The venture capital industry is facing real competition for the first time in decades. Not only that, but the growing battle between venture capital firms and "super angels" presents an amazing opportunity for entrepreneurs trying to build the next big thing.
All of this is according to Paul Graham, co-founder of the early-stage investment fund Ycombinator. During a presentation at Startup School at Stanford University earlier today, the prolific investor discussed the state of startup funding with a packed auditorium of students and entrepreneurs. Specifically, he said the funding world has been turned upside-down.
So what's causing this fundamental shift? The answer is the rise of super angels, Graham said. He explained that startup funding used to consist of relatively small angel investments ($20,000 to $50,000) from individuals or multi-million dollar investments from venture capital firms. In the middle of that was a gaping hole.
That's no longer true, thanks to a new class of investors known as the super angels. These investors usually raise a smaller fund and make investments into startups that range in the hundreds of thousands of dollars. Because they offer competitive investment terms and don't usually demand a board seat, super angels have become major power players in the startup scene. Ron Conway's SV Angel and Dave McClure's 500 Startups are just two of the many examples of the super angel phenomenon.
The sudden rise of prominence of the super angels has shaken the very foundations of the venture capital industry, according to Graham. VCs — who could before invest in a startup and get a third of the company in return — are now facing stiff competition from the super angel crowd. The result is that many venture capital firms are now making smaller angel investments in an attempt to get close with startup founders that are likely to raise bigger funding rounds later on.
The YCombinator founder believes this means great things for entrepreneurs. The competition for funding startups is increasing the valuations of startups, giving entrepreneurs and founders better investment terms. Angel rounds also tend to close quicker. Graham sometimes wonders if this is the beginning of another bubble, but believes instead that the lines between super angels and venture capitalists will blur -- you will see more VCs participating in smaller rounds and more angels participating in larger rounds.