Angels Want to Wear My Red Shoes

Oh I used to be disgusted
Now I try to be amused
But since their wings have gotten rusted
You know the angels want to wear my red shoes.
     — Elvis Costello, “Angels Want to Wear My Red Shoes” (from My Aim is True (1977))

I believe in angels. Investors, that is. The best of them are supremely useful: savvy, experienced, fast-moving, tolerant of risk, and patient with unvarnished entrepreneurs. They are great.

But not all angels are angels, if you know what I mean. There is a Wall Street Journal piece tonight that makes that point in drive-by fashion, talking about all the nouveau riche 30-somethings who are playing at being angels the way doctors play with stocks. That is, it is an idle pastime, something to talk about with buddies as much as something you really believe in.

And it works, sort of. There has been a crop of small-ish companies that have gotten by on less capital than usual, and angels have been able to ride ’em to returns. And that’s great.

But it won’t last. As always, returns get arbitraged and subsequent generations of companies built on the same premises cost more than the prior one. In other words, it will cost more money to create the next new things than it cost to create the last set of new things. You’ll have to solve harder problems, make more noise, penetrate a more crowded market — even, God help you, sell into enterprises. All of those require money. Much more money than your average angel is able to put up.

Because angels get tired. They may put up their $25-$50,000 once. Maybe even twice. And the odd one will pay three times. But after that, entrepreneurial boys and girls, you’re on your own. Say what what you will about institutional venture capitalists, but “getting tired” is not a problem. Assuming your deal still looks good, they’ll keep rumbling along, putting in new tranches of capital. It’s far harder to kill a deal at most firms than entrepreneurs think it is, and a VC firm lifespan is much longer than the attention span of the average addled angel.

So, sure, take angel money. Take lots of it. Just recognize that we are either at or very close to the point where a bunch of newbie angels start feeling very, very sleepy.


  1. While Angels certainly have less attention span, what scares me is the VC firms taking 60% of the company right off the bat, and you eventually get diluted out – as experience beyond even my own has shown.
    It is a quandry, and we have to play with the guy holding the cards (sic money) rules.

  2. “returns get arbitraged and subsequent generations of companies built on the same premises cost more than the prior one”
    Is this right? I thought all the cool kids were onto the “it’s 30x cheaper to build companies” meme:
    Didn’t you write something similar? (Btw, your search box is intolerably slow)
    Seriously, are you seeing any evidence or do you have predictions of cost of startup rising? If so, I’d better get off my butt and get back into the game…

  3. Spaceman — It’s partly the attention span, but it’s more the investing fatigue that should worry people overreliant on angel backers. Most of the Angels 2.0 out there aren’t nearly as wealthy as they think they are, at least not when it comes to being tested with faltering investments into which they are being asked to insert good money after bad.
    With respect to the 60% issue, I’m with you. It is exceedingly rare these days to find a good deal that has venture investors taking that kind of percentage of a startup right away. Either the entrepreneur is looking for too much moeny, or the venture investor is trying to play by bizarro world rules that omit the crucial “founder motivation” variable.
    There are sensible and balanced venture-led seed/A deals going on out there. You just have to look for them.
    Parand —
    For sure, the cool kids are on that meme, and I’ve said the same thing, and even done presentations on the subject. But as the price of becoming an entrepreneur has come down, the result has been an abitraging effect, with low-capital opportunities being pecked to death by startup ducks. Every category I see lately that can be chased by an angels-only entrepreneur has ten or twenty startups doing the same thing.
    One almost inevitable result, as I said above, will be people pursuing increasingly capital-intensive opportunities.
    And yes, I know the search here is awful. Keep meaning to swap out MT’s search function for Google, but haven’t had time to do it.

  4. Brent Buckner says:

    Interesting stuff.
    It may go further than this segment being funded to the point where excess returns are crowded out; the sector could easily be/become over-funded. Per the article: “But he [Mr. Senkut] concluded he should go back into something he knew: technology.” Here we have a version of the home investing bias, and that home space has spun out a lot of capital. Too much may well get piled back in.
    At least the report has Mr. Senkut prepared for his angel portfolio to go to zero. I suspect many others aren’t so prudent.
    On the angel investor fatigue front, it is difficult to keep a pile of “dead” money laying about, waiting for subsequent rounds to require it. If many of these angels have no reliable on-going income streams, their only other option for funding subsequent rounds is to sell other investment holdings (selling off over-performers to fund under-performers has its own set of issues, including taxation).

  5. Paul, is the assumption that returns get divided uniformly among the competitors? One could imagine that despite more entrants the shape and size of the final distribution of return stays the same, with the top few getting the bulk. In other words, there are more people running but the number of medals stays the same.
    I’m trying to figure out where the arbitrage comes in.

  6. My take away from the WSJ article to which you refer was quite different. These fairly young (“mid-thirties”) and junior technology industry folks (“senior managers”) had newfound significant wealth (“tens of millions”) and sought to dabble in angel activity (“20K to 80K each”). The reporter makes that point at the end of the piece with Senkut saying even if he lost all the money he’s risking with angel activity, “my financial future won’t change.”