Why the angel bubble is not a bubble but actually the missing link

Naval Ravikant has written a thought-provoking post on the growing “angel bubble”. His thesis is that there is no bubble because the total money amount of money being invested in venture hasn’t increased. What’s changed he claims, is simply that instead of bigger Venture Capital (VC) rounds that are fewer in number, we’re seeing smaller but many more Angel investments occurring. In other words, the VC industry — not the Federal Reserve — are the ones that should be worried about this “bubble”.

I actually think what’s happening is that the market is now more resistent to bubbles. Contrary to a previous post of mine where I hypothesised the seed investment bubble (which I’ve since reconsidered and I’ll explain later in this post), the Angel “bubble” is a externality of one simple fact: it’s now a lot cheaper to build a startup. To understand this, watch the presentation Naval gave a few month’s ago which is the best I’ve seen to date in this trend.

So as a consequence, angel investment has now becoming (and rightfully so) the dominant way for a company to fund a startup company, with the existing VC model being relegated to more of a latter stage role.

Why is this a good thing? Well first of all, a lot more startups are being funded — but with the same amount of money in the economy. Statistical theory will claim that this alone will be good thing for the economy, as there is a higher probability of home runs. By spreading risk among more bases, there’s a better opportunity to generate returns.

But something more important is happening. VC’s now have a better qualification of a business to invest in. The huge amounts of capital they can invest into a business, are now going to be done after having seen a more advanced startup’s potential future, pushed to that stage by the seed accelerators or angels that cover their startup cost.

What I mean, is that by the time a company gets to VC, they will no longer be a startup — which is a business searching for a business model — but instead a high-growth business that’s now executing on their newly discovered and high potential business model. The VC firms are no longer needed in the business of starting something in information technology; they are instead now purely in the business of growing a business (where already some of the larger funds exclusively focus on). And the capital they are putting at risk on behalf of the endowments and pension funds that gave them that money, now have a lower risk of achieving higher returns.

Better still, the VC’s funds can focus on the future of technology like clean energy, biotechnology, and nano  technology — industries that were what information technology was in the 1970s: high startup cost, low chance of return.

And while that’s all well and good for the VC’s, this new funding lifecyle actually opens up opportunities for returns for everyone (which is why this isn’t a bubble). The seed accelerators and angels have the ability to pass the baton and exit their investments to better capitalised groups like the VC’s, allowing them to focus on the earlier stage of the market. With the IPO market dead since the introduction of the Sarbanes-Oxley legislation, tech has relied on acquisitions as the sole form of return. But with earlier stage investors like the Angels getting exits to VC’s, and the VC’s having better qualified businesses that they can grow to a large IPO, this is actually going to see the IPO market reopen due to this focus.

All in all, that’s not a bubble: that’s called efficiency and a rejuvenation. The Angel bubble isn’t a bubble but a maturity and evolution of the technology ecosystem. This is actually the missing link in efficient information technology being built — the link which now connects the super-highways of the economy to sustainable growth and value, not bubble.

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