Thoughts on the upward trajectory of angel valuations

Angel investment rounds in the tech sector (or at least the internet-related part of it with which I'm most familiar with these days) continue to rise. Articles such as this one seem to crop up with increasing regularity.

Indeed, it's hard not to notice this if you login to AngelList as an investor - many of the angel rounds there are well into the $5m-$10m premoney range that used to be considered VC territory, with even valuations above $10m cropping up sporadically. I've seen at least one $18m premoney deal, for an iPhone app in the apartment rental space. 

As an occasional angel myself, I sometimes wonder how the rising valuations will be affecting expected angel returns. Those returns circa 2007 were described in a study by the Ewing Marion Kauffman Foundation. In brief, they shake out to around 2.6x over an average 3.5 year time to exit, which works out to an IRR of ~27%. Unfortunately the Kauffman study authors don't report the valuations of the companies they covered for their study, but from sources like the CB insights report and others* it's safe to assume it would have been much lower than current numbers.

Unless today's higher valuations are tied to a commensurate rise in company quality and/or exit opportunities, it would seem that these returns are going to come down significantly from what they have been in the past. It may be that company quality is up significantly - getting to the revenue stage requires less capital than it used to in the internet space, and many of the companies commanding higher valuations do have significant customer traction and revenue. Likewise, exit opportunities for what might formerly have been "failed" investments seem to have improved somewhat also owing to the increasing number of acquihires. 

Or maybe we are simply in the middle of a real angel investing bubble. My instinct tells me that there is at least some of that going on; the much-discussed series A crunch facing angel companies is in my view simply a result of the glut of applicants coming out of the angel-funded pipeline. I certainly think angel investors in this climate will have to be more discrimating than ever when choosing deals. Fortunately it is possible to do so with over 50,000 companies listed on AngelList alone...

What do you think? - are today's valuations promising for angels hoping for historical returns? 


* See for example: http:www.niic.net/resource.../scorecard-valuation-methodology-1.pdf‎

FDIC Insurance, Cyprus, and Google Trends

Playing around with Google Trends - check out this graph of interest in FDIC insurance over time:

http://www.google.com/trends/explore#q=fdic%20insurance&cmpt=q

http://www.google.com/trends/explore#q=fdic&cmpt=q

There certainly seems to be alot of serenity around the risks to bank accounts these days in the US compared to the massive panic during the financial crisis... the Cyprus issue doesn't even register a noticeable blip.

Maybe Cyprus will see some tourism benefits from being cast in the international spotlight so dramatically - their trendline seemed to have been heading in the wrong general direction until their recent financial debacle:

http://www.google.com/trends/explore#q=cyprus&cmpt=q

(Note: the cyclical troughs are the dips in interest around the winter season, which is typical of Mediterranean destinations with cyclical tourist seasons. Another example:
http://www.google.com/trends/explore#q=malta&cmpt=q)

It does look like nobody's actually booking just yet though...

http://www.google.com/trends/explore#q=cyprus%20hotels&cmpt=q

http://www.google.com/trends/explore#q=cyprus%20flights&cmpt=q

No particular conclusion to this post other than the above observations; I'd be interested in seeing what other discoveries the Google Trend tool brings to light though... let me know if you come across anything interesting.

Silicon Valley - still the place to be?

One counterpoint to the prevailing wisdom that the Valley is still the place to be in the Web 2.0 area, if not tech in general:

http://ryancarson.com/post/47618850291/startups-you-dont-need-to-be-in-silicon-valley

In a couple of important ways I personally think the Valley is a harder place to start a company these days. The competition for talent and sky high real estate prices translate to expensive salaries which entrepreneurs have to pay somehow, and employee loyalty is probably harder to achieve in a place where employees have so many job opportunities vying for their attention. Those factors make it harder to get a company off the ground, and harder to keep it going for the long term, offsetting to a significant extent the benefit of easier access to capital.

A worthwhile read on the financial crisis from a unique perspective

Dr Michael Burry is one of the very few who actually foresaw the financial crisis and bet real money on his views (basically most of the hedge fund he was managing at the time), making about $100m for himself in the process. You may be familiar with him if you read The Big Short: Inside the Doomsday Machine by Michael Lewis, which I strongly recommend. Here is the full text of a commencement speech he gave at UCLA last year:

http://www.scribd.com/fullscreen/133937101?access_key=key-1uu9vztz18gtxi853os6

More about Michael Burry here:

http://en.wikipedia.org/wiki/Michael_Burry

People change

In case you don't believe it, here's a link for you:

http://en.wikipedia.org/wiki/Alan_K._Simpson

Scroll down to the part "Run-ins with the law" and take a look. By the way, Sen Simpson, although now officially retired, is doing important and laudable work on getting people on board on reducing the skyrocketing US national debt and budget deficit. Here's more on that in case you're interested (and if you're an American, you should be):

http://www.npr.org/blogs/thetwo-way/2012/12/06/166634673/alan-simpson-goes-gangnam-style

What now for Romney?

I can't help feeling that Obama could do worse than hire him as an "economy czar" and delegate all things fiscal-related (fixing the fiscal cliff, balancing the budget, reducing unemployment) to him. Kind of like the way he was gracious to Hillary after 2008 and appointed her as Secretary of State.

On many other matters, especially foreign and social policy, it always seemed to me that Obama had the more reasonable view, even though the more extreme views which Romney espoused in the campaign might have been forced upon and not a true reflection of how he would govern.

Just my opinion... and one which is admittedly unlikely to be implemented anytime soon.

Bureau of Trade - cool concept but will it work?

I saw this in Techcrunch today about a new ecommerce company by the name of Bureau of Trade (awesome name IMHO).

I wonder about the long term potential of this... they seem to be getting some decent traction according to the stats in the article but do enough men to support this at scale really shop this way?

In my view, men and women do shop very differently. Women tend to browse shopping sites for enjoyment, with only a vague idea of what to buy, making "shopping discovery" sites which look more like online magazines work well if they cater to their interests. Fab.com is the uber-example online in this area - it has experienced most success with the 24-35 year old college-educated female demographic. Even offline, there are tons and tons of women's magazines whose modus operandi is to provide women with shopping ideas.

I think men on the other hand tend to be much more search-driven - they identify something first, then Google or Amazon it to proceed with nailing down alternatives.The idea of men browsing items they weren't specifically planning to buy for enjoyment and then actually making the leap to taking out their credit cards doesn't quite strike me as being close to reality. Check out any random dating site for anectodal proof if you're not convinced. Most men don't list "shopping" as being one their hobbies... women are of course a different story.

Which is not to say all men behave this way, of course. But the million-dollar question for Bureau of Trade (maybe $100m-question in view of the VC funding they're taking in - goals tend to be a bit loftier when that happens) is whether there are enough exceptions to the above behavior to support a website like theirs. I wish them every success but can see it being a bit of an uphill struggle.