Last week I wrote an explainer defining angel investors and their role in start-ups. The subject has been a hot topic in the world of entrepreneurs, as many aren’t qualified or looking to avoid the venture capital road.
Angel investors may becoming too hot of a topic in the start-up world, as both the president of Facebook, Sean Parker, and venture capitalist Mark Suster claim the angel investor bubble is about to pop.
According to Parker, the early seed stage, where entrepreneurs are desperately looking to raise capital to get their dream off the ground, is now considered “overfunded.” Parker went on to tell an audience at Technomy in Arizona that investing is becoming assembly-like.
VC Suster chimed in with his own opinion at the VentureShift conference in New York City. He believes people are in the FOMO mindset. For those of you who don’t follow Suster’s unneccesary acroyonym, FOMO stands for fear of missing out. Because everyone wants to jump on the bandwagon and there appears to be an oversaturation of angel investors, Suster invented another tasteful acronoym for this scenario: ENIFA or Everyone Now is a F—g Angel. Classy.
Do they have a point? Possibly. The number of start-ups has increased over the years as costs to begin your dream business have decreased due to technology advancements, a slew of free information on the internet, cloud computing, and mentor programs. Along with more dreams comes more demand for funding, which results in more greed from investors eager to get their hands on a piece of the next possible Facebook.
Inc. pointed out that The National Venture Capital Association found investments in the early-stage of start-ups jumped 68% in the third quarter, which equates to $1.6 billion.
So if the angel bubble is supposedly going to pop, what choices do entrepreneurs have?
Parker touts incubators as the next phase for start-ups, but will this type of mentor program be the next bubble? I don’t have the stats on the number of incubators in the U.S. but just by staying in tune to the tech scene it seems like they are popping up everywhere. As wildly popular they are, it doesn’t seem like incubator programs really benefit that many entrepreneurs.
Y Combinator, possibly the most popular, will most likely surpass their largest class size of 63 for the upcoming winter session. Keep in mind the program started with eight. What do you get if you are accepted into the highly competitive three month stint? Besides a chance to break bread with the most sought after mentors in the tech community, you also get $17,000 to grow your company. What do they get? Approximately 7% of your company. Some would argue it’s a bit of an unfair tradeoff and the mentorship aspect is getting diluted with the increase of businesses accepted into it.
Also, aren’t incubators doing the same as angels—investing in all sorts of companies with the hopes one will land it big? Yes, they can pick and choose who they want in their program but with the high growth of these incubators across the country doesn’t that create the same dilemma the angel community is now facing?
Only time will tell if Parker has a point, but in the meantime he should maybe focus on his Founders Fund, an investment firm for start-ups.