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DiggIt's fun to watch a new era in investing unfold, partially because identifying trends is satisfying and also because it gives me plenty to think and write about. It's no secret that we're at a point where early-stage and angel investing has become more important and more common.
Yes, certain types of companies are cheaper to build than others, and yes, some buyers are ready to acquire products and features instead of businesses. As such, early-stage investors are gaining in prominence as their deals exit in relatively short amounts of time, with relatively little investment. Even Intel Capital is playing in the early stage.
Paul Graham, managing director of startup incubator Y Combinator built the firm around this trend and is clearly interested in where it's going. So a recent post on The Future of Web Startups makes for good reading.
Graham's premise is that the process of creating, building and funding startups is becoming a commodity. I'm not sure I'd go that far, but I do agree with him that parts of the process could be standardized. One of his suggestions is the creation of standardized angel investment documents:
"Till now investment terms have been individually negotiated. This is a problem for founders, because it makes raising money take longer and cost more in legal fees. So as well as using the same paperwork for every deal we do, we've commissioned generic angel paperwork that all the startups we fund can use for future rounds."
He suggests that because Series A rounds are generally for $1 million or more that those will still need to be customized but writes, "An angel who wants to insert a bunch of complicated terms into the agreement is probably not one you want anyway."
I emailed Graham to get an idea of how Y Combinator's generic documents look, but he said he's not prepared to reveal details yet. Since Y Combinator generally invests up to $20,000 for between 2% and 10% of the startup, its perspective is a bit different than an angel group that generally invests from $100,000 to $500,000 in a deal and takes between 10% and 20% of a company.
Angels also invest in companies in areas other than the consumer Internet startups garnering all of the attention nowadays. If the goal is to sell a company fairly quickly (and Y Combinator has already seen at least three exits after only two years in operation), then worries about liquidation preferences and participation requirements are less important. But for many angel investments, the goal is to make a reasonable return after several rounds. Angel groups and Y Combinator might not have the their interests aligned on these points. -- Stacey Higginbotham
See Oct. 11 post from The Seed Stage
See October post from Paul Graham
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Angel investing should not be defined in general by the actions of a few. There will, of course, be variations in style and substance with an investment field so large.
Y Combinator seems to have one style, build and flip. Easier said than done in markets outside of Boston and Silicon Valley.
As for fees, Y combinator invests relatively small amounts in very early stage companies. They need an economically viable (read cheap)"commodity" document/term process. Either that or they will pay more in fees than their investment. (Don't forget the time element in initial financings.) Last, it's fairly easy to write off a $20,000 investment as opposed to a $500,000 one.