The perennial criticism lobbed against Silicon Valley goes something like this: Entrepreneurs aren't thinking big enough, and too many of the new start-ups being launched are really nothing more than fancy features or clones. As Founders Fund puts it: "We wanted flying cars, instead we got 140 characters."
The more cynical investor might put it a different way: We wanted more billion-dollar exits and IPOs, instead we got more mid-priced acquisitions.
Is it fair to place the blame solely on entrepreneurs? I don't think so.
It's a complex issue, but there are broader market dynamics at play. Particularly, it's worth examining the rise of the newest class of investor--the super angel--whose fiduciary interests seem to push founders into early exits. Super angels bridge the investment gap between the angel and a Series A round, typically putting anywhere between $25,000 to $500,000 in a company.
Marc Andreessen, speaking Thusday at the Allen & Co. conference in Sun Valley, Idaho, described a recent acquisition of one of his firm's portfolio companies, Silver Tail Systems. He said:
It was great, but it would have been greater if it had had a $100 million business and they bought it for $1 billion. We spend a ton of time trying to convince founders to not take those deals. As a consequence, you don't have a new breed of Intels, and Oracles and Googles.
But convincing founders not to take those deals may be at odds with the desires of a company's earliest investors. This post by Paul Graham is almost three years old, but it's a good way of expressing how angel funds can potentially put pressure on entrepreneurs to sell early.
A company that gets acquired for 30 million is a failure to a VC, but it could be a 10x return for an angel, and moreover, a quick 10x return. Rate of return is what matters in investing--not the multiple you get, but the multiple per year. If a super angel gets 10x in one year, that's a higher rate of return than a VC could ever hope to get from a company that took 6 years to go public. To get the same rate of return, the VC would have to get a multiple of 10^6--one million x. Even Google didn't come close to that.
So I think at least some super angels are looking for companies that will get bought. That's the only rational explanation for focusing on getting the right valuations, instead of the right companies. And if so they'll be different to deal with than VCs. They'll be tougher on valuations, but more accomodating if you want to sell early.
In other words, super angels profit on the $30 million to $100 million exit, but that exit is hardly a success for a traditional VC fund or, for that matter, for more ambitious founders. Even so, as super angels proliferate, it's hard not to expect more entrepreneurs to buy into a similar approach.
This is not to say that super angels haven't been a boon to entrepreneurs in recent years. On the contrary. Super angels hedge against certain founders raising too much capital early on in a multi-million dollar Series A, thereby preventing founders from blowing through gobs of cash before they find a working business model. And super angels inevitably will push VCs to "become more agile" in their investments or risk missing the boat on hot start-ups, which may also help founders close the deals they need.
What's talked about less often, however, is the net effect of the rise of super angels on the mentality and ambitions of tech entrepreneurs. It's still early of course, but Andreessen raises a thought-provoking point: The rise of the super angel may be helping to create a culture in which the mid-sized acquisition is celebrated--and the big ideas and billion-dollar exits are scant. That's hardly the ideal environment in which to even attempt the next Intel, Oracle, or Google.