The entrepreneur turned VC warns that there is too much money chasing too few marketable ideas. The crash, he says, is coming next year.
Outspoken entrepreneur-turned-VC Mark Suster last night put a date on a prediction he has been making for some time in his blog about a coming crash for angel investors: The end will come next year. “And if not 2012,” he said. “Then 2013.”
Suster’s prediction, made at the VentureShift conference at Le Poisson Rouge in New York’s Greenwich Village, adds to a chorus of warnings that the current surge in angel money into the startup market is going to end badly. Sean Parker made a similar prediction, reported here on Inc.com, earlier this week.
There are a couple key market forces creating the froth in the market, Suster said. Chief among them is what he identifies as a 90% drop in the cost of starting a company over the past 10 years, thanks to the adoption of open source programming and cloud-based business services, among other things. A startup ante that was $5 million in 2000 is now down to $5 thousand.
With the barriers to entry lowered, new players have rushed in. Founders have grown younger and more tech-focused. Mentorship-led investors, like Y-Combinator and Tech Stars have stepped in to serve their needs and get access to the next Zuckerberg. For fear of missing out—the emotion Suster abbreviates as “FOMO”—VCs that ordinarily would have focused on larger deals have joined the move to early stage investing. The result merits yet another acronym: ENIFA. Or, Everyone Now is an F—g Angel.
The effect on valuations has been predictable. “There is too much money chasing too few great ideas,” says Suster. “People are paying too much for early stage funding.” At some point, angels will realize that there is no way to get their money out at anything like what they paid, and the flow of money will shut down.
If you’re in the market for funding now, Suster says, grab what you can while the money is still flowing. He is making sure that all his portfolio companies at GRP partners have the funding to see themselves through a coming dry spell, and he advises startups to do the same.
Don’t wait until your product is fully featured before seeking funding. “Most startups over-optimize,” he warns. Instead, take the money while it’s available. “When the hors d’oeurve tray goes by, take two,” he says, “and stick one in your pocket. Don’t spend everything right away.”
And then brace yourself. No one will ring a bell when the angel investing is ready to collapse. “Have you ever read Nassim Taleb, author of Black Swan? We’re aren’t going to know until it happens.” But Suster has no doubt that we are near the end of the great angel investing surge. “Are we in a bubble? Of course we are.”
ERIC SCHURENBERG is the editor-in-chief of Inc. Before joining Inc, Eric was the editor of CBS MoneyWatch.com and BNET.com and managing editor of Money Magazine. As a writer, he is a winner of a Loeb and a National Magazine Award. @EricSchurenberg
ALLISON FASS is deputy editor of Inc.com. A longtime business journalist at Forbes and The New York Times, she has also held roles in venture capital and innovation at Hearst Interactive Media and digital strategy at a start-up consultancy. @alliefass