I care about your startup thiiiiis much. (Photo: Slog)

Good news for tech bros who still have a soft spot for their jam band past: everyone's favorite musician from high school is now joining Justin Bieber and Will.i.am in the angel investor game. Dave Matthews has backed SpotTrot, an ecommerce app that allows musicians to sell merch on mobile phones.

Hey, this almost makes your firedancer tattoo relevant again.

Swap Ryan Phillippe for @aplusk, of course. (Photo: Wikipedia)

Let's face it: There's a reason clubs will pay reality stars just to come hang out. People are more intrigued by a famous face. Silicon Valley might think itself above crass fame-whoring, but that doesn't mean tech folk are immune to the siren song of social proof. Witness, for example, the rise of the so-called "party round."

Today TechCrunch takes on the topic of these early-stage "family-style" rounds, where angel investors and VC firms pony up a bit of cash (often as a kind of option for later investments), but no one quite leads the pack. The process is compared to--what else?--high school:

Second tier VCs want to be in the same rounds as first tier VCs and third tier VCs want to get in on the deals offered to 2nd tier VCs. It’s all very high school if you think about it on any sort of anthropological level.

Only in the Valley: "I don't know if I feel like going out. Who's coming?" "Marc Andreessen." "Well, why didn't you say so?"

Hm, that triggers more recent memories, namely: standing in long lines outside clubs that, once you're finally admitted, aren't actually all that great. Because the problem with party rounds is that everyone has a stake but no one has a big enough stake to give much of a damn. There's therefore little incentive for investors to step up when inexperienced founders face challenges.

This recent post from Chris Dixon argues they're also bad for investors:

It’s hard to disentangle cause and effect here, but most likely there are a few causes: 1) higher-than-market valuations due to no lead investor there to negotiate and lower price sensitivity of investors “buying options” on the next round 2) small checks reflect lack of investor confidence which in turn reflect something else risky about the startups’ fundamentals 3) worse exits in the downside scenarios because investors don’t help out.

The thing about raging parties is that, all too often, one wakes up the following morning with a raging hangover.

Aaron Sylvan

This post is taken from a lengthy comment by local techie Aaron Sylvan on a recent Betabeat story on NY Angels. We felt the comment was in depth and deserved its own forum.

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.)

Mike Lazerow

You always remember the ones that got away. Tell us about the start-up you regret passing on the most.

Well I bought into Facebook pretty early, but looking back, I had the chance to get in much sooner. They were pre-revenue and the valuation seemed high, so I passed. Zynga is like that too. Mark Pincus is a board member of Buddy Media and was at the time he was founding Zynga. I could certainly have been more vocal, could have pushed harder, to be an early investor in that, but at the time I didn't really see it. Veterans like Fred Wilson or Brad Feld, who can separate the signal from the noise, they looked at Zynga and saw a company with a proven founder entering a wide open space with a huge market. I saw an online poker app. 

What “me too” trend should we avoid or invest in?

Inside the beltway consumer tech start-ups, these light apps that aren’t solving a real business problem or a deep human need, are going to get crushed. Foursquare is going to do very well, but even the largest check-in app is 10 million people, compared to Facebook’s 700 million. It’s really hard for me to believe that there is enough real business to support the explosion of mobile and tablet apps I see these days.

What’s the weirdest pitch you ever heard?

I like crazy ideas, so to me most pitches don't sound strange. I thought Netflix was the worst idea ever. I mean for years, the bigger they got the more money they lost. Reed Hastings had the balls to keep investing in the company and to ignore the markets and the naysayers. Turns out Netflix is one of the biggest and best businesses to come out of the last wave of the internet. Oh wait, I did get one strange pitch recently. Someone pitched me a shoe company for women with six toes. No, I'm not kidding.

What’s the best way to ride out a bubble?

I've been angel investing for about five years, but this is the first year I've taken it really seriously. I was just heads down with Buddy Media and now its running on its own steam to the point where I can blink, where I can take one percent of my time for something else.

Over the last year I have done a dozen deals in the spaces I know best, ad-tech and social. Because of my position with Buddy Media, and the way social has become central to everything, I am being invited into a lot more deals.

I'm not a very experienced investor, so I don't like to lead. I look for a great management team and strong partners in the funding. Having really big, smart money in your syndicate is the best way to avoid getting your ass handed to you.

I know I can't pick the next Facebook, so my strategy is to try and get into as many goo deals as possible and hope a third of them turn out to be hits.

The last thing you want to hear from a founder is?

"I can't." It takes someone to will these companies into existence and at the end of the day its not going to be the investors. I look for great DNA in a company, and so often when the founders leave, they take what was driving the business with them.

Explain, without jargon, what the word pivot means to you.

Pivot is a really annoying, overused word. But I think by definition what a good start-up does is to pivot, and to continue to do that until they are a real company and no longer a start-up. Your job is to become a mature, profitable business, and you react and you iterate until you reach that goal. That is the kind of approach that has driven the tech ecosystem in this country for decades. So even with a company like Sticky Bits, which became Turntable.fm, and that's maybe something beyond a pivot, its such a big change, but more power to them. Now when I see a big established company with 500 employees and they are telling people about how they plan to pivot from a location-based service to mobile games, that is not a pivot, that just means your company is fucked.

I am about to make my first angel investment. What should I do before I wire the money?

Local angel Roger Ehrenberg has this one covered:

1. Admit to yourself that you don't know shit about angel investing.
2. Don't attempt to lead the round. See 1 above; you'd be doing a disservice to both yourself and the entrepreneur.
3. Be the rump in a syndicate with a strong and experienced lead. They will drive documentation and legal due diligence.
4. Ask lots of questions, don't rely on "social proof" but don't be a oxygen-sucking, time wasting pain in the ass, else this may become the last syndicate into which you get invited.
5. Remind yourself that massive adverse selection is at play. The best angels (read: the most experienced, most value-added, most connected, most highly respected) see the best deals. The others see, well...
6. This is why if you are new to angel investing that you should hook your star to angels far more experienced and skilled then you, respectfully ask for small amounts of capacity in their deals and try to only focus on deals where you can add something to the syndicate, e.g., a few domain-specific connections, a few business development contacts, etc.