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September 22, 2010

Lots of talk about a “seed bubble”.  Is it true?  The total capital within ALL the super-angel funds COMBINED is still smaller than some individual VC funds, so I don’t think I would call it a bubble.  In the East Coast particularly, it’s a joke to think that there is a bubble.

But it is true that more seed capital does exist today than existed a few years ago. What are the implications?  Let’s think them through – I think it’s not as dramatic as the press makes it out to be at all. 

Natural Implications for more seed capital:

1. Prices increase: It the law of supply and demand.  But as my partner Lee Hower has mentioned before – does it really matter?  The seed round is still the lowest cost investment opportunity for these companies.  Valuations in the market may ebb and flow.  But this isn’t a buy-low-sell-high business.  It’s buy the best and make 100x business. 

2. Access becomes more important: More capital means more competition which means that you need to make sure you get access to the best investments.  But what else is new?  It just means that investors need to see the investments early, be respectful people, add real value to the companies, and have relevant domain knowledge and expertise. It also means that you have to be well aligned with your entrepreneurs so that they are in the best position to succeed.  Oh, it also meant that there is some network effect to their investment (either through the strength of the portfolio or access to their network).  Isn’t this a good thing?  Again, nothing new. 

3. Syndicates become less friendly: See access.  The guys who add the most value will be allowed in.  Period.  For the ecosystem as a whole, this is a good thing. For more, read this.

4. More companies get funded.  More companies fail. I really believe that shots on goal is a good thing to aspire for.  Many of the best companies and entrepreneurs were born out of not-so-great outcomes.  ie: Odeo —> Twitter, Tribe —> Zynga.  True, this means more companies fail.  From an investor’s POV, that’s why you get paid the big bucks.  You have to choose well and help your companies win.  From the entrepreneur’s side, more companies might mean more noise and confusion in the market.  Capital efficiency exacerbates this.  So what?  I think that’s just the name of the game these days in certain sectors, and it may mean that some old school entrepreneurs will not perform as well.  That’s evolution for you. 

5. Harder to attract talent:  This is the only implication that I think is a big deal.  It’s harder to build world class teams when someone’s BATNA might be to start their own thing and access to capital is easier.  Roger and David Tisch have talked about this before, so I won’t rehash.  My bet is that good angel investors will actually be more discerning, since only really dynamic entrepreneurs with a great vision are going to be able to recruit talent.  So the need to back pied pipers will be even greater.  

So, in summary:

1. Prices Increase : Small negative impact. 

2. Access becomes more important: Nothing new

3. Syndicates become less friendly: So what?

4. More companies get funded: Net positive

5. Harder to attract talent: Net negative

IMHO, strong seed investors that really help their companies and have access will be largely unaffected.  In the long term, things will ebb and flow, but the segment will endure and the best investors will make a killing. 

  • Author robchogo
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