Super Angels And The Startup Bloodletting Of 2011

Super angels have been super active over the past year. Now their business models will be put to the test, and a bloodletting of startups may be on the way.

Both they and the new crop of micro-cap funds actively pursued seed and early stage opportunities in 2010. They funded scores of companies, including many in the Internet space, where shoestring startup costs make business plan experimentation relatively painless.

Over the next year or so, many of the young businesses will need new money. The question awaiting them is will they get it? And if not, what are the alternatives?

“It will be a very interesting test case” of how these investors manage their portfolios, says Michael Kim, managing partner at Cendana Capital, a fund of fund that places money with seed and micro-cap funds.

Kim (pictured) predicts that the top 5% to 10% of these startups will get funding from top-tier venture capitalists. Another 20% to 30% will raise money from other VCs.

The remaining 60% of companies will face a more uncertain fate. Some will secure money through inside rounds, some will sell themselves at fire sale prices. Still others will shut down.

Kim estimates about a quarter of these up-for-grabs companies are solid businesses that simply need more time to hit their growth and development milestones. Another quarter is likely to bring acceptable returns though acquisitions. An additional quarter will likely be liquidated for close to asset value – say $500,000 – and a final quarter will shut down.

There is a “potential bloodbath” on the way, he says.

VCs and super angels are still trying to figure out their place in the world of seed funding. This year could offer more clarity and present super angels with decisions they hadn’t anticipated.