Rich Dad Poor Son

My father, Scott Walchek, was kind enough to write a response to my post on the future of venture capital. The former post introduced the Super Angel and spoke about the thumbprint the Super Angel will leave on the current and future methods of venture investing. If you haven’t read my previous post, it may help to do so in order to provide context. Click here to read.

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Hey Son - nicely written. Some thoughts:

-When we introduce ourselves as “Super Angels” (sounds a bit megalomaniacal, huh?) it is meant to say that we position ourselves in a stratum between Angel investor and traditional VC.

- One of most important distinctions we make under the moniker of Super Angel, is that we are investing our own dough! Money that (as often as not) was made as operational entrepreneurs …hard earned dollars attended by scars, battles, disappointments, elation, late nights, early mornings, innumerable surprises, headaches, and the satisfaction that it was all worth it. Money not easily parted with…but invested mostly (in fact nearly completely) in people (and their plans) who are not unlike ourselves.

- An SA typically invests in early/seed stage.

-An SA is more “high-touch” than the typical Angel (read: brings *operational* experience, not just deep pockets; gets hands dirty in the operations, strategy, hiring, fund-raising, etc.)

- Whereas an Angel will typically spread around his/her investments in relatively smaller chunks (25k-250k), an SA may take a larger slice of equity committing to larger dollars…more like a traditional VC.

-And (like his VC brothers), an SA will reserve capital for follow-on financings (hopefully! - truth be told, one of the most costly decisions I ever made was not reserving enough capital for the mezzanine round for Baidu, which we had to raise from others…that cost me roughly .2% of the company - a very large number when cap value of Baidu reached $10B - ouch!…but I did make a lot of friends; selah).

- Certainly not the sole domain of the SA, (and again like his/her VC buddies) s/he will require pre-emptive rights (the right to invest on a pro-rata basis in future rounds of financing so as to avoid dilution.

- Because SA’s invest their own resources, they do not charge a carried interest or management fee - rather are pleased to get into a deal at the earliest stage possible…This stage is of course the most risk laden, and a very high number of these investments do not work out. However, when they do, the reward (both psychic and financial) is remarkable!

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Thank’s Dad. As always, your wisdom is greatly appreciated. The Super Angel model is Venture Capital 2.0, bridging the divide and enhancing collaboration between traditional financial institutions and the high net worth investor.

I love the last part of his response “they do not charge a carried interest or management fee…the reward is both psychic and financial.”. The early stage venture investor should understand, encourage, and assist in overcoming the plight of the entrepreneur. The Super Angel is in it as much for the love of the game as they are for the financial reward.

After all, they’ve been there, done that, and haven’t stopped yet. For there is no greater joy than a man to toil in his labor and see the fruitions of his work (and to help others in the process).

I have been hearing quite a stir about the future of Venture Capital.

For those of you who are not into finance, venture capital firms (VC’s) are companies that invest external money (pooled together from various sources) into an assortment of businesses at different stages of a company’s life cycle. Typically, VC’s invest money in exchange for a portion of ownership in said company. If the company they invested in goes public or gets acquired, the VC’s pay out returns to their investors, minus the management fee and profit share.

Prominent figures are predicting a collapse of the current VC model.

I’m stuck in limbo because I firmly believe that investing in startups is critical to our economic health yet I see flaws in the current VC operation. Open and available funding for new ideas helps dummies like me sleep a little more soundly at night. That and Lunesta.

So if the predictions ring true, or even partially true, how can anyone with a good idea hope to get it off the ground? In this liquidity crunch and generally cash strapped market, it’s tough. But in the near future, I believe a new method of startup funding will emerge.

Enter the Super Angel.

I first heard this term coined by my father (though he may have heard it somewhere else) 9 years ago while eating dinner with several of his business associates. At first thought, Super Angel just sounded cool. I began to picture an awesome transformer toy I used to play with in my earlier years. That alone inspired me to ask the group what a Super Angel was, to which my dad replied:

“A Super Angel is an individual capable of making an investment in startup companies with his own money, but others follow his lead and invest along side of him, trusting his judgment. He also moves freely in the VC world, often having a network of VC’s investing alongside him. A Super Angel also brings exceptional mentor qualities to an organization and carries a track record of success.”

The key differentiator between an angel investor and the Super Angel is the network of tangible and intangible capital that follows them. A Super Angel generally has the ability to invest his own capital into a startup AND can call on a network of individuals AND VC funds that trust him enough to make an investment based on his word and track record. The Super Angel has the wherewithal to know which person or fund within his network will provide the most tangible (monetary, network) and intangible (mentorship, marketability) capital to a new startup.

The VC model with its current modus operandi is, in my humble opinion, antiquated. I believe a new model is emerging. Take a look at Tech Stars. This is venture investing 2.0, run by a group of Super Angels. They connect startup companies with tangible and intangible capital, providing channeled mentorship (mentors with related product experience), seed money, and a broad network including VC’s and angel investors. Best of all, at the end of the day, they aren’t asking a whole lot from the entrepreneurs.

“In exchange for the TechStars summer program, seed funding, advice, mentorship, connections, and investor demo day, TechStars receives a 6% equity stake in your new company.”

Tech Stars’ is getting it right. Last year, even amidst the financial turmoil and a limited M&A market, a Tech Stars company was acquired by AOL.

