The angels of Silicon Valley

Plug and Play in Moscow, Russia.

Tess Vigeland: Now we're going to talk about angels. Not the ones with wings, or the ones that wear red uniforms and play in Anaheim. No, this kind flits around Silicon Valley showering money on startups: Angel investors.

These aren't big venture capitalists who spend millions of dollars of other people's money. Angels fund the very early stages of startups, looking to get in early on the next big thing. A lot of angel money ends up going down the drain.

But as Marketplace's Queena Kim reports, that's the price of innovation.


Queena Kim: Here’s a word you hear a lot lately in Silicon Valley. “Frothy.” Frothy’s what happens when money chases every startup out there.

Peter Wendell: There’s a lot of lemmings being funded.

Peter Wendell teaches entrepreneurship at Stanford Business School.

Wendell: Look in Groupon’s space, for example, there’s 50 or 60 companies that do essentially what Groupon does that have gotten at least angel funding.

Wendell says that angel money can be hard to track, but...

Wendell: Last year, somewhere around 60,000 angel investors probably invested somewhere around $22-$23 billion.

I saw some of this money in action recently at the Plug and Play Expo.

Entrepreneur: Thank you all and I’m the co-founder and CEO of Music Prodigy.

The Expo takes place in a dark, auditorium inside a non-descript office park in Sunnyvale. Thirty entrepreneurs from around the world pay $2,000 each for a chance to pitch their ideas to angels and venture capitalists.

Entrepreneur: So we are presenting the coolest music discovery interface out there.

And investors were trying to figure out if any of these guys -- and they were all guys -- were worth betting on. It’s "American Idol," meets Vegas, meets PowerPoint.

Entrepreneur: What if drivers could get money from data coming from their car? Now we’re looking for $500,000 of an angel round of your money.

Plug and Play puts on four Expos a year, and they’re pretty high-profile. But with so many angel investors hungry to fund startups, these types of match-making parties are popping up all over the Bay Area.

David Koehn: I look at 100 deals a week probably.

David Koehn is a member of Sand Hill Angels, a group of about 60 investors, mostly tech professionals. I met him at the Expo.

Koehn: I was just at Pitch Crawl last night where I got pitched by 20 different startups, and of course, I’m here again.

It doesn’t take much to be an angel these days because funding a startup is cheaper than ever. In the last tech boom, it took at least a million dollars to start-up a tech company. Today, it takes a few hundred thousand -- startups can plug into cheap or free web services instead of creating everything from scratch. Early in the cycle, the flood of investor money is essential. Innovation requires lots of failure and that requires lots of money. But at some point, all that money stops driving big ideas and starts driving up costs.

Kevin Hartz: The price of all these natural resources of the startup, engineering talent, of sales talent of service and so on rise greatly.

Kevin Hartz is an angel investor who was in Paypal and Pinterest, but he moved to the sidelines about a year ago. Veteran angels like Hartz believe the real winners of a tech boom emerge when the silly money dries up.

Hartz: Pay Pal, Google, Apple, Netflix, once all the Pets.coms and so-ons had gone out of business they were given the ability to build great long standing businesses.

Back at the Plug and Play Expo, after first round of pitches ends, investors pour into a large sunlit room where entrepreneurs and their teams, show off their mobile apps and web pages.

Entrepreneur: Products available on iPad, iPod and iPad Touch.

It’s a feeding frenzy -- long lines are forming at tables, and angel investor Tom Chui says a valuable lesson is playing out right in front of our eyes.

Tom Chui: You see a lot of rookie angels out there who just made their first million and they got excited on every single idea.

And it’s just a matter of time those ideas fail, the froth dries up and bubble -- well you know, what the bubble does.

In San Francisco, I’m Queena Kim for Marketplace

About the author

Queena Kim covers technology for Marketplace. She lives in the Bay Area.

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