SuperAngel VC Smackdown!

This morning I attended a fascinating session in Palo Alto that points to the future of venture capital in Silicon Valley. Provocatively framed as a "smackdown" between traditional VCs and a new class of Super Angels, it instead highlighted the future rebirth of innovation in Silicon Valley.

Venture Capital has been in its own Lost Decade with negative returns since 2000 after three glorious decades during the Era of Moore's Law. Moore's Law continues, but innovation has moved higher in the technical stack at the same time as the Politics of Envy have greatly plucked the Golden Goose of American innovation. This last decade brought us horrific laws like Sarbanes-Oxley, which raised the cost of IPOs, and tragic policies such as the demonization of stock options which have been pecking the growth engine to death.

Silicon Valley, however, finds ways around blockages. 

We have now entered the Era of Cheap, where great companies can be launched on the cheap. The first wave of Consumer Internet franchises are racing towards big IPOs: Facebook, Zynga, Twitter, Chegg, Groupon. These ventures were started with capital from a new breed of investor, the so-called SuperAngels - institutionalized seed funds that embrace the Era of Cheap. As this chart from CBInsights shows, in the past year the SuperAngel seed funds have grabbed over 25% share of new fundings from the traditional VCs.

What the smackdown series of debates (which you can find on VideoCrunch) show is how the Era of Cheap is disrupting the venture business itself. After funding disruption to traditional industries for thirty years, the big VC funds are finally getting a taste of their own medicine. How they will respond is unclear. There is a lot of chatter that the traditional VC model is broken. Certainly with the poor returns for the past decade, the pension funds which invest in the venture category are pulling out. 

But is the model itself at fault, or the exogenous factors that have plagued all financial sectors in the past decade? I argue that the New Normal of low returns for an extended period affects venture capital as well. I conclude that even granted the effect of exogenous factors, the VC industry should stop expecting it to go back to the old normal right away. Instead, venture capital needs to figure out how to deliver returns in its new nromal: an environment with few IPOs and smaller m&a exits. They need a new model. 

The SuperAngels have been the first to figure this out. The Era of Cheap lets them fund Internet deals which can be quickly tested on small capital. They may exit with a quick flip, or raise boatloads of VC capital and go for the big win; but the modest capital allows them the time to experiment and find a market before big money removes the quick exit. 

The final smackdown event went back and forth on this issue. The Big VC argument is that you need the big money to build a real company. The SuperAngel counter is that for both founders and buyers the small exit might be a better outcome, and they can preserve the big win if the company hits in the consumer Internet lottery of consumer appeal and fickleness. 

My take: in the old model, after the seed round, traditional VC was a necessity, In the new seed model, Big VC is but an option.

Comments

[Mamma Boom Boom]

>Everyone should feel free to take a long weekend. Most of next week is going to be sloppy, you won't miss a thing.

Posted by: Mamma Boom Boom | Friday, September 03, 2010 at 12:14 PM<

Up 5 points for the week. Nope, you wouldn't have missed a thing.

-----------------------------

>Friday : BIG RALLY

Posted by: Hank Wernicki | Thursday, September 09, 2010 at 12:24 PM<

Hankleberry, some day you'll learn to check with Mamma before making those kinds of forecasts.

[Jersey Boy]

Anyone seen Roger lately?
Heard that Mickey D's gave him a job at the fry-o-lator.

[trendlines]

Shanghai Composite: Crouching Tiger?

SSEC has been crouching just below 2700 level for the past few weeks. The two possibilities in my view are shown on the chart. Whichever the case, i'm looking for an initial target between 2900-3060 in the short-to-medium-term, and possibly even higher in the medium-term. Depending on your chosen vehicle for trading the SSEC, you may be outperforming big time, especially if you are in a small-cap focused etf or fund (Check out the FTSE Xinhua charts below).

http://trendlines618.blogspot.com/2010/09/shanghai-composite-crouching-tiger.html

[Account Deleted]

Weekend update on SPY: CLICK HERE

[Hockthefarm]

I think it would be absolutely hilarious if September turned out to be the best month of the year and the best September in decades. You would have to sweep so much punditry into garbage can. Not because they are not smart, analytical people, just simply because they don't have a clue where markets are headed and never have. One would have to replace them with the talking heads and all the bulls they have marched out since last June.

As for me, I still have my fun money puts and everything else in short term bonds. Based on what I've read, I still think we see a sharp September decline of 10 to 20 percent. I think the markets are in denial about economic prospects in the next 6 to 12 months.

Must say, it sure is fun, watching and plodding along.

Hock

[Mamma Boom Boom]

>Not because they are not smart, analytical people, just simply because they don't have a clue where markets are headed and never have.<

WHAT?

