral for the industry that fuels Silicon Valley?”  Once again, you can guess the rest.

Angel Returns Exceed VCs; Small Funds in the Angel Space Do Best; Band of Angels Reports IRR of 54%

Like us, John Frankel collects research on Angel and VC returns. He is particularly bullish on small-cap VC funds investing in the angel space, of which we have a couple of new entries founded by local angels: SideCar Angels by Rick Lucash and Jeff Stoler, and  Beta Fund by Dan Von Kohorn and Norm Meisner. 

 

“I finally have had the time to collate the research we have found, and am happy to share it. This post is quite technical, but the bottom line is simple: angel-stage funds outperform,” says John Frankel  founder and partner of  ff Venture Capital, writing in TechCrunch. His conclusions:

Venture capital funds, in aggregate, managed an anemic 4.41 percent end-to-end pooled return over the last 10 years. "Despite the risk and illiquidity of the asset class, they haven’t outperformed public markets."

“Angel groups, on the other hand, have done exceptionally well,” he says. Every large angel return study has mean angel IRRs ranging from 18 percent to 38 percent. Detailed exit analysis has revealed that angels have robust rates of “home run” (5x or more) investments, while maintaining a decisively lower level of risk.

Frankel argues that “smaller funds, focused on the angel space, with deep resources for due diligence and an ability to help their companies get to the next level, should outperform.”  Click here to access Frankel’s excellent tables, diagram,  and references, as well as to view his full conclusions.

Band of Angels

We first met Ian Sobieski, Cordinator of the Band, roughly a decade ago at planning meetings leading to the formation of the Angel Capital Assn.  From the web site:

 “The Band of Angels is Silicon Valley's oldest seed funding organization. We are a formal group of more than 130 former and current high tech executives who are interested in investing their time and money into new, cutting edge, startup companies.” 

“The Band has invested more than $208M into 240+ companies since 1994. Of these 54 have been acquired and 9 have gone public on the Nasdaq. The cumulative IRR for all band investments since inception, including the losses suffered through the bust, is a positive 54%.”   

New Funds

“SideCar focuses on filling out investment rounds that are syndicated by angel groups and microVCs.  As you know, most angel group rounds in the Boston area have more than one group participate,” says Rick Lucash. “Our goal is not to compete with established groups, but to increase deal flow and assist angel groups and companies by bringing additional money to the table.”
 


According to Norman Meisner, the Beta Fund intends to raise $5 million. The fund will focus primarily on emerging high-tech and bio-tech companies. “We are a small fund for small companies.  We invest early, typically at the angel financing stage, prior to typical venture capital financing, and in collaboration with other angel funds and groups. We see this as the time when value grows fastest, capital can have the most impact, and good judgment and execution can make the biggest difference.”

Who’s Next? Rumors abound that other small funds are on the way.