NYC EDC has been meeting with entrepreneurs, VCs and others from the startup community in New York City to figure out whether it is possible to create more startup jobs. I recently participated in a discussion on this topic and there was an interesting discussion about the availability of seed capital in New York. Several folks made the argument that there is already enough seed capital available and that if more were available it would just mean that businesses get funded that “shouldn’t.”
I don’t believe that to be the case. In fact, there is no such thing as too much seed capital, even if it means that a lot more startups are formed and fail. Startups have a large component of chance and if you want a few great ones to come out at the bottom, you have to put a huge number into the system and be willing to see the vast majority fail.
From society’s perspective even a failed startup is a good thing. How? First, for the duration that it lasted it did provide employment. Second, and much more importantly, there is now one or more entrepreneurs who have experience under their belt, which hugely increases the likelihood that they will succeed with their next startup.
That is where angel investors come in. True angel investors back an idea and/or an entrepreneur out of passion and not because they are looking at this as another asset class. There is a reason after all why it is called angel investing. Professional seed funds or individuals acting as such, by contrast, are looking for a return and as a result will always err on the side of caution (stronger team, more traction, etc). The profit motive alone will result in a vast underallocation of money towards the seed stage.
What can New York City do about this? For starters, it can promote the notion that folks who have made money over the years in media, financial services, fashion, etc should be active as angel investors. The most compelling way to do that would be for Bloomberg to lead by example! Second, the city could help raise public awareness of successful startups in New York and focus in particular on those that did receive angel financing. There are other things the city could do to foster startups that will have more short term impact (e.g. give city contracts to startups), but long term if you want more startup activity you have to get more startups going and seed capital from angels is critical for that.
