Note: this post is one of several drill-downs on the topic of why angel investing and early-stage venture investing are not just different in scale, but different in type.
It’s the total collapse in the cost of innovation.
Thanks to advances in open-source tooling and cloud-based infrastructure, companies that once required millions of dollars in capital can now be built by small teams of high-performing digital creatives for just tens or hundreds of thousands of dollars.
At the same time, the world’s richest people have gotten even richer, creating an ever-larger pool of returns-seeking capital. (Access to high-risk investments like venture capital is generally limited to “accredited” or “qualified” investors, the same one-percenters that have reaped the greatest economic gains over the past decade).
So, as the cost of digital innovation has collapsed, the pool of capital available to finance innovation has exploded.
This mix would be combustible enough if the world were standing still.
But — unlike the first wave of internet innovation, when the population capable of consuming digital services was relatively small — this cycle is feeding a massive, global user base, where 2 of the 7 billion people in the world have internet access.
Not only is there a massive addressable audience for digital innovation, but a large and growing segment of those users have the internet with them all the time — more than half of US cellphone subscribers owns a smartphone, and mobile tablet sales are projected to outpace PC shipments in about a year.
The cost of attempting digital innovation has never been lower, the pool of capital available to fund innovation has never been larger, and the economic value of a “winning” digital innovation has never been greater.
No wonder the market for “disruptive” digital innovation is blowing up.
The current surge of software entrepreneurs will create many viable businesses, with happy customers and growing revenues. But only a tiny sliver of them will strike the magical balance of talent, insight, effort and luck that produces breakout success.
What does all this mean for the professional venture investor, and how does her view differ from that of the “typical” angel investor?
In previous posts I’ve asserted that:
- Angel investors prefer deals where losses can be contained, while professional investors will “trade away” downside protection to maximize the potential for gains.
- Angel investors are more likely to attain “local maxima” while professional investors are structurally driven to seek “global maxima”.
The world is awash in capital and the cost of innovation is rapidly approaching zero. Financial capital — whether angel or institutional — no longer matters.
Today the equation for breakthrough innovation is breathtakingly simple — it has just two variables:
Angel investors — for whom investing is a hobby but not core to their career or financial success — rarely back up their money with significant allocations of personal time.
Professional investors are the opposite: each investment is an unrecoverable “silver bullet” fired from a finite pool of capital, and career success and compensation are directly tied to the accuracy and force of those shots.
Venture investors have three jobs: raising money, sourcing new deals, and helping portfolio companies win. Raising money is no longer the hard part (at least for investors who have a track record of producing returns). For the returns-maximizing venture investor, success boils down to outperformance in just two areas:
- Talent — Doing everything in your power to ensure that the teams you invest in are the most gifted, ambitious, relentless digital creatives on the planet.
- Time — Constantly triaging your schedule to maximize the positive impact you have on the teams and companies in your portfolio, particularly those that have the greatest odds of producing extraordinary returns for your investors.
Once a venture investment has been made, the *only* lever the investor can pull to improve the odds of a returns-generating outcome is to devote personal time to helping that company win.
Any activity that accelerates progress, neutralizes threats or otherwise removes obstacles to a portfolio company’s success is an activity worth spending time on. Any activity that doesn’t fit one of those descriptions is a “tax” on your odds of success as a professional investor.
There are only 24 hours in a day, and once they’re gone you can’t get them back. Angel investors do good by deploying capital, but professional investors produce their biggest impact by allocating time.