In first grade, way back in 1990, we had a dedicated computer in each classroom. The computer was used for typing on a blue screen in white letters and if we were lucky, playing Oregon Trail during break. We were the first generation of students to be exposed to computers throughout our entire academic life. This dynamic was unique because unlike prior generations we never had to adapt to the impact computers would have on our lives, they were just a part of it. We weren’t blinded by how things used to work, a world without computers, and instead operated in the world as it was.
Where am I going with this?
In 2010, after spinning my way out of a failing startup, I was fortunate enough to land at a small VC fund in Boston, investing in seed stage startups. During this time AngelList was first launching and soon after I received an invite from an angel investor friend, becoming one of the first of the AngelList generation of investors.
What does this mean?
Unlike many of my colleagues, the rules I learned to operate under were far different than those of previous generations. The old cliché is that many investors won’t meet with a startup unless it comes through an introduction. As painful as that was for many startups, it was for a reason, there was no social network of startups and investor, just a personal network. Identifying startups, particularly at the seed stage is not an easy task. In many cases, they lack sales, employees, press, and reputation. This correlated to a lack of reach and confined investing to a regional activity that led to a reliance on the introduction. Lucky for all of us, AngelList changed that.
How did it change the way investors look at deal flow?
Regional investing no longer makes sense – If I am no longer confined by a personal network for deal flow, why would I continue to let it drive my investment strategy? My first company was in the services industry and was geographically constrained by where we could physically drive to. It would kill me when we would get leads from across the country that we could not serve. It felt like we were leaving hundreds of thousands of dollars on the table every month. The same goes for investing. Yes the majority of our deals are here in Boston, where we reside, but by no means do we let that constrain us. AngelList provides a platform for geographic uniformity; I can reach out to and learn about a startup in Dublin or San Francisco, just as easily as I can reach out to a startup across the river in Cambridge, MA.
Moving away from referred deal flow and toward proactive deal flow – Building a network of trusted investors who refer startups will continue to be important; however, less than 15% of the companies I talk to are through introductions. AngelList has cleverly turned the process on its head by requiring investors to ask the startup for an introduction before the two are connected.
This role reversal has produced a more proactive process to generating deal flow. If I see a startup on AngelList or anywhere for that matter, that I am interested in, I proactively reach out to them via phone, email, or social network until we connect. Waiting for them to come to me or asking someone to introduce them to me is slow and ineffective. The chart below shows a sharp uptick in seed investing that points to greater exposure to quality deals and insights that a platform like AngelList represents.
Increased deal competition – By flattening the startup ecosystem, AngelList has increased the competition among investors (and driven up valuations!). No longer are Angels or VC’s competing with local investors, they are competing with every investor…everywhere. AngelList syndicates have increased the competition even further by allowing investments to happen seamlessly through the AngelList platform, allowing a startup to fill their round in a matter of days rather than weeks and months. Foundry Group, through FG Angels has been one of the few larger funds to adapt to this new dynamic. Investors who don’t are going to miss out and begin disappearing.
These changes have forced many early stage VC’s to change in one of two ways; identifying talent at an even earlier stage with advanced statistics, or to provide additional value beyond capital, which explains the rise in VC content marketing practices, as well as the rise in strategic VCs. It has also given rise to an influx of micro-VC’s who prior to AngelList would struggle to identify the number of high quality deals to fully deploy their capital. Unless you are in Silicon Valley, most regions lack the talent to produce enough investable startups.
These developments will produce a much more proactive investor who is willing to go after and fight for the investments that they believe in. Those who choose to sit back and rely on their network will see a dwindling of deal flow quality because the new generation will be faster and more aggressive.
Kyle Fugere is an entrepreneur and Investor for dunnhumby Ventures, a corporate venture capital fund focused on investing in innovative retail technologies before they become broadly available in the marketplace. Prior to his work at dunnhumby Ventures, Kyle operated a development project in sub-Saharan Africa before starting the first of two companies in the technology space. Shortly after Kyle made the transition to venture capital having worked at Tollman Capital Partners and now as a Principal at dunnhumby Ventures.