The Economist has a great piece on Angel Investing titled Giving Ideas Wings. The article outlines the history, role, importance and changing landscape of Angel Investing.

The piece describes an equity gap - between the three F’s (friends/family/fools) and venture funds - that’s widening:

“As venture-capital funds have developed and expanded, so their ambitions have grown with them. Many are no longer interested in deals unless they are worth much more. Most venture-capital firms in America will now consider only deals in which they can invest at least $7m”

Angels have stepped in to fill the gap and are increasingly becoming organized/syndicated in order to serve the growing divide.

The author, Jeffrey Sohl, clearly outlines value-adds that angels bring to young ventures:

• - Many Angles have “specialist knowledge of an industry” that’s available to the firm
• - VC introductions (”angels introduce about two-fifths of the new investment opportunities seen by venture-capital firms”)
• - Many are experience entrepreneurs with real operating experience and can advise “managers on the nitty-gritty”
• - Assit with introductions to new customers
• - Help recruit essential employees
• - “And… business angels can help negotiate better terms with the venture capitalists when the day comes to scale up even further”

If you’ve read Disruptive Thoughts for a while you know that this equity gap, and the opportunity it has created for early-stage invesetors, has been an area of interest for a number of months. In January I outlined a few reasons for the growing gap and the opportunity for investors who brought value to companies bridging the equity gap.

I still suspect that the equity gap will be bridged by a number of different, innovative, groups - which should be good news for entrepreneurs:

1) Organized Angel syndicates, as outlined in the Economist article, with increasing sophistication will add value at the seed-fund stage with return requirements that fit the investments made.

2) Innovative VC firms who, through nontraditional venture practices/services, move down the financing horizon, and actively compete in the gap by providing valuable services to early-stage companies.

(Aside: in Feb. I talked about the non-traditional practices of Union Square Ventures and Brad Feld from Mobius. Since then I’ve gotten to know Fred and Brad and I’m even more impressed with what they’re building at USV. Maybe we’ll also see Brad pursue an innovative strategy in the coming months)

3) Specialization companies that specialize along business stage/process pathways.

There are already examples of entities within all three groups attempting to bring value, and earn returns, by bridging the gap. It will be exciting to watch this space in the coming years.

What do you think the seed financing stage will look like in 5 years? As always, I’m interested in hearing your thoughts.

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