This blog was not written as a promo piece for Tech Stars. But I do believe that the Super Angel model they have built is the future of VC. I think that investors and funds hiring VC’s (if they hire them at all) to manage their money will come to expect a higher degree of transparency, accountability, and a better hands-on approach when it comes to selecting a company for investment. They will expect a team of Super Angels to do exactly what Tech Stars does for their portfolio companies:

Network. Invest. Inspire. Mentor. Market.

(Written in 2009)

(Written in Jan 2009) Just yesterday, I was engaged in a deep discussion with my roommate regarding the state of the economy. I’ve been best friends with Jay for many years and though finance and economics are topics that capture my interest, an intense colloquium on the subject is rare between the two of us.

Jay kicked off the conversation with the following statement:

“I never really cared much to discuss the economy until I (now) was able to understand just how far reaching the trickle down effect of a few people’s actions was. I just don’t know who to blame…”

I am not an expert on the economy, but I have done a fair amount of research and have a competent finance vernacular. I thought it fitting to help my friends understand who is truly to blame for the once in a lifetime economic pandemonium we (in the US) are experiencing. After watching a video put together by the Wall Street Journal entitled “The End of Wall Street” (which I thought was ironic), I wanted to offer my humble opinion on who to point the finger at in the ever present blame game.

It started with the government encouraging large mortgage lenders like Freddie Mac and Fannie Mae to reach outside of the lending box they had constructed over many years and loan money to extraordinarily risky (in the credit sense) individuals. The mortgage companies listened. They began to promote ARM’s (adjustable rate mortgages) and allowed consumers to borrow based on stated income.

Enter the loan officers. Many of them were slick, commission only salesmen who would do anything to get a buyer to sign on the dotted line. With the ability to loan to consumers based on stated income, all you had to do was tell the loan officer how much money you “made” and that would be good enough.

Loan Officer: “Proof? Nope, we don’t need it. Documentation? Nope, we’ll make some up for you.”

People were quickly enthralled by the slick salesmen exclaiming “Buy the house of your dreams! We’ll make it work”. Loan officers often distracted the consumer during the signing process, getting them to focus on the immediate rather than the long term. Buyers often neglected the fact that their payments would double in 2 years in an ARM loan. Yet they signed into it, unforced.

Why did the Banks keep lending to high credit risk customers? Allen Greenspan, former Chairman of the US Federal Reserve, lowered US interest rates to historical levels. Banks saw this as “free money” and borrowed, leveraged, and loaned money to the maximum. But the Banks didn’t want to hold all of this high risk debt on their books. To alleviate risk and responsibility for lending, Banks and other lending agencies packaged and sold these toxic high risk mortgage loans through complex financial instruments like CDOs.

Enter ratings agencies. The rating agencies are supposed to be third party objective entities that look deep into complex financial instruments and rate them according to their level of risk. Investors put an enormous amount of faith in the objectivity of the rating and often invest billions of dollars based on the opinion of the ratings agency (to their credit, the ratings have been historically accurate in their risk assessment).

Somewhere, somehow, the ratings agencies failed in their due diligence. They slapped the highest rating, AAA, on these debt instruments that carried high risk sub-prime mortgages as the collateral. This was in large part due to the fact that AIG, the insurance giant, was more than willing to ensure that the holders of these CDO’s were well insulated against loss. That meant that a bunch of high risk loans bundled together were considered as safe as a US Government Treasury Bill (known as one of the SAFEST investments in the world).

One question I have: How can we expect a rating agency to be objective when they are PAID to be objective? It’s the same dilemma that scientists face. They are funded to produce “objective” results for companies that don’t want objective results at all. And the results are often skewed so that the scientist continues to have funding and a job. Could it have been much different for ratings agencies such as Standard and Poors or Moody?

Enter Wall Street investment bankers. They are highly educated and incredibly gifted financial salesmen. They also have excellent analytical skill and often dig as deep into the financial products they sell as the ratings agencies do. The investment bankers saw the ratings that were tied to these complex debt instruments (AAA, extremely low risk), analyzed, and subsequently sold them to pension funds, endowments, and other banks worldwide.

Knowing several investment bankers and their high degree of intelligence and having conducted due diligence on debt instruments before, I have a very hard time believing that they didn’t see the inherent risk of what they were doing. Yet no red flags were being waved, no one sounded the alarm. And why would they? Their bonus checks were very fat.

And then came the meltdown.

The prices of homes dropped at astounding rates. People were in way over their heads. Their mortgage payments often doubled. Foreclosures on homes soared to record numbers. Consumers couldn’t spend what they didn’t have. Banks didn’t slow lending. They stopped it. The stock markets plummeted worldwide. Unemployment skyrocketed (is skyrocketing). Revenues dropped. And thus began the global financial crisis of 2008.

So who do we blame? Allen Greenspan and the US Government? Wall Street? Banks? Mortgage Brokers? Consumers?

Answer: All of the above. The long reach of the trickle down/up effect becomes more apparent every day. And we all bear the burden of responsibility. Follow the dollar, find the thief.

Rich Dad Poor Son

How Would a Super Angel Define the Moniker?

Entertaining a Super Angel…The Future of VC

Follow the Dollar, Find the Thief