Super Angel Investments Are About Data Collection and Learning

If you want to call yourself a Super Angel, then the entry fee will be $20K per investment, and you will need to do at least one investment per month – or one per week, if you can handle it.

You get to be the ultimate opportunist and invest in anything you like.  Move over traditional angels and traditional VCs.

Here is why this is a good deal.

We attended Capital Factory’s Demo Day 2010.  It was a great day, with some interesting new companies and some very interesting speakers.  The organizers and mentors can be proud of their work.

Dave McClure, of Twitter and 500 Startups fame, made an entertaining and “F-bomb filled” presentation.  It was also insightful.

During the Q&A period, we asked him about his due diligence process.  When you visit a VC, no one knows your market niche, and you spend a lot of your time educating the VC about an opportunity because 99% of the time your market niche and opportunity is outside their areas of interest and expertise.  McClure responded that he will try to focus on niches that he knows such as payments and finance (as he was formerly part of Paypal and was an investor in Mint.com) and he would try to crowd source among his friends the due diligence process in niches he doesn’t know.

We spoke to him after the event, and suggested that we thought that this crowd source idea would still be a problem since an interesting,…..revolutionary,…..disruptive……ideas ….would not have any data that could be used to validate the market in order to make his multiple investments.

McClure’s response was that he would gladly “throw $20K at a company” in order to collect some valid market data.  It may take 6 months to collect that data as the engineering team builds and introduces the product/service, but he will have something that no one else has – valid market data which can be used to make additional operational pivot decisions and make additional investment decisions.  His $20K investment also gives him a real world view of the abilities and innovative capabilities of a untested and unknown management/engineering team – a team that a traditional VC would never respond to since they are unknown.

That is the key.  A startup must be designed, from the first day, to be an entity focused on discovery and learning – as we wrote last July.

Valid market generated data focused on an actual market trial – all for $20K per investor.  Any startup team will have done a lot of their own due diligence work in order to identify that a large market exists in their niche.  However, they will have no idea whether anyone will ever buy their product since it is completely new.  The product may need buyers to change behavior, the product may be an impulse purchase, or it may actually solve a real world pain.  Nevertheless, no one ever has any idea whether it will be successful because it is brand new and no market data exists.

McClure will need nine other friends to investment $20K each for a total of $200K to give the team some discovery and learning runway, but given his rapidly growing contact list, that part will be reasonably easy.

This will drive a traditional VC insane as it moves the largest majority of those traditional VCs further down the line toward irrelevancy.  If you are an angel in an organized group hoping to make a couple of “tag-along” investments a year with other members that know something about the space, then you have become even more marginalized.  McClure and his Super Angel friends will take on the additional risk that the traditional angels won’t take.  There may not be any need for any VC money or additional angel money, hence, no additional dilution.  If there is a need for VC money to fully validate a much larger business model, then returns on that investment made by a VC will be significantly lower than the returns made by the Super Angel investors – who got in early, collected data, discovered and learned.

The Super Angels will also be learning far more about the market opportunity than any of the best Silicon Valley VCs can ever learn because they will have collected real world, market validated data about what works, and what doesn’t work.  Good for Dave, and this is great news for all entrepreneurs with an interesting idea where no valid market data currently exists.

Traditional VCs will need to adapt, and do so quickly.  This is not a “Spray and Pray” strategy.  This is a “Spray, Collect Data and Learn” strategy.

Twitter this post

Richard Piotrowski CFA is a former #1 ranked securities analyst, and the Managing Partner of Outram Research LLC, which focuses on assisting startups and prospective turnaround companies to define their value chain, as well as define an executable product, partnership, competitive and exit strategies.  You can follow Richard on Twitter: @Angelpitchdoc.  He can be reached at richard@outramresearch.com, or at his blog: angelpitchdoc.wordpress.com.  Also check out our website: www.outramresearch.com

About Richard Piotrowski, CFA

Richard Piotrowski, CFA, is a formerly a #1 ranked securities analyst, who has 20 years of experience building, dissecting, and fine tuning presentations, business models and valuation models of all kinds. The experience has been gained working in the investment community on both sides of "Wall Street", on "Bay Street" (Canada), as well as on "Main St." as Chief Financial Officer, Chief Operating Officer, as well as Evangelist and Marketing Director, where he focused on building messaging for solution sales opportunities based on value positioning, high ROI and fast payback. Richard joined Canada’s investment banking community in the early 1990s as an analyst following technology companies. He was recognized within two years by the Street, and was ranked "First" for Quality of Research in the survey of institutional investors conducted by an independent advisory firm – Brendon Woods. Richard was also the founding member of the internet technology research practice at two boutique investment banks.
This entry was posted in Angel Investors, Austin, Startups, Venture Capital. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s