Super Angels Continue to Thrive

Two more Silicon Valley-based angel investors are raising funds, according to filings with the Securities and Exchange Commission, highlighting how more and more angel investors are backing inexpensive consumer Internet companies.

Mike Maples, founder of Floodgate Fund, formerly known as Maples Investments, raised a third fund of $73.5 million, more than double the $33 million he raised for his second fund in 2008. He calls Floodgate “a super-angel” fund.

Dave McClure, meanwhile, who’s managed seed investing for the Founders Fund and an incubator program for Facebook, is in the midst of raising $30 million for a fund called 500 Startups, which he describes as “a micro-venture fund.”

Neither Maples nor McClure would comment on their funds, but both have used their websites to describe their investment philosophies.

Maples—whose investments include Twitter, Digg and Chegg—wrote a short and pithy post describing how Floodgate bridges the gap between small seed investments from relatives or wealthy individuals and much bigger investments from traditional VCs. Floodgate’s investments typically range from $250,000 to $1 million.

McClure—who launched the job search engine Simply Hired and has run conferences for tech and startup groups—wrote a 2,500-word rant on his blog against traditional VC firms that invest in Internet companies: “Most consumer internet investors, large or small, have no goddamn clue what they are doing. They are getting killed on IRR, and most of them should be put down and put out of their misery… NOW [sic]. Their investment thesis is suspect, their domain-specific skills are limited or non-existent, and their desire & ability to innovate is minimal. They are simply collecting fees, waiting for the next tee time.”

McClure goes on to urge those VCs to “HURRY UP & DIE ALREADY, U FRIGGIN’ PATHETIC DINOSAURS [sic].”

Both McClure and Maples agree that startup costs have fallen, especially for Internet-related businesses, and that many venture funds are too big to invest profitably in young companies.

Most consumer internet investors, large or small, have no goddamn clue what they are doing. They are getting killed on IRR, and most of them should be put down and put out of their misery… NOW [sic].

Dave McClure

Seed stage investing was the only category of investing that rose in 2009 (by 2%) in a year that was otherwise dismal for U.S.-based VCs. In total, VCs invested only $17.7 billion, a 37% drop from 2008 and the lowest number of dollars invested since 1997, according to the MoneyTree Survey by the National Venture Capital Association and PricewaterhouseCoopers, based on data from Thomson Reuters (publisher of VCJ).

Chris Douvos, who has invested in micro-VC funds since 2005 through his role as a managing director with The Investment Fund for Foundations, says that investors, such as Ron Conway and O’Reilly AlphaTech Ventures, are seeing a capital cap that they can fill by “being nimble in the sense of traditional angels, but also bring a level of activity and DNA-setting that was the hallmark of more institutionally focused funds.” (See Q&A with Douvos in LP Notes.)

Douvos says that the goal of the angels isn’t to supplant VCs, but to be a value-added early processor of companies.

“They [the angels] are recognizing some really meaningful trends at certain types of startups—capital efficiency and the fast cycling of ideas at IT/Internet companies—and they are typically people with some sort of entrepreneurial background with a bit of investing experience thrown in,” Douvos says. “The startups would be far better off for having this earlier participation.”

Investors speaking in July at a “super angels” panel at AlwaysOn conference at Stanford University offered both good and bad aspects of the growth in angel investment funds, a trend that they said doesn’t hold for cleantech or biotech companies, because those companies require more fund-raising to get launched than angels like to invest.

The investors at the conference also offered some cautions about the new fund-raising landscape. For example, entrepreneurs need to understand that the type of funding they sign up for may determine their future, said Allen Morgan, who’s transitioning out of his partnership at the Mayfield Fund to focus on eight to 10 small consumer Internet investments.

If entrepreneurs decide they can build a big company and raise $15 million in venture funds, “they’re signing on to a path that is several more years at least, and includes an implicit commitment by everybody that if you can’t build a company worth several hundred million dollars, you won’t be there,” Morgan said.

Sometimes entrepreneurs don’t realize this, Morgan added, and “they’re shocked or saddened when they’re not part of the deal as it’s building toward higher valuations.” —Deborah Gage and Dan Primack