June 21, 2011 Leave a comment
I recently attended a talk on Angel investing given by Brad Feld and David Cohen at the Boulder TechStars Bunker. One of the challenges I’ve been unable to get my head around as a prospective startup investor is how do I get access to the most promising startups? All of the “high profile” startups that are started by the most accomplished entrepreneurs are almost impossible to get access to. There’s a small community of well known Angels and entrepreneurs that circle these startups and get first dibs at seed level funding. Makes sense. If I’m starting a company, I want “smart” money in my deal. Not just cash, but cash from accomplished business builders and investors who have a track record of helping companies be successful and generating a return on their investment.
So the question is, as an unknown investor with some success starting and building companies, how do I get access to the better deals?
Enter AngelList, an online marketplace for startup entrepreneurs and prospective investors to connect started by serial entrepreneur Naval Ravikant. Here’s how it works: Startups can register and create a listings page that contains their product, screenshots, video, team and advisors. What really makes it interesting is that you can see which prospective investors are “following” the company and which are “endorsing” the company. Investors must also register and be “qualified”. To be qualified, an investor will be evaluated one of two ways, either by how many current community investors are Twitter followers or by having a certain number of current investors “endorse” you as someone they would trust and co-invest with. This qualification process I believe gives the community credibility and its working based on the list of over 2,000 incredibly accomplished investors and entrepreneurs listed on the site. The latest, unverified stat I heard was that AngelList was adding 20-40 startups per day.
Now, does AngelList by itself give me access to the most high profile deals? No, but it sure does begin to provide transparency and level the playing field. Gone are the days when prominent VC’s had proprietary access to deal flow. Now everyone – entrepreneurs, Angels and VC’s – has to be scrappy and compete.
This level of market transparency is also great for startup entrepreneurs. They now have access to a broad range of investors and in this era of AngelList and social media, you can get to almost anyone if you can efficiently articulate your pitch and cut through the volume of social media noise. But access is no longer the issue.
The final implication to consider from this increasingly transparent and open investment environment is on valuations. I’ve said before that we are not in a “bubble” similar to high-flying times of 1999, but pre-money valuations right now are pretty darn high I think due to numerous factors but certainly at least two: 1) huge success stories like Facebook, the LinkedIn IPO, Zynga, Groupon, etc. have investors over-exuberant about finding the “next big stock” and 2) an increasingly transparent market (via AngelList, Second Market, Sharespost and social media in general) is allowing anyone to invest in startups, creating more demand and driving prices up.
It will be interesting to see if the market becomes more transparent and open, if valuations will continue to rise, stabilize or fall and what effect a fall in valuations might have on the supply/demand equation for startup financing.