Unnoticed by almost no-one, the startup financing landscape has been transformed: a combination of ease of entry, lower capital requirements, failing incumbent venture capital (VC) firms, and general fervor has driven the emergence of a host of new “super-seed” firms. These small-ish outfits — usually running less than $20m — specialize in seeding a bazillion companies, following on in very few, and generally trying to be fast-moving and networked.
- Incumbent VCs in IT running more than a few hundred million dollars, at most, are screwed. The industry is maturing, requiring less capital, and producing fewer IPO winners, and that means the fee game is over, and they can’t produce returns justifying their size.
- Super-seed funds are, in game theoretic terms, a dominant strategy in the current market, one characterized by low capex startups, consumer-centricity, and a general Next Big Thing sensibility.
- Declining average cost of company creation is driving declining average cost of venture firm creation. When companies need less money, their VCs need less money. When VCs need less money, more people get to declare themselves VCs (or at least super-angels).
- More angels means more companies getting funded, and an inflection point in competition for the “best” low-capex deals.
- More companies being funded means more companies languishing, being triaged or looking for growth dollars, as there is simply not enough market space to create and differentiate hundreds of new centi-million-dollar companies in the crowded consumer interstitials being chased by these low-dollar startups.
- More funders of early-stage firms means higher valuations on those deals, which means more risk and lower returns for the people who do the deals (on average).
- Incumbent VCs make up shit about the inadequacies of super-angel funds. While their small size is a problem sometimes, as is, sometimes, their inability to follow on, their nimbleness, work ethic, and ability to pivot matter more. In other words, saying that super-angels are going to crash says nothing about the raging rigor-mortis-in-the-prime-of-life inadequacies of VC incumbents.
- Venture capital is hard, whether practiced by brain-dead VC incumbents, or by smart and nimble super-angels. Most VCs, and most angels, fail — it’s just that its takes 10 years to kill a VC fund, while angels, like drosophilidae, evolve and die faster, which is a good thing.