NYC VC

What’s Really Going on With NY Angels?

angel investors Whats Really Going on With NY Angels?

Too many angels bubble the cloud

A little over two months ago Betabeat weighed in on the state of NY Angels, a group that gained a lot of visibility and respect for backing tech projects during the dark years following the dot-com bust. Every so often a media outlet will cover a NY Angels event or interview one of their executives. The latest is from Xconomy, which is ramping up its coverage of the local tech scene.

Xconomy’s Arlene Weintraub sat down NY Angels vice chairman Brian Cohen. When we last spoke with Cohen, we asked why the group’s portfolio, which has its own page on the website, didn’t show any investments after 2009. “We are building a new website, so check back in 60 days,” Mr. Cohen told us.

Well, it’s been 100 days, and the site looks exactly the same. In his discussion with Mr. Weintraub, Mr. Cohen reveals that the group is aggressively adding members. The idea, he says, is to bring more “smart angels” into the mix, because there are “scalable startups” that can’t find enough capital.

That sounds nice, but it’s simply not the case. Their is a glut of money ready willing and able to be invested at the seed and early stage of tech companies in New York City. The best companies can afford to be very choosy about who they bring on, usually picking angels who can provide more than funding. Business development and connection to top engineering talent is what separates angels from the pack these days.

The NY Angels model, in which retired bankers, doctors and lawyers would cut $25,000 checks and make decisions by committee, was in demand from 2001-2008. Adding more of these folks to the mix by expanding the ranks won’t help to convince local entrepreneurs that the NY Angels is a smart place to go for funding.

What NY Angels really needs to get back in the game is a series of smart, highly visible investments or social proof in the form of endorsements on the blogs and Twitter feeds of well respected investors and founders in Silicon Alley.

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Comments

  1. Aaron Sylvan says:

    [Boy am I gonna get chewed out for this one… I hope my comments are useful to someone, because I expect to be flamed for this commentary.  Hopefully I don’t burn any bridges by presenting a somewhat unpopular view…]

    The NY Angels is a great group, but I agree that the business model around “Angel” investing has changed considerably.  Once upon a time, there was such a thing as a bright kid with an idea who just needs a few $ to pull it together, and a bunch of wealthy older folks who would kick in a bit to see where it goes… they get to be mentors, and if they really pick a bright star, then the might get to brag about being one of the first investors in the next Google (or whatever).Nowadays, that’s not what “Angel” investors are.  Have a good idea?  Forget it.  You must think you’re back in 2007, or 1999, or some other millennium completely.  The NY Angels have told me on numerous occasions they are only interested in companies with revenue, and ideally positive cash flow.  There needs to be not only a concept, but also a great product, a great team, anchor customers, and rapid growth into a large sector.I daresay, a tech company with all those attributes must be under terrible management if it’s still willing to consider taking on the burden of outside investment!So what’s this all about?  Don’t get me wrong — I know a few of the NY Angels personally, and I feel privileged to accept occasional mentorship from three of them.  But it’s not a consortium of people who plant seeds of entrepreneurial charity into a garden of aspiring youngsters…There are really two “types” of angels: “Type I”, which you’re probably thinking of, is the ex-entrepreneur who has cashed out for tens of millions (or hundreds) and now just wants the excitement of being a Santa Claus to the next wide-eyed kid who reminds them of themselves in a younger day… whereas “Type II” is the compulsive gambler or show-off wannabe who has a few hundred thousand to play with, and is hoping that Angel Investment will be like a high-yield savings account.  Or he just wants to be able to tell his friends, “Yeah, I’m an Angel Investor these days.  I roll like that.”The NY Angels has a lot of “Type II” angels… So, the investments have to be “conservative”, which means nothing exciting.  Which is why they really haven’t “knocked any out of the park” lately.The level of traction the NY Angels require of a business is comparable to what VC Firms used to do… but when the economy crashed in 2008, the VC firms pulled out of risky early-stage ventures and saved what little cash remained for bail-outs of their existing portfolio companies.  This left a void, which groups like the NY Angels filled.Instead of investing $200-$500k in a really clever idea, mentoring that idea, making some introductions to hook up the first good sales, and so forth… they lowered their risk profile to only include established and proven businesses.In addition to the crash drying up “Series A” Venture Capital funding, the onerous Sorbanes-Oxley rules increased the legal fees associated with a VC transaction to the range of $200-300k… which means there’s no practical way for a venture capital firm to do a transaction smaller than $1-2M.  Even if they were willing to (nowadays some are, again, although not for early-stage companies but for later-stage businesses in distress where they can buy a big piece for pennies-on-the-dollar).The NY Angels, are (in my opinion) avoiding risk in an effort to appease the lower-net-worth members. The investment profile is “must have great team, great product, great traction, selling into a giant and growing market segment”… but if the product was built on <$100-200k, then it's unlikely to have all that.  Unless the company's activity is so simple that a competitor could knock it off, which the Angels will be quick to point out.I would hate to be mistaken for being a case of "sour grapes", as someone who had a plan rejected — I freely admit the plan I pitched was far-fetched and the progress I demonstrated at the time of the pitch was shaky.  What disappointed me was that I was warned in advance "we only look at things that have tremendous opportunity and defensible positioning, which have already proven themselves using their seed funding"… I realize that a software project which would have cost $200k in 2006 might now be done for $20k in Rails or WordPress… which means there are more seed-funded startups that have demonstrated pretty cool traction… but many things, such as enterprise business software, cannot be written AND proven on a shoestring.Once upon a time, Angels filled that gap.  Now they're just mini-VCs.The only way to get $500k+ funding without having a ton of customers… is if you already cashed out for millions.  I believe the risk in their investments comes largely from picking companies which got big enough to impress them, using a tiny budget, and then petered out.  If the NY Angels want to get more exciting, maybe they should tell their smaller investors to grow a set, and stop "playing it safe".  Make moves that are more exciting, to attract more of the big players — who can afford to take a bunch of 100% losses while hunting for the 10000% headliners.My advice to the entrepreneur seeking Angel investment: forget about it.  They won't take you until you're big enough you don't need 'em.  And by that point, you'll have no interest in giving them board control, liquidation preferences, and all the other stuff they expect.-Aaron Sylvan, President Sylvan Social Technology, LLC(By way of full disclosure, I have raised $3.6M in seven private offerings I closed, funding two businesses at which I was CEO.  In 2009 I pitched a project to the NY Angels, which rejected me, although I remain in contact with several individuals in their group, and consider them to be among my personal friends and most valuable mentors.)

  2. brian cohen says:

    Hi Ben,

    Anytime you would like to join us at our monthly Angel Group meetings and spend some thoughtful time with some of the most committed and caring NYC seed investors let me know. I believe that the more you know about us and the complex area of angel investing the more you’ll understand. The New York Angels are part of a wonderfully vibrant investor and startup community that is now working closer together to fund more smart businesses.

    Regarding Aaron’s comment’s, I think they are fair and balanced and they frankly can be said about ALL angels. His insight reveals that angel investing rarely makes money and that the principles of quality investing apply. Unfortunately, too much of the “shoot from the hip” approach to angel investing, though sexy, leads to poor performers and then then less angel investing which is not what anyone wants.

    I look forward to finally meeting you and having the opportunity to share the names of the large and growing number of exciting NYC startup companies we’ve funded and perhaps the many hundreds of entrepreneurs we’ve reached out to hug and mentor in the past.

    We love our responsibility in helping the NYC startup community.

    Brian Cohen
    Vice Chairman

    PS. Unfortunately website development is not as predicable as I had hoped.