About the author.
Over the last 8 years, I’ve been an active executive or founder (working full-time on a startup) and an active angel investor (investing in about one company per month). I’ve done pretty well: I’ve invested in unicorns and been part of successful startups, but I don’t think my story is all that unique. I’m one of the many people that started doing something odd in the last decade: investing in startups way earlier in my career than would historically have been possible and becoming what is somewhat regularly (now) called an “operator angel.”
What’s an Operator Angel?
It’s hard to describe the thousands of operator angels with generalities that apply to all of us, but there are a few common traits:
We generally have friendlier and less structured relationships with founders, chiefly because we’re still in the trenches working on our startups while we’re investing and are at a more similar career stage to the founders starting new companies.
Founders look to us for more actionable and relevant advice on dealing with challenges, because we’ve often seen the same issues recently in our own companies.
We are more likely to invest in companies early because we know the people starting these companies well (they are often our friends and peers) and we can be quicker to spot important emerging trends.
We make independent decisions and often work without partners (or in very tight / very small partnerships).
Because of these facts, we’ve become an increasingly large part of the early-stage funding that goes into new companies. And because it keeps getting easier to become one, a larger and more diverse group of people become Operator Angels every year. I expect this trend will continue for the foreseeable future.
When compared to traditional VCs or Angel Investors; we have much less capital, we spend less time on investing, we are more nimble, and there are way more of us. Except for one notable exception (similar dynamics play out differently in cryptocurrency, which I will not address in this note), Operator Angels contribute to an evolution of the startup financing landscape, but not a revolution or disruption of venture capital — many of us are even supported by VC firms, with them giving us capital to invest for them as Scouts or LPs.
Operator Angels create increased experimentation and uncertainty. As a general rule, the existence of Operator Angels introduces more variance into the startup financing landscape. We are a bit like free radicals in the venture ecosystem — more experimental and far less predictable or stable than traditional investors.
This has extremely positive effects, namely increasing the type of investors and options available to founders as they build their companies.
It also creates more uncertainty. It’s harder to model/predict our behavior. Individual operator angels may start and stop investing, switch between active and passive investing, try new experiments frequently, and have wide ranges on our average check size or focus areas.
The history that created Operator Angels.
The modern rise of Operator Angels has played out over the last decade or so. It started in 2009/2010 with the founding of AngelList and the start of the Sequoia scout program. Over the next few years, it became far easier to get access to small amounts of capital to invest in startups, which enabled hundreds of people to start angel investing earlier in their careers, often when they didn’t have much personal capital to invest.
In 2012/2013, the forces creating Operator Angels became mature enough that we started seeing a Cambrian explosion of small, independent, early-stage investors. Many different factors enabled this:
the IPOs of Facebook and others (and the growth of bitcoin) created liquidity for hundreds of new angels
the explosion in the number of unicorns created a much bigger interest in investing in startups
the growth of YC created more startup investment opportunities
other VCs started copying Sequoia’s scout program
AngelList launched syndicates
AngelList launched Spearhead (related programs like First Round’s Angel Track launched around this time as well)
Taken together, this all led to a massive increase in new investors who were less proven, less minted in their careers, less wealthy, less experienced as investors, and more hungry to succeed. This created a competitive early-stage investing environment as these new investors started trying to get into great deals and make a name for themselves.
The impact of Operator Angels
These new investors were much more independent than traditional investors, but much less powerful. They were able to make investment decisions independently, and there was a net increase in “check-writing authority.” Because new investors are generally bullish, and these investors had sole authority to make decisions, a larger number of founders and startups were able to raise money. But these new investors didn’t usually have enough capital to fund a company alone, and many watched some of their early investments struggle to raise enough and ultimately fail as companies.
Quickly, these investors learned that they had to work collaboratively with other operator angels and venture funds — and that they had to invest in companies that could attract other investors very quickly. That narrowed the criteria on what looked like an “investable” opportunity, and the demand for hot companies went through the roof, while the demand for the average startup saw a much more modest increase in demand. Both the speed and valuations of well-liked early-stage companies were drastically altered. Company founders experienced a much wider variance in fundraising. Popular companies with little-to-no traction raised early rounds in days at valuations 2-3x higher than they would have gotten 2 years earlier. Middle-of-the-pack companies struggled for months to get any investor attention at all.
Because of these dynamics, the limited capital these new investors have, and the risk of “going first” many new investors decided consciously or subconsciously not to lead. Most new investors instead fought to follow after signal has been created. This further amplified the dynamic of variance in the fundraising experience. None of this was new, these dynamics have always been present in venture funding, but the magnitude changed as more people and more capital flowed into the startup fundraising ecosystem.
Traditional venture firms found themselves dealing with annoying problems — faster-moving deals, less time to do due diligence on new investments, and much higher valuations — but they also had companies achieving much larger outcomes and they had much more demand from LPs looking to invest in this asset class. Given these new dynamics, most of the name brand early-stage firms raised larger funds and migrated to later-stages of investing, further opening the early-stage market to new entrants.
