By James Jeffrey
University of Texas at Austin students Eric Katerman and Rene Pinnell thought they had come up with a dynamically engaging iPhone app that would both stand out from and involve the crowd using Google maps to direct friends to spontaneous social gatherings. They called it “Hurricane Party.”
Apple certified the application in August. Now the young entrepreneurs needed a business plan and money.
During the 1990s tech boom, they might have pitched to venture capital firms or tried to find an angel—someone to sink personal money and expertise into the venture. In today’s slack economy, venture capitalists are funding fewer projects and avoiding startups in favor of more seasoned companies. Funding from angels is down, too, but finding potential angels is easier these days because of changes in how angels do business. Incubators stand ready to develop good ideas, and angels have formed accessible investment groups to fund them.
Author and angel investor Naval Ravikant [startupboy.com] recently said in an Austin speech that angels have become much more important in funding startups. The venture capitalist model has been “unbundled,” he said, with incubators providing guidance and angels providing money.
The team behind the Hurricane Party iPhone application relied on "angel investments" for funding. Photo courtesy René Pinnell
Ravikant’s speech came in September at the annual “Demo Day” held by the Capital Factory, an Austin-based incubator that provides $20,000 in funding and the help of a seasoned entrepreneur-mentor. According to the National Business Incubator Association [nbia.org], its members include 1,900 incubators in 60 countries, 75 percent of them in the U.S.
Hurricane Party found the help it needed at Capital Factory. The incubator’s Demo Day showcased five startups—including Hurricane Party—that completed Capital Factory’s 10-week development program. The give made their pitches to angels in the audience. Their presentations were also broadcast on the Web.
Katerman and Pinnell explained that Hurricane Party was born of the idea that like hurricanes in nature, successful social events depend on the confluence of key factors. They felt the concept would work as an iPhone application, providing a way to broadcast how and where you are going to party.
Anderson Price, a UT business graduate student who works at Hurricane Party, described the experience of bumping into a friend, then going for a drink leading to a “spontaneous crazy night.” That is hard to plan and recreate, so “our goal is to allow people to experience that more often,” he said.
Hurricane Party lets you create spontaneous events and broadcast them to friends. “We consider ourselves the bridge between social networking and actually being social,” Price said.
There’s a business angle, too. Using Hurricane Party, people can qualify for discounts by holding their gatherings at local bars, restaurants and clubs. Businesses can also initiate their own gatherings in the hope of drawing business. Locations, along with explanatory text, show up on a Google map on the iPhone screen.
The app has similarities to Foursquare and Gowalla, which indicate your location, but the makers of Hurricane Party are looking to go further: “We are all about broadcasting intent, rather than locality,” Price said. “The app is itself a call to action through the offers, but it also lets each user project that call out to their friends. Rather than broadcast past experiences, we are about creating new ones.”
Ravikant was impressed by what he saw and decided to put Hurricane Party on his Web-based Angel List website, which details new companies he feels have potential. Competition for funding is tough, but websites like Ravikant’s have made it easier to get a hearing with angels. According to the Angel Capital Association, the number of angel groups had risen to around 300 in 2009 from about 100 in 1999. The ACA has 146 member groups in 49 states.
At the same time, angels invested $8.5 billion in the first half of 2010, down 6.5 percent from the first half of 2009, according to the Center for Venture Research at the University of New Hampshire. “These data indicate that while angels remain committed to this investment class they do so with a cautious approach to investing,” the center said in its half-year report.
According to Ravikant, angels now dominate early-stage consumer Web investing, outpacing venture capitalists. The dominance of angels in startups is probably a permanent change, he said.
The shift from venture capitalism to angel investing, which has benefited companies such as Hurricane Party, was a reaction to the venture industry’s being slow to adapt to changes instigated by the Internet, which is where the angels have become “essentially startups competing in the market to finance entrepreneurs,” Ravikant said in his speech.
The change has happened in the last 18 months “rather quickly, under our noses,” Ravikant said. Entrepreneurs have more power over their futures now, he said, “the balance of power having shifted from investors to entrepreneurs.”
“The 18-year-old kid who walks through the door and has coffee stains on his T-shirt well that might be the next Mark Zuckerberg [founder of Facebook],” so you have to take everyone seriously, Ravikant said.
Meanwhile, Hurricane Party has verbal commitments from angels for about half of its $250,000 funding goal, Katerman says, and is proceeding with its business plan.