Of Boston’s Angel Tsunami and the Future of Venture—XSITE Dives Deep and Gets Personal

Boston’s ongoing flurry of angel investor activity and programs for seed-stage startups arguably started in January 2009, when that paragon of seed-stage incubators, Y Combinator, announced it was pulling out of town for good and ending its Cambridge, MA-based summer program. As I noted last fall, the void left by Y Combo seemed to attract an influx of new incubators, boot camps, competitions, mentorship programs, and more for startups and would-be entrepreneurs—TechStars, Dogpatch Labs, the Venture Café, Mass Medical Angels, [email protected], the MassChallenge, 12X12, Betaspring, to name more than a few.

The wave of such programs didn’t end last fall. In fact, it has gotten so strong that well-known local angel investor John Landry has proclaimed it an “angel tsunami.” A big reason for the trend, says Landry, is a (forgive the pun) sea change in how companies, most notably software companies, operate. The cloud and various Web-based collaboration systems enable companies to share information with developers working out of their homes, he says, while the Internet makes marketing and direct sales easy.

“The entire industry that was built on a model of sales offices and distributors and million-dollar deals has completely revolutionized itself into a much more low-cost and direct-to-the-customer model,” Landry says. Instead of needing $5 million in venture financing to get going, companies often need a fraction of that amount today. “Therefore, the venture guys do not have a model that works for this type of industry any more,” he says. “The slack, if you will, has been filled by angel investors, angel groups in particular, and now microcap funds.”

Landry himself is part of this change (one of his angel investments is Xconomy). So I’m extremely pleased that he will be leading a plenary panel at XSITE 2010 (the Xconomy Summit on Innovation, Technology, and Entrepreneurship), which will take place next Thursday, June 17, at Babson College. The session, aptly called “Angel Tsunami,” will examine the forces shaping the new angel movement, the various programs arising, and the ramifications for the region. Joining John will be a great group of individuals representing various aspects of angel and seed-stage investing: John Harthorne, Founder and CEO of MassChallenge, the $1 million startup competition that kicked off last month; John Prendergast, an angel investor himself, but also a successful entrepreneur who just rode the tsunami to fund his new, still somewhat stealthy new company, Blueleaf; and James Geshwiler, a managing director of CommonAngels.

While the surge in angel activity has been praised as all-good for entrepreneurs and innovation, Landry raises a warning flag. “As more and more of this happens, I personally get this kind of queasy feeling,” he says. He’s seen something like this before, during the bubble, when an over-capitalized venture market chased after “the weirdest deals possible.” Landry says he plans to raise this with his panel by asking: “Are the deals good enough, and the business plans good enough, to support that potential capital glut?” And, he predicts with some relish, “that’ll get people angry.”

But the morning angel tsunami panel is only one half of XSITE’s investigation into the startup investment climate. In the afternoon, we will hold another plenary session on “Venture is Dead? Long Live Venture.”

Many forces are shaping venture today—from efforts in Washington to change the tax structure affecting venture partners’ income to the industry’s generally poor financial performance over the past decade to the forces underpinning the surge in angel activity (see panel one). Consequently, many venture firms have decided not to raise new funds—and others have dramatically scaled back the size of funds they are seeking to form.

But those who think venture is past its prime, or even in its death throes, should take note. The industry is itself innovating rapidly. Exploring the shape of that transformation will be a big part of our second panel. To lead it, we are extremely fortunate to have one of the world’s greatest experts on venture capital, renowned Harvard Business School professor of business administration William Sahlman. He will be joined by a quartet of VCs from around Xconomy’s network. They include: Dana Callow, a leading figure in Boston venture capital and managing general partner of Boston Millennia Partners; Lucy McQuilken, a director with Intel Capital; Steve Hall, managing director of Vulcan Capital in Seattle; and Marc Weiser, co-founder and managing director of RPM Ventures, an Ann Arbor, MI, firm that specializes in investments out of Big Ten engineering schools. Together, they will give us a great picture of venture around the country—at small funds, large funds, and corporate venture arms.

Sahlman agrees with his fellow moderator Landry about the low cost of starting many businesses today, which he says “makes that territory ripe for angels and challenging for big venture firms.” He cites other challenges as well. “At the other end of the spectrum, the capital requirements [are larger] for cleantech investments, particularly after the early stage. [And] every venture investor will find the absence of an IPO market has a negative impact on returns. In general, continued poor returns will force many firms out of the business.”

All of which gives him a lot to talk about with his guests—and, hopefully, you the audience. And these two panels are just a small part of an incredible day of innovation and networking featuring keynote talks by Peter Diamandis, founder of the X Prize Foundation, Alkermes CEO Richard Pops, Rod Brooks of iRobot and Heartland Robotics, Bob Metcalfe of Polaris Venture Partners, and Eric Giler of WiTricity, along with presentations by roughly 30 of the hottest and most interesting startups around.

You can see the whole lineup and register here. I hope to see you at XSITE.

Bob is Xconomy's founder and chairman. You can email him at [email protected] Follow @bbuderi

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