Please note that I’ve said “some” or “most” several times above. I’m painting with a broad brush here. Many operator angels lead. Many firms stayed firmly in the Seed/A camp. Please don’t take offense if I’m painting a picture that you feel like doesn’t capture your experience directly – I’m generalizing a broad trend.
Early operator angels (and others) turned into emerging managers. Given the opportunity appearing at the early stage, successful early operator angels and early-career VCs seized this opportunity to raise dedicated seed funds and become full-time investors. They ceased being operator angels or principals, raised a small fund to prove themselves, and became professional investors and emerging fund managers. Some folks have taken to calling these emerging winners “Solo Capitalists.”
This bifurcated the market – with fewer late-stage funds getting a larger percentage of overall dollars allocated to venture capital, but many more small early-stage funds being created. In 2014, Scott Kupor called this the “death of the middle” and noted that this was similar to what happened in many other mature service industries.
This is how we got so much more novelty and experimentation in venture capital models, even as power solidified and accrued to a smaller number of firms. The number of operating angels and emerging managers grew significantly, but large amounts of power accrued to the people with network centrality and access to lots of capital (famous venture firms, AngelList, etc.). This is why the oft-predicted “total disruption of venture capital” never really materialized, despite the fact that the rate of new firm creation and new experimental models continued to grow quickly.
Where are we now and where will this all go? The venture capital industry has always operated like a federation of independent firms. Venture firms have long had to compete with each other in any given fundraising round and then switch to co-operating with each other across multiple rounds. That created a complex and evolving political landscape with changing alliances and dynamics. Now, with all these new individuals and small firms, many more independent investors are jockeying for position and the rate of change in dynamics between investors is more rapid than ever.
The most powerful firms, those at the center of the network, continue to accrue more power. As they get more powerful, they share this power with their allies and diffuse more agency and decision making to independent actors outside of their firms. You see this happening today as VCs regularly back new seed-stage funds, angel funds, and scouts. This continually creates more opportunities for investors that look different than historical norms to get started in this industry, but it also runs the risk of creating a feudal system with a few firms exerting pressure on smaller investors that functionally act as their vassals.
That risk, at least today, feels fairly inert. As long as a reasonably large number of powerful entities exist, and remain return-motivated, than the Operator Angels should have significantly higher degrees of freedom to prove the value of their approach. That is the case today, with lots of powerful players supporting new investors (the networks like AngelList, the large funds, and institutional LPs). The amount of competition at this level should keep the ecosystem stable as it creates more operator angels and emerging managers. That means we’ll get an increased diversity of investors and a more successful industry writ large. As an important caveat: if these powerful players stop competing with each other, or where most of them systemically exclude groups of people or types of opportunities, then intervention (either communal or regulatory) may be required. You see this happening today with more venture firms waking up to racial inclusion because of communal social pressure coming from founders, employees, journalists and other people in the industry.
This all leads to the conclusion that Operator Angels are (and will increasingly become) the primary engines of diversity, experimentation, and change in our industry. As they work to stand out from a crowded field, they will be naturally forced to look for opportunities to differentiate from their peers. If they’re able to show success, many will raise funds and become emerging managers. During that journey, they will prove new models of investing, feed promising new investments and new ideas to late-stage firms, all while increasing their value and bargaining power as they build out their network and relationships with the powerful firms. The successful folks here will become economically and reputationally wealthy.
In the vast majority of cases, I believe that Operator Angels will be blocked from accruing enough power to become a new, powerful entity (e.g. growing into a large, late-stage fund). They will likely stabilize at lower fund sizes (~$100m or less), which aligns their economic interest to carry over fees. This likely makes these investors, when analyzed as a group, more efficient (in terms of value created for society) and better actors.
That’s not to say that there will be no new entrants into the powerful, late-stage fund ecosystem, but it will be much harder to break in. Entrepreneurs may build new networks (companies like Carta and OnDeck) that ultimately accrue a similar amount of power that a big VC fund would have as a side effect of their business model. And of course, if emerging managers seed a generational company (the next google) using a differentiated investment approach, the return from that investment would be large enough that the firm can accrue enough power and capital to break-out — especially if they retain pro-rata rights and opportunity funds as points of leverage (we’ve seen the potential for this in vehicles like Chris Sacca’s first fund).
That brings us close to the end of this essay. Unfortunately, there’s no real call to action here, this essay is intended purely to serve as a primer to the landscape we find ourselves in today. I hope it’s convinced some of you that Operator Angels are important to our industry’s future and worth understanding and supporting.
In the future, I plan to share more about the nitty-gritty of who these folks are, which breakout models they are trying (and which are working), which new players are accruing centrality/power, how you can become an operator angel or support them, if you should do so, and how you can profit from that work.