Paul Kedrosky has kicked off an interesting debate by suggesting we will see a “super-angel crash."  Paul’s initial post resulted in a bunch of strong disagreement in tweets and comments, enough to cause an update to the initial post.  While the update says many nice things about "super angels” and a bunch of negative ones about “incumbent vcs,” it ends on the same note by reiterating that we are seeing too much of a good thing.

From a social perspective I believe that overfunding of startups (which is what Paul argues is happening) is actually a good thing.  Even if a bunch of super angels wind up not succeeding, there will be a lasting benefit to society from training many more entrepreneurs and people who know how to work at a startup.

From an individual super-angel perspective, I have no doubt that there will be some that will not succeed.  Even lame-old rational economics would suggest this.  Whenever a new set of investment opportunities emerges, capital should flow in until the marginal investments have essentially no return.  But since funds have highly variable outcomes, for the marginal players to have zero return on average requires some of them to do really poorly.  Now add to that the fact that investors tend not to be rational and are likely to rush in even past the point of marginal returns being zero and you have a fairly strong case for a future “super-angel crash.”

I don’t think, however, that this is likely to impact the authentic super-angel innovators (I won’t attempt a list as I will surely forget and upset someone), but rather the folks who are coming late to this party.  These are funds that most of us haven’t even heard of but are nonetheless putting money out as if it were going out of style.  And it includes yet another wave of corporate incubators and strategic investment vehicles that rolls around at roughly the same time.

There is another reason that I feel fairly confident in this prediction: I have been late to the party myself.  Towards the tail end of the first bubble (late 1999, early 2000), I and two partners raised $25 million when none of us had any meaningful investment experience.  By being somewhat disciplined and very lucky we managed to lose only some of that money, but we lost money for investors nonetheless. The same will likely be true for many folks forming super-angel funds too late.

Paul Kedrosky has kicked off an interesting debate by suggesting we will see a “super-angel crash."  Paul’s initial post resulted in a bunch of strong disagreement in tweets and comments, enough to cause an update to the initial post.  While the update says many nice things about "super angels” and a bunch of negative ones about “incumbent vcs,” it ends on the same note by reiterating that we are seeing too much of a good thing.

From a social perspective I believe that overfunding of startups (which is what Paul argues is happening) is actually a good thing.  Even if a bunch of super angels wind up not succeeding, there will be a lasting benefit to society from training many more entrepreneurs and people who know how to work at a startup.

From an individual super-angel perspective, I have no doubt that there will be some that will not succeed.  Even lame-old rational economics would suggest this.  Whenever a new set of investment opportunities emerges, capital should flow in until the marginal investments have essentially no return.  But since funds have highly variable outcomes, for the marginal players to have zero return on average requires some of them to do really poorly.  Now add to that the fact that investors tend not to be rational and are likely to rush in even past the point of marginal returns being zero and you have a fairly strong case for a future “super-angel crash.”

I don’t think, however, that this is likely to impact the authentic super-angel innovators (I won’t attempt a list as I will surely forget and upset someone), but rather the folks who are coming late to this party.  These are funds that most of us haven’t even heard of but are nonetheless putting money out as if it were going out of style.  And it includes yet another wave of corporate incubators and strategic investment vehicles that rolls around at roughly the same time.

There is another reason that I feel fairly confident in this prediction: I have been late to the party myself.  Towards the tail end of the first bubble (late 1999, early 2000), I and two partners raised $25 million when none of us had any meaningful investment experience.  By being somewhat disciplined and very lucky we managed to lose only some of that money, but we lost money for investors nonetheless. The same will likely be true for many folks forming super-angel funds too late.