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06TH March 2012

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Angel Series #5: Quick cheap deaths & occasional glory: Why angels still love digital media


Hobbes said it: Nasty, brutish and short.

This excerpt is serialized from a whitepaper titled Angel Investing for Single Family Offices (SFO’s) by The Family Office Association and Vaux les Ventures. Those looking for tales of my latest death defying adventure may find it extremely boring. Entrepreneurs looking for angel, or vice versa, may find it shockingly illuminating.  For a complete copy, visit the FOA website. 

People often ask why I have gravitated to digital media. Point number one might be I have been doing it long enough I have seen enough ways to fail that I might know how to succeed- by process of elimination. But Digital is efficient and Angel investing works best with capital- efficient businesses, where startup costs are minimal but exits are still attractive.

  • For example, Manufacturing is tough to justify, as the capital investment is significant, the likelihood of finding other capital sources is remote and the necessity of leverage is likely if the business grows. Likewise, the exit multiples are generally based on historical earnings power and don’t command hefty multiples.
  • Conversely, Digital Media has many of the attributes SFOs find attractive for angel investing. Here’s some of what drives leaders like Facebook and Groupon:
  • They sprout from vibrant eco-systems that help solve the “cold start” problem and give quick scale without huge capital requirements.
  • They leverage the power of the social network and the mobile phenomena that symbiotically drive adoption and always-on usage.
  • They enjoy lower development costs as the recession and web 2.0 has enabled developers to launch “minimally viable products” for a fraction of the cost of many launches from even five years ago.
  • Likewise, go-to-market costs are dramatically lower than five years ago, a result of the leverage of the global affect of social and mobile media.
  • Younger entrepreneurs are starting many of these businesses, bypassing the carrying costs of their more established brethren. “Ramen noodles and peanut butter” have a certain appeal for first time entrepreneurs unburdened with mortgages, tuitions and families to support.
  • Digital media businesses typically have global potential for an audience from day one, without the costs of setting up operations in multiple time zones. This is especially true with mobile applications and solutions.
  • The jumps from Angel valuations to Series A and even exits are significant for those enterprises that execute well.

Factors like these have generated a significant uptick in interest in digital media companies, but consider a few more facts. Those that succeed usually do so dramatically; those that don’t die in equally dramatic fashion. But, because of the dynamics in the market, one success in the portfolio should pay for more than a handful of total failures, and still leave plenty of return.

Downside of all this is: it’s no secret. Plenty of guys coming to compete in this market. Game on.

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