By Carl Grant, Senior Vice President of Business Development at Cooley LLP

In a previous post I discussed the current state of the venture capital (VC) market in regard to two very disparate reports published just days apart in the Wall Street Journal.

In that post, I agreed with one of the article’s assertions that the VC market is strong, especially in the national capital region. I touched on how the rise of some VC firms, and demise of others, is just part of the natural rhythm of the market. I also summed up the VC ecosystem, where up-and-coming funds provide the smaller investments necessary for start-ups and emerging growth companies that larger VC firms wouldn’t see enough return on to justify their time and investment.

Well, according to a recent article by TechCrunch founder, Michael Arrington, there’s new competition for these small VC funds when it comes to investing in early-stage emerging growth companies. This new competition is coming from angel investors.

Angel investors have long been a part of the VC ecosystem, often investing small amounts of capital early on in a company’s growth prior to handing them off to VC funds when larger investments and marketing pushes are necessary. However, Arrington claims these angel investors are becoming a disruptive force as Internet companies based on open source software and with next to no development and start-up costs have proliferated.

With companies needing less initial funding to get off the ground, angels are stepping up and providing the capital that start-ups would previously have turned to VC funds for. The end result are more companies avoiding VC funding, or looking for VC investment further along in the process when the return is no longer as great.

What’s more, Arrington claims that these angel investors, including the likes of Dave McClure, Chris Dixon, Jason Calacanis, Mike Maples, Chris Sacca, Aydin Senkut and Jeff Clavier, are having a potentially negative impact on the VC market, and possibly the larger economy as well.

Venture capitalists are claiming that the ability to get funding from angel investors in hopes of starting a company that will be acquired by an organization like Google has led many entrepreneurs to aim low and not swing for the fences.

The ability to get rich quick by building a company with funds from an angel investor and then seeking an acquisition is keeping start-ups from trying to innovate and develop something larger. These companies looking to be acquired by Google or Microsoft aren’t aspiring to be the next Google or Microsoft, and that’s potentially robbing the economy of another large company and employer.

What are your thoughts on the “Cold War” Arrington is painting between angels and VCs? Are angel investors helping spur on innovation and the economy or a disruptive force? Drop us a comment and let us know your thoughts.

Disclaimer: The postings on this site are my own and do not represent Cooley LLP’s positions, strategies or opinions.

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