[DG]

I think it would be absolutely hilarious if September turned out to be the best month of the year and the best September in decades.

It wouldn't surprise me at all, but even if this turned out to be true, it would still not disprove the thesis I've been working with for months now (since the end of May, to be precise), which is that the market is in a trading range.

Watching the bulls and the bears try to twist every little market movement into "proof" the trend they're awaiting has started has been the thing that's "absolutely hilarious".

[Hockthefarm]

""WHAT?""

"""Watching the bulls and the bears try to twist every little market movement into "proof" the trend they're awaiting has started has been the thing that's "absolutely hilarious"."""

C'mon Buda Boom Boom. Hochberg is an bright, analytical individual. I think if you are open minded at all, you would agree with that.

But he has been calling for the decline in gold prices since I started reading his stuff about a year ago. As new information arrives he adjusts his wave count to reconcile the past. I have no problem with that except to note that all he has done is provide a great map of where gold has been. His projections about where gold is headed have not materialized. So at best one could conclude that his wave analysis of gold is trend following. I hate gold and never play it at any risk level so I think I'm on safe ground here. But days are still young and there is still lots of time for redemption. But at some point I think you have to draw the line.

I remember the father of a close friend growing up who threw all his money into diamonds just before retirement. What a mistake. Maybe that is the true value of Prechter and EW. Apart from pissing around on the edge, that is certainly what I use it for. Regardless, these next 4 months are "credibility huge" for the Dent's and the Prechter's of the world. If we get through Sept/Oct without blood on the streets and then ramp 30% in the following 6 months, it is Chicken Little all over the place. Nothing wrong with that, but let's call a spade a spade and recognise that everyone can be a guru for a day. Especially is you get to beat the same drum day after day while moving your time lines for a year or two.

Hock

[JT]

"Based on what I've read, I still think we see a sharp September decline of 10 to 20 percent. I think the markets are in denial about economic prospects in the next 6 to 12 months." - Hockthefarm

Good Luck with that mega-bear opinion... It's basically the SAME exact one that has put people like Prechter and David Rosenberg up for a gig on the Comedy Channel during the past 12 months.

If some of these people (and their followers) actually traded their "views" for a living and had a boss like Stevie Cohen, they wouldn't last more than six weeks with a job as a trader at SAC.

[Wave Rust]

I have for a very long time stated here that 2000-2009 low was an ABC, with the caveat that March 2009 could just be a of C.

But no labeling will be definitively known for years. For example, I'm guessing half of EW'ers label '74 as the beginning of the bull market and the other half say it was '82.

2013 or even 2016 will be a better time to specu-guess-tulate on current final/actual count.

DG is right Sep/Oct are best traded as sideways. Thats because dumb money never moves the market in a new direction or trend.

smart money sits on the sidelines until they are certain of condititons. So, they will sit until they are pretty sure Congress is going to be gridlocked and Obama is handcuffed. That means they will wait to see what the socialists, that get unelected Nov.2nd, do in the lame duck session.

So, November and December should be accumulation time if just one house of Congress goes Republican. If both go republican, all bets are off. If Congress goes Repub in both houses, Obama has the bully pulpit to blame everything on them again, and get re-elected.

Don't underestimate obama for a second term (since there isn't an electable Repub out there yet). To me that would mean longer sideways, maybe with an upside tilt, until he finally leaves in 2016 ,,,, kinda like what the Dow did from '46 to '49 after the last big socialist tried to destroy free enterprise.

That makes the April 28, 1942 low analagous to March 6, 2009 low. Is that 57 years low-to-low? Aha!

What matters is what you do with the unexpected daily events. Not the long term count ,,,, unless you are an investor ,,,, then just sit in gold for a few years.

It's traders game now ,,,, channel traders, swing traders, and scalpers. Then again, the S&P could shift ranges to trading between the low 900's and 1050 for awhile.

wave rust

[Wave Rust]

Crude is higher.
Sydney, Tokyo, Hong Kong gapped open higher and are holding.

what was that about your bullish johnson shrinking? I forget!

Sell on the vix signal? not yet. :)

wave rust

[Mamma Boom Boom]

Hock, I misunderstood.

[Hockthefarm]

"If some of these people (and their followers) actually traded their "views" for a living and had a boss like Stevie Cohen, they wouldn't last more than six weeks with a job as a trader at SAC."

JT: If your aunt had nuts, she'd be your uncle. Nuff said.

Hock

[ricky]

With the price of gold going up so much, one wanders what to do? I must admit I am a bit lost and will keep my savings in cash for the next few months.