Angel investors--affluent individuals who invest in early-stage companies--have long been a staple in the world of business investment. But a new breed of so-called "super angel" investors is emerging.
This segment of investors, which includes individuals and early-stage funds, often forms groups to invest in a broader range of companies to mitigate risk. And their numbers are growing--up 40 percent from last year, according to a recent National Association of Seed and Venture Funds study.
They can be an important bridge over the "valley of death" in investment dollars: that gap between about $100,000, which often can be raised through friends and family investors, and several million, which is how much most VCs need to invest to generate returns large enough to sustain the businesses, says Jim Jaffe, president and CEO of the seed and venture funds association. Fifty-one percent of its survey respondents plan to invest more money in new companies than they did last year.
"Last year, the average VC investment was between $8 million and $9 million," Jaffe says. "The average for our constituents was $500,000 to $1 million."
Jeff Clavier, managing partner of SoftTech Venture Capital in Palo Alto, Calif., prefers the term micro-cap VC, because these firms typically focus on early-stage investment at lower levels than more traditional VC firms. But regardless of what you call them, your business should be on a fast track to return three to five times on investment--usually through acquisition--within five years.
Clavier, who focuses on Web 2.0 startups, looks for a strong management team committed to being capital-efficient and a business that can scale to accommodate tens of millions of dollars in revenue within a few years. He also wants to see that the team has some skin in the game.
"It's hard to invest in something that is just an idea," he says. "Asking for funding for an idea so you can quit your job and develop it isn't entrepreneurship--it's moving from one job to another."
Not every company is destined for the explosive growth these investors seek, but those that are can count on early-stage funders like Clavier to provide experienced counsel and connections, just as traditional VC firms do. Early-stage investors are also typically willing to take on more risk, both because the investment points are lower and the very nature of startups is riskier.