Mark Suster, entrepreneur turned venture capitalist has a warning for angel investors
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. Suster says.
“There is too much money chasing too few great ideas. 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. He warns startup entrepreneurs to take the money while its available.
“Most startups over-optimize. When the hors d’oeurve tray goes by, take two, 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.”
COMMENTARY: That's a bold prediction by my colleague Mark Suster. But, it's not out of the realm of possibility for the following reasons:
- Shakeout in the venture capital firm indusry (See my March 14, 2011 blog post).
- Poor venture capital firm returns over a 10-year period (See my February 1, 2011 blog post).
- Venture capital firm fundraising is down (See my October 11, 2011 blog post).
- Poor quality of IPO candidates (see my November 8, 2011 blog post).
All of the above are dimming the promise of a big exit for many venture capitalists. Many angel investors seek a quick exit, generally between 3 to 4 years tops. If the venture capital firms don't see a potential big exit via the IPO or acquisition route, the chances that angels will be able to cashout early are dramatically lessened. We are already seeing the stock of several 2o11 IPO firms selling below their IPO stock prices.
Venture capital firms are also having problems replenishing their portofolio funds, and the pipeline to fund new investments could be drying up quicker than many imagined.
The IPO market is being affected by internal and external forces: Slow turnaround from the Great Recession, slow U.S. GNP growth, high unemployment, soverign debt problems in the Eurozone, Arab Spring Revolt has kept oil prices high, tremendous volatility in the public stock markets.
There is a "herd" mentality among angels when they invest in a promising startup. They invest in groups, and this tends to increase overall angel investments, and we are seeing evidence of this as I reported to you in my posts dated 12/9/10, 8/11/11 and 10/12/11. I attribute this to the proliferation of angel investor groups, an abundance of information via the internet and the "Facebook Halo Effect," a.k.a. investor dellusion and exhuberance. They all seem to think they are investing in the next Facebook. My advice, if there is already a lot of money being invested an industry for more than 6-8 months, it's too late to enter that industry.
These are turbulent times for any angel, so if you are reading this, you know that I am right. If you are the founder of a new startup checkout this video from a Funding Post venture capital conference in Sedona, AZ:
Courtesy of an article dated November 18, 2011 appearing in Inc
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