Where are innovative startup entrepreneurs turning for financing these days? Venture capital has gotten tougher than ever to come by in recent years as VCs have become more conservative in the types of investments they make. Enter a new breed of investor: the “super angel.”
Halfway between traditional angel investors and venture capitalists, super angels combine the traits of both in a way that makes them well-suited to help today’s innovative entrepreneurs. Knowledge@Wharton recently took a look at what’s going on in the super angel arena. Here’s what you need to know:
- Like angels, super angels are often former entrepreneurs. What’s different is that many of them came out of groundbreaking tech companies, such as Google and PayPal, giving them insider insights into what makes innovative business ideas succeed or fail.
- Unlike angels, who invest their own money, super angels pool their money with that of friends, family and wealthy private investors. This means they typically invest more than angels, but less than VCs. Most super angels manage funds of $10 million or less; their investments in individual companies range from tens of thousands of dollars to $1 million, but usually fall below $500,000.
- While VCs focus on companies at many stages of development, super angels generally concentrate on seed-stage businesses that can prove their viability in six months to a year. They are looking for innovative ideas and startups that can run lean and mean.
- Super angels invest in industries with low startup and operating costs, including: mobile and web-based software, social networking tools and platforms, and Web-based advertising and media.
- Super angels are highly active. One angel cited in the article invests in an average of four firms a month; another says funding 60 companies a year is not unusual.
Because of this high rate of activity, super angels are more likely to sell a business quickly—which has led some VC experts to criticize super angels for not giving entrepreneurial innovation time to mature. The evidence doesn’t support this claim, according to Knowledge@Wharton. Here’s why: because they invest less to begin with—super angels don’t have to look for a huge payoff the way VCs do. True, they may sell a company quickly to reap a profit—but they may also hang on for years until the company is ripe for exit. Super angels were among the first investors in Twitter and Facebook, and are still invested in both companies.
As institutional capital flows into more super angel funds, they could move beyond investing small amounts in startups and begin financing innovative firms in the growth stage. Still, given the entrepreneurial roots of today’s super angels, there’s slim chance they’ll ever lose their passion for the scrappy, innovative startup.