The Age of AngelList

UK tech investors that avoid the seed stage are going to be losing out on the most exciting investment opportunities after Facebook goes public. A $100bn IPO will create an incredible pool of seed money that will be showered onto willing entrepreneurs, says Rodolfo Rosini.

For any new venture, where your raise first round of venture funding matters. It may define the future of your business. Your management team is expected to move there. It can be easier to find investors for later rounds, if you are nearer to them. Investors syndicate across their networks and can hook up start-ups with local mentors and employees.

I raised money in October for my new venture, Storybricks. Searching for funding, I hustled pretty hard on AngelList and through my personal network. The result was a seed round from a syndicate of Israeli, French, US and British angel investors, mainly thanks to AngelList.

As I am planning to go for another round of funding soon, I was re-checking the database the other day. I saw how many new investors have added their profiles in the last four months. To my surprise, the number of angels has gone through the roof. Tech clusters like New York or Berlin are growing significantly, but the list of angels in the San Francisco Bay Area is phenomenally impressive. It features many big-name investors.

It takes just ten minutes to follow everyone with a chequebook in the UK on AngelList. But as for the Bay Area? I have been adding people to my follow list over the past few days in-between emails and calls. There are least 2,300 investors but I have only just followed my 1,050th angel.

And now it starts to look interesting

Reading the investors’ profiles, I noticed a pattern: they were in groups. Either they had invested in some cool start-up that exited and made great returns, or a company that had held a killer IPO employed them. Google, BEA, Netscape, Oracle, Salesforce and more… they were all there.

Then I started observing former employees of newer companies, including people who sold their companies to Twitter and Zynga and left long ago with a wad of cash. Imagine what might happen this year: Zynga’s shares lock-up will end on May 29, Facebook is rumoured to go public in April (and if so, the lock-up should end in October 2012).

Twitter is still private but gingerly trading on SharesPost at $34.50 a share. Goldman Sachs made a list of 30 tech companies likely to IPO soon and most were based in the Bay Area. There is a healthy secondary market for cool consumer start-ups since all the action is moving away from public markets. These are truly exciting times.

But UK VCs are screwed

I have been fundraising on both sides of the pond and have been speaking with many UK angels, many of whom either did not know about AngelList or said (and this is an actual quote): “Oh, yeah, heard about it. But it’s an American thing, isn’t it?”

This, from people who are seeking to invest in early stage companies and who should know better.

Silicon Valley has about $1,000 of venture capital per capita and there is $600 in Israel, but it is just $10 in Europe, according to a speaker at DLD this year. And it is not just because there are more people or that Europe does not have a cluster. Those are silly excuses.

Want a practical example? Autonomy, founded in 1996 in Cambridge, went public in 1998, and sold to HP last year for $12bn. That must have made a lot of people happy.

But there is only one person on AngelList who worked at Autonomy who is now an active angel and invests in “4-6 startups at $50k-$100k each a year”. And where does he live? You may have guessed it by now: San Francisco. Investors are missing out as more and more start-ups start using AngelList – and not just for fundraising, as it now has a high-quality, curated job board.

The worst thing about the UK venture community is that it has few, very insular investors. Angel groups in Cambridge who do not hold events in London. Pay to pitch scams. Advisors who charge five per cent of money raised. You get the idea. Not all of it is a disaster, but there is a lot of reprehensible behaviour.

And the upside is pretty small. At the last count, there were only eight seed-stage VCs in London. (They are: Passion Capital, Amadeus Capital Partners, Atomico, Index Ventures, Octopus Ventures, Profounders, Octopus Capital and Wellington Partners. A new outfit called Hoxton Ventures is still raising their first fund and is expected to seek early stage opportunities as well.) None will fund a PowerPoint with a killer team.

UK VCs make all kinds of noises about developing an “ecosystem” of serial entrepreneurs that can jumpstart a utopian Silicon Valley in East London, with a fancier accent and a lot more alcohol. But the reality is that the money simply is not available in the UK and the money that is, is not being reinvested, especially at an early stage.

Sounds familiar? Yes, we have been here before. Many times. It was called the “equity gap”. And now the problem looks set to worsen.

The Facebook IPO will make a lot of people wealthy. Accel Partners alone are rumoured to be on track to make 20 times their entire fund. None of the other early Facebook investors have a presence in the UK. All the Facebook employees with significant shareholdings are in Palo Alto. They will probably invest locally.

And there is little reason for a start-up to limit itself, by raising money only in UK or continental Europe. My start-up, Storybricks, is a Delaware corporation (despite the fact that I have never been to Delaware in my life; nor do I plan to) that owns a UK limited entity. Investors acquired shares in the US parent.

All R&D is based in London (yes, near Shoreditch, but alas we are not on the Tech City Map) and expenses are incurred by the UK entity. Since it is 100 per cent owned by the parent, according to HMRC rules we could issue Enteprise Investment Scheme (EIS) share options to UK employees, if we wished to.

A new start-up can pack its bags and move to San Francisco for three months to raise capital just by using Gmail, Airbnb, Dropbox, Rapportive, Skype, LinkedIn, Kayak and obviously AngelList.

US banking for start-ups is also so much better than in London thanks to outfits like Silicon Valley Bank. The second most senior person in my company actually lives in California and is a US citizen, so there is no visa issue for us.

Moreover, Tier 1 VC funds in the Valley have immigration lawyers on staff. It is likely that immigration rules will be relaxed to allow founders to move to the US (and, importantly, pay taxes there). If you follow Steve Case and the work he is doing with Startup America to bring great entrepreneurs to the US, you should be keenly aware that this is going to happen. It will soon become easier to start your own company in Silicon Valley, not harder.

Unless UK venture investors can come in as first investors and add significant value they will have a hard time surviving. There are very few that can pull it off. Passion Capital is an example, but they made a boatload of great investments in 2011, and so are probably going to be quiet this year.

Another example is the fund being set up by Anil Hansjee, former head of M&A at Google Europe. Anil’s plans are not public yet, but from what I have seen he will add terrific value to any investment. His fund is being structured to offer operational help on both sides of the Atlantic using his extensive network of connections.

Down and out in San Francisco and London

When I founded my first UK start-up in 2005, there were a lot of terrible VC funds, remnants of the dotcom boom that were managed by blatantly incompetent people. Luckily we have moved away from that, and those gentlemen went back to investment banking and accounting after selling their portfolios in secondary transactions.

But a lot of investors are still too focused on risk avoidance, and rely on the imaginary fact that a start-up can only raise money from one of the handfuls of investors in St James’s or Cambridge.

While this is changing, there are still some great opportunities in London and the valuations are much lower than in San Francisco. But there is now more competition from all over the world, and not just Silicon Valley. Think about 500 Startups (based in San Francisco) and Kima Ventures (based in Israel), which are the most active angel investors in the world. (Disclosure: Kima is also the largest investor in Storybricks).

Jeremie Berrebi at Kima invests in two start-ups per week, anywhere in the world. In some cases Kima expects to be part of the founding with just a great team and some code. And they take a week or less to decide – in some cases, 24 hours.

I am happy to be an entrepreneur right now. I’d be terrified of having to compete with all these great funds and experienced angel investors for an early stage deal. And syndicating the deal might end up pushing up its price, to the point where it impacts negatively on future returns.

Right now, the scarce commodity is early-stage capital in the UK, and people in the Valley. Who do you think is more likely to move: young, brilliant, tech-savvy, entrepreneurial graduates or 40 year old venture capitalists with a partner and kids?