Bill Lee: Angels produce better returns than VCs

Angel investor Bill Lee on bubbles, returns and why social gaming, mobile commerce are hot sectors

Here's the second part of the interview with Bill Lee, entrepreneur-turned-angel investor. Lee has invested 30 start-ups over the course of the last 10 years. He's also a limited partner in some venture firms in the Valley. He's accelerated his own angel investments in the last few years because VC investments have been "terrible," he said, adding, "I realized I could make better returns myself."

Here are some highlights:

- Valuations are getting out of whack. "I think there's a bubble forming and it's too easy to raise money," said Lee. "I'm seeing a lot of scaling valuations... That scares me. But I guess it doesn't apply to my portfolio. Let's have this conversation in the next two years (when we'll know whether he overpaid or was a genius).

- The dollar flows into private equity is currently shaped like a barbell - a record amount of investments are going into seed-stage start-ups while significant chunks of investments are being made in later-stage funds, leaving little to be spent in the mid-stages. Some people believe there'll be a scarcity of funds in about a year for the many seed-stage start-ups. But Lee doesn't see a dearth of capital for start-ups anytime soon. He's hopeful that the newly-minted millionaires at Facebook, LinkedIn and Zynga will become sources of capital for the start-up ecosystem.

- Lee is concerned, however, that there's too much money going into seed-stage start-ups. He predicts the returns for early-stage investments will be down. He's focusing more of his efforts on later-stage deals.  

- Lee is focused on investing in mobile commerce and social gaming start-ups. "I have tremendous respect of Zynga” said Lee. "But it’s just the first-generation of social gaming,"  He's also looking at start-ups that can help people manage and organize their time.

- Out of the 30 start-ups Lee has invested in, two have failed while all have pivoted, a change in direction that he expects to see. "Companies that win, iterate the fastest," he said. Lee will invest in a person and a small niche market opportunity for a $10 million M&A exit. The start-ups don't always have to be positioned to be homeruns, though it would be nice.