At the Venture Association of New Jersey’s (VANJ) December meeting, bicoastal angel investor A. Wayne Tamarelli gave entrepreneurs some advice: “I think it’s critical to fail early and fail fast.” Whatever a company is trying to do, “get it proved quickly so you can modify it and move on or get out,” he added.
Tamarelli, president of AWT Private Investments (Basking Ridge), founding chairman of Jumpstart NJ Angel Network and a member of Silicon Valley’s Band of Angels, examined the current overall investment climate in a talk entitled “New Tech Bubble? (Is It Champagne Bubbles or Sewer Gas This Time?)” His answer: a possible gas bubble on the Internet front.
Internet media companies are the fastest to market, and those that break out return investments quickly, Tamarelli said. Large companies acquire Internet startups just to get the talent. The companies may or may not further develop the startup’s ideas; they just want to bring on the team.
Unlike Internet investments, clean tech takes a lot longer to provide monetary returns than people expect, Tamarelli added. In his experience, that industry’s capital requirements are large, and big money from big international investors is needed very early in the project, because “to even demonstrate many of these clean technologies, you have to do it on a large scale.” Equity funding has peaked for clean tech, he concluded, and government funding is controversial.
Currently there is an investment “valley of death” between $500,000 and $3 million, where many VCs and angel investors won’t play, Tamarelli observed. If a company needs that much to stay alive, it should seek out strategic partners to help it through, he advised.
“Strategic partners have been critical to some of my companies in recent years,” he said. They can be suppliers or customers, collaborators on intellectual property or marketing, or other industry insiders interested in the same market space as the company’s who want it to succeed. “If you can work a deal to partner with them and they can come up with funding and other resources,” that would be quite helpful, he said.
The VC industry on the whole is not doing well, Tamarelli noted, with return on investment very low. VC funds that have seen poor returns are not obtaining new money, while some VCs are bragging that they make decisions in fewer than three days because they have to compete for the best deals. The number of people employed as VCs is decreasing, he added.
“There is a big shakeup in terms of how companies are funded,” Tamarelli said. We are seeing “way too many startups,” he observed, and almost no initial public offerings. Also, the boundaries are blurring between angels and VC funds, fueled by the emergence of “super angels,” young entrepreneurs who have successfully exited from startups and are funding others. They often have the same Rolodex names and industry contacts as do the VCs.
Many angels are now coming to the conclusion that it’s not a good idea to invest initial money, expecting it to be followed by venture capital, Tamarelli said. Some elaborate studies have shown the best returns come when there is angel money invested without VC funds. VCs typically require companies to exit for at least $250 million, which many companies can’t sustain, he indicated.
“Before you know it, they [the VCs] are pushing for a $500 million exit,” while the entrepreneur would opt for an $80 million M&A; offer, said Tamarelli. “The VCs block it because they get control of the board of directors,” he added. There are many examples of companies not reaching the stage at which they can sustain a big exit, so nobody gets what they want, he said.
Early in his talk, Tamarelli portrayed a U.S. that has been paralyzed in terms of investment in innovation. By contrast, “some countries aren’t hurting so bad … India is slowing down but has done relatively well in recent years, Brazil has done quite well and China is cooling off a bit but is still doing well,” he noted. Other countries are catching up to us by reducing the amount of time it takes to start a business, a traditional U.S. advantage, but we still have an entrepreneurial culture, innovation skills and a strong property rights legacy and postgraduate education system.