Seed Funding Revisited: In Defense of Dabblers

Yesterday’s piece by Claire Cain Miller in the NYT titled Angels Flee From Tech Start-Ups prompted many blog responses, including one by Roger which also got picked up by Bijan.

Here is what it Roger wrote on his blog

Are fewer companies getting funded by angels? Of course. Should all the companies that had previously been funded by angels, many of them dabblers, gotten funded? Definitely not. So is value creation in the early-stage space really being inhibited by a dearth of angel investment? I don’t think so.

Bijan more or less agrees with Roger that the good deals are getting done.

While that may well be true, I believe this view misses a crucial point on seed financing.  If only the good deals are getting done, then not enough deals are getting done!  That’s for two primary reasons:  First, the social value created by a startup (e.g., experience for the founders) far exceeds the benefit that accrues to investors.  Second, among even the most unlikely tier of startups there will be some real winners.

Dabblers therefore play an important role in the overall system.  Case in point: Etsy!  The original seed funding for Etsy did not come from and I believe would not have come from any of the professional angels operating today.  When Etsy got going, none of the founders had any entrepreneurial track record to speak of or built an ecommerce site (or any high traffic site for that matter).  Add to that the scepticism that many professionals (not just angels) had about the size of the market for handmade goods.  The first money for Etsy came from two Brooklyn real estate guys who had never before made a tech investment.

With the current retreat of dabblers, the next Etsy may well not be funded and that would be a shame.