A couple of weeks ago I joined AngelList hoping to get into the angel investment scene and diversify my own business interests (as well as meeting new people and having stimulating / challenging business conversations about their work). I've had a couple of introductions to startups which I thought had some traction, but to date I've resisted pulling the trigger on any of the deals, as I've decided to err on the cautious side.
Bubble or no bubble, I'm not convinced of either of those ends on the spectrum. This article published by the Economist last week introduces a new "bubble theory", one which resonates more with my own thoughts than the alarmist articles that have been published recently.
Here are my concerns:
1. Funding supply is exceeding the demand, which is driving higher valuations. Angel investment has indeed become sexy and - dare I say it - moved into the mainstream. Heck, I'm quite connected and I read a lot, but it's only in the last couple of months that I've taken notice of angel investments to the extend that I'm intrigued enough to get involved. More angels obviously means that valuations are being driven up and I'm not sure that all of these valuations could ever be sustainable.
2. Valuation techniques / models are shocking. Talking about valuations, I recently quizzed a startup founder on how they decided the valuation of their business (for the purpose of raising some funding). He said: "We want to raise $200k and for that we're willing to part with 10% equity. So this values our company at $2m". A little crude IMO (especially since this was prior to $1 of revenue)... I'm no investment expert, but I did my fair share of business valuation models during my Honours Degree and this kind of valuation is risky at best.
3. The Exit Culture. At this kind of pre-revenue valuation, how can I ever earn a proper ROI on my angel investment? I need to hope that the company is valued at a higher level in a subsequent funding round or I need to hope that they get acquired somewhere in the future, in which case I'll probably be rich. Alternatively I need to hope that revenues eventually justify that valuation, which is a gamble at best since your guess is as good as mine when - and if - that will happen (as there's no supporting evidence pre-revenue).
4. Closed Focus. It just seems that so many startups are targeting the same kind of tech-savvy demographic, which suggests that we'll eventually reach a saturation point in the appetite of this demographic to try something new (which in actual fact is only a slightly different spin on something else they've been using until now). This approach is very gimmicky and I highly doubt that we'll continue to see $1m-in-sales, overnight iOS app successes as much as we've seen them until now.
None of these concerns, invalidates either angel investment or the tech / startup community at the moment, but they most definitely make me think twice about make any investment at present. I know that there are a lot of angel investors - especially those that have access to the best deals in the Valley - that will make an absolute killing for pulling the trigger now, but that is most definitely easier, when you can make 10-odd sizeable investments & in the process you're hedging your own risk (based on the assumption that you're actually making good investments).
Unfortunately I'm not in that position to take a 10-deal kinda risk on our personal finances at present and I thus need need to be much more selective about the investments that I do make.