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Are Angel Investors Angels or Demons?


angel investorAccording to the following article from the Economist, there have been allegations that "super angels" have been banding together to keep venture capital firms out of the startup business and to lower startup valuations.  This conspiracy theory in the startup industry has recently caused apprehension in investors and entrepreneurs.  

Read the full article from the Economist below:

"I WAS at Bin 38 and all I got was this lousy valuation", read the message on Dave McClure's T-shirt at a conference in San Francisco this week. The boss of 500 Start-ups, a fund that provides seed capital to entrepreneurs, Mr McClure had the shirt designed to ridicule an accusation that he and several other financiers have been colluding.demon investor

The charge was made by Michael Arrington, the founder of a blog called TechCrunch (which was sold to AOL this week). His claim has turned a spotlight onto "super angels", who run funds that invest in deals considered too small to be of interest to traditional venture-capital firms. In a blog post Mr Arrington said he recently gatecrashed a meeting at Bin 38, a San Francisco wine bar, at which he claimed a bunch of super angels were gathered "Godfather-style" to discuss things like how to counteract rising valuations of young firms and how to keep big venture funds out of deals.

"Angelgate", as it has been dubbed, sparked a furore in the start-up world. In an expletive-laden response on his own blog, Mr McClure called Mr Arrington's claim of conspiracy "bullshit" and said the angels' meeting focused on issues like how to boost access to start-up capital and how to get non-tech firms more interested in buying tech businesses.

It is hardly unusual for investors in Silicon Valley to compare notes. And Mr Arrington has yet to provide hard evidence of collusive behaviour. But the episode has exposed divisions in angels' ranks. Ron Conway, a well-known investor in tiny firms, has privately castigated some of his fellow super angels for having overinflated egos and for appearing too keen to make a fast buck.

All this matters because their clout has been growing. "Angelgate is a bit of a validation of super angels' influence," says David Hsuof the Wharton School. And competition is certainly getting stiffer. Established firms have rediscovered their appetite for seed funding: Greylock Partners, a well-known venture firm, this week said it had launched a $20m seed fund. That will make heavenly returns even harder to come by.

Source:  Economist; 10/2/2010, Vol. 397 Issue 8702, p82-82, 1/2p



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