Monday, July 12, 2010
Sarah Tavel posted an analysis on the EarlyStager group blog (which I found, read beginning to end, and loved last week) on the microcap bubble. She used both # of funds created and total $ raised as proxies to determine if we’re approaching 1999 levels of irrational exuberance in the angel funding market.
Sarah pieced together the data very well, but leaves the conclusion as an exercise for the reader… are we in a microcap bubble or not?
My answer: I was instantly reminded of a post that Albert wrote on his blog which said, there’s no such thing as too much seed capital availability. I remember strongly agreeing with Albert at the time, and the argument he made that really persuaded me was the one regarding the downside scenario.
Let’s say for argument’s sake that there *IS* too much seed capital available right now and some companies are getting funded right now that objectively *shouldn’t* be. So, what’s the problem? If these companies really shouldn’t be getting funded, then they will very likely fail, but failure is not bad at this stage. it provides temporary employment… It trains entrepreneurs with experience… it provides a data point for other companies operating in the same market with a similar business plan.
There are two real problems I see with early stage failures: some lost economic value due to time spent developing/learning products that don’t survive, and the return to angel investors on failures is obviously abysmal. But, each of these problems already exist at the angel stage… they’re known risks that any savvy angel investor or early-stage entrepreneur is comfortable with. These problems are worth the upside that comes with them: more startups get a chance to innovate, more entrepreneurs spent more time working on product and less time sweating fundraising, more competition in business means end-comsumers win, etc…
So, to Sarah’s question, I say: Yeah, we’re probably in a microcap bubble, and that’s great! I hope even more money gets deployed at the angel stage. And, I’d argue this is *not* a self-serving conclusion based on my job at Spark… I’m actively seeking angel investing opportunities on behalf of Spark and more competition at this stage doesn’t make my job any easier. But, for the sake of the early stage startup community, and as an end-consumer benefiting from the innovation of startups, I love to see all this angel investment activity.