The ‘Super Angel’ investment phenomenon

America’s Super Angels phenomenon and how successful entrepreneurs are investing in UK start-ups too

In the first of a three-part feature on the Super Angels phenomenon, Growing Business looks at why successful entrepreneurs in the US have been recycling their wealth back into entrepreneurial start-ups via venture capital-style investment funds – and how the trend is growing here.

For start-ups and growing businesses, angel investing has always been an early port of call. The ability to access funds and business acumen at an embryonic stage makes angels a key part of the UK investment ecosystem. Typically they can step in at a time when banks are reluctant to lend and before a business is proven enough for venture capitalists to be interested.

In the past, angel investment has been organised through networks, syndicates and word of mouth. Successful angel groups include the London Business Angels, Cambridge Angels and the Oxford Investment Opportunity Network. In some ways it is a closed off world that is quite cliquey.

As Paul Munn, partner of Par Equity said: “It’s reliant on the input of the people who are involved. There’s always more work involved than you first think, and you need deep pockets to be involved.”

That state of affairs has been changed in recent years by the emergence of a new class of investor, the super angel. First spotted in the US where cashed out Silicon Valley entrepreneurs are keen to reinvest in the ecosystem that spawned them, super angels can be described as successful entrepreneurs who have used their own personal credentials as business leaders to attract money to create their own funds.

Successful entrepreneurs have always invested in other business, but the super angel phenomenon represents a more professional, scaled up and managed version of traditional angel investment. Julie Meyer advances the case for her Ariadne Capital being one of the first super angel funds, launching in 2000.

“It’s difficult for me to see how anyone else in Europe or the UK could say that Ariadne didn’t pioneer the trend here. We are known for our investor network of entrepreneurs who back other entrepreneurs.”

Silicon Valley origins

However, the development of super angel, or ‘micro venture’ funds as they are sometimes called, has accelerated in the past two to three years as Silicon Valley entrepreneurs have cashed out.

Notable US players include: … PayPal’s Dave McClure launching 500 Startups (launched 2010), … LinkedIn’s Reid Hoffman who runs the Discovery Fund at Greylock Partners after having made around 80 angel investments of his own (launched 2010), … Mike Maples Jr’s Floodgate fund (launched 2005), … Zappo’s Tony Hseih Venture Frog fund (launched 1999), … Chris Sacca’s Lowercase capital fund (launched 2010), … Peter Thiel of PayPal, and Sean Parker of Napster, both of whom are part of the Founders Fund collective (launched 2005).

Typically, these funds make multiple, small investments, often at seed level stage, and look to exit in a shorter time frame than larger VCs would expect. They may be fronted directly by entrepreneurs, or by a professional management team who handle day to day decisions.

The launch of these entrepreneurial funds can be put down to a number of reasons. Firstly, existing angel investors are looking for a better way of doing things.

Former Yahoo and Skype product developer, Eileen Burbidge set up office in London’s White Bear Yard in 2009 with Stefan Glaenzer (Last.fm, Ricardo) and Robert Dighero (QXL Ricardo). All three are individual angel investors and wanted to see if they could take their activities to another level. “We all loved what we were doing but we wanted to get more volume and more scale,” she says. “If a business does well, as an angel it’s difficult not to get diluted in subsequent rounds.”

Investors with an entrepreneurial background also have empathy with the difficulties that early stage businesses face.

Jos White, partner of Notion Capital, and founder of three businesses, including MessageLabs says his approach is to try and be the investor he wishes he had, first time round – somebody who could see beyond the immediate demands of the day to day.

“In business, you have to be able to make decisions for the future that you might not see the benefit of straight away. With MessageLabs, the architecture was never really thought through. We were the largest processor of email in the world but operating on a network that was designed as a prototype.”

This knowledge of what lies in store for growing businesses is a crucial advantage for investee companies, he says. Learning as you go along makes for slow decisions, which can hamper growth.

“I started three businesses, but it was only by the time of the third one that I felt able to take more risks. I can help businesses to be less cautious than they need to be.”

Filling an investment gap

For investee firms, the attraction is twofold. Firstly, entrepreneur-backed funds have filled an investment gap where venture capital firms are reluctant to commit, bar odd notable exceptions such as MMC Ventures and Octopus Ventures. Investment also comes with the promise of extended business networks, contacts and knowhow from experienced business operators.

While much of the hype around super angels has focused on the emerging VC community in the US, the UK and Europe are starting to see funds being run along similar lines. Burbidge, Glaenzer, and Dighero’s Passion Capital and White’s Notion Capital are just two examples. Lastminute.com founder Brent Hoberman and Bebo’s co-creator Michael Birch have put their names alongside others behind PROfounders Capital, while Atomico Ventures is a fund created by Skype’s Niklas Zennstrom.

Atomico partner, Mattias Ljungman, says Skype’s history has helped shape its investing approach. “Skype had struggled to raise money from venture capital firms. This wasn’t just a problem for Skype, it meant that most of the VC firms missed a great opportunity. We came to the view that there was an opportunity here for a VC firm specifically designed to help and invest in companies taking advantage of the internet and other new technologies.”

Oscar Jazdowski, relationship manager at Silicon Valley Bank which has a focus on early stage companies in the technology, clean tech and biotech areas says super angels are becoming a more important part of the ecosystem in the US.

“VCs want to see validation and revenue growth that will allow them to invest. Angel investors can come in at an earlier stage. Angels in the US have become very powerful equity source. They’ve made millions themselves and are prepared to invest it back in companies. And they are starting to write bigger cheques.”

While the UK is on a similar trajectory, one of the differences, until now, has been that many UK angels come from finance or property backgrounds, and lack the technology chops to help emerging new businesses.

Par Equity’s Munn says this is changing with newer money, and younger entrepreneurs making up its angel syndicate. “Your knowledge ages fast in technology so that’s important.”

While the UK lags behind the US in the development of super angel funds, there is an undoubted hunger for what they have to offer. Initiatives such as Tech City in East London and the Silicon Roundabout cluster serve the emerging generation of dot coms, and events such as Seedcamp, Techpitch 4.5 and Founders Forum are helping to bring together raw early stage businesses, or even business ideas, and investors who can help them grow.

What the future holds for super angels is unclear. As they grow – and some are looking to build funds that include institutional money – there is a feeling that they may become indistinguishable from existing VCs. In the US there is already concern that the strategy of undertaking multiple small investments means that funds cannot devote sufficient energy to all, creating a brutal survival of the fittest regime. There is also evidence that super angels look to exit quicker than more traditional VCs, leading to the accusation that their interests are not focused on the long-term best interests of businesses.

Whatever the truth, they represent a dynamic and exciting element of the high potential start-up ecosystem, and one that seems to be growing in importance.

In part two of this three-part feature we talk to some of the leading Super Angels in the UK as they tell us what they’re looking to invest in. Then, in part three, we’ll list the entrepreneur-led funds, their investment criteria, and who they’ve invested in to date.

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