Threat to VC Is from Regular Angels, Not Super Angels, CEO Survey Says

[Corrected, see below] “Mounting tensions” would be the journalistic cliche to describe recent relations between traditional Silicon Valley venture capital firms and the growing class of “super angel” investors—groups like Ron Conway’s SV Angel, Mike Maple’s Floodgate Fund, Dave McClure’s 500 Startups, Aydin Senkut’s Felicis Ventures, and Jeff Clavier’s SoftTech VC.

The relationship between these super angels and VCs matters a lot, because it could have an impact on investment for the next generation of small, Internet-based ventures. Thanks to innovations like cloud computing, many of these Internet companies don’t really need the multi-million-dollar rounds traditionally dispensed by venture firms. So, when the super angels aren’t sniping at each other about how to work with entrepreneurs (witness the blizzard of leaked e-mails prompted by TechCrunch’s “AngelGate” kerfuffle), the VCs are circling warily and arguing that big venture firms make better business partners than super angels, thanks to their larger networks and operational experience.

But if traditional venture firms are concerned about losing out on deals, they may have the wrong targets in their sights, judging from survey data released today. Software, Internet, and mobile entrepreneurs raising their first or second round of funding are much more likely to turn to individual angel investors than to either super angels, traditional VC firms, or early-stage VC funds, according to a survey conducted by attorneys in the Palo Alto office of Dorsey & Whitney, which works with numerous venture firms.

The 363 startup founders who responded to the survey said they were mainly looking for investors who will offer attractive deal terms and valuations, who can move quickly on deals, and who won’t push startups to take more money than they need. On all three counts, angels happen to have the perceived advantage. But the entrepreneurs indicated that they cared more about getting deals done than about whether there are big names on the other side of the table. Which means traditional venture firms who don’t want to be locked out of today’s smaller companies probably shouldn’t waste time worrying about super angels (who are arguably evolving into mini-VCs in any case).

Dorsey CEO Funding Chart“The survey results say that that debate is beside the point,” says Matt Bartus, a partner in Dorsey & Whitney’s corporate group and a co-author of the survey report. “Entrepreneurs are looking for investors to fill their funding needs along with the relevant expertise, and they are pretty much indifferent as to which entity that comes from.”

Bartus conducted the survey with Ted Hollifield, another partner in Dorsey & Whitney’s Palo Alto office. Participants for the online survey (full report here) were recruited through the firm’s internal contact list as well as via blurbs in TechCrunch, Venture Beat, and StartUp Digest. The CEOs who responded were mainly from consumer Internet startups (34 percent), cloud computing or Software as a Service companies (17 percent), and mobile startups (13 percent). A small slice were in energy (3.3 percent) and life sciences (2.7 percent). They were predominantly from the Bay Area (42 percent), with smaller contingents from places like New York, Los Angeles, Boston, Seattle, Denver/Boulder, and Austin. Some 19 percent were from outside the United States.

All respondents had either raised funds within the last 12 months or were planning to raise funds in the coming 12 months. Most said their firms needed relatively small amounts of money: only 9 percent had raised more than $5 million, and only 12 percent said they’d need more than that in the coming year. A full 58 percent had raised $500,000 or less.

So, who have these CEOs turned to for funding? About 59 percent said they’d already raised money from individual angels or groups of angels. Friends and family represented the next largest group of investors (32 percent), followed by early-stage VC funds such as True Ventures and First Round Capital (19 percent), traditional VC funds (17 percent), incubators such as TechStars and Y Combinator (12 percent), and, way down at the bottom of the list, super angels (9 percent).

[This paragraph corrected with new input from Dorsey & Whitney 10/12/10 9:05 am PDT] Asked who they’d likely turn to in the next 12 months, startup founders gave similar answers—angels (69 percent), super angels and early-stage VC funds (both about 38 percent), friends and family (26 percent), traditional VCs (22 percent), and incubators (12 percent).

“Angels are clearly the largest category by far for this class of investors at the early stage,” says Dorsey’s Hollifield. “They led by a country mile. A large number of entrepreneurs find that … Next Page »

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Wade Roush is a contributing editor at Xconomy. Follow @wroush

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