What did the Angel Investors say to the Venture Capital firm? “We’re not so different you and I.” And you know, something. It’s not at all far from the truth.
Angel investors and VC’s are essentially, looking for one thing – a return on their investments. But do the similarities end there? Some might argue, yes, while others will disagree, pointing to the necessary change in strategy when a company needs to go mass market. We’ll get to that part later. Overall, however, my view is that although there are some big differences, both of these investor types are motivated by alternative forces than simply money.
A long intro of sorts
Before I get to the juicy part though, I want to talk about the notorious 3Fs (yes, friends, family, and, most notably, fools). Before knocking on the door of any angel investor or VC, entrepreneurs have to fund their new business out of their very own resources. And, thankfully, most of them do so.
Once the founders’ resources are about to run out, they naturally take their chances with their closest contacts — the 3Fs that is. Obviously one’s friends and family basically invest in the person. It is not uncommon for them to have absolutely no idea what the business is about (by the way, the purpose of this post is not to find out what drives the fools).
However, unless one comes from a very wealthy family, the 3Fs’ resources are likely to provide just a short runway for the new business. This basically means that those funds will not suffice for reaching important milestones.
So, what’s next?
Increasing numbers of (very) early stage funds, like Kima Ventures, and numerous startup accelerators (Y-Combinator, Plug and Play Tech Center and countless others) continue to crop up. However, the first choice for entrepreneurs still tends to be receiving an early stage investment round from angel investors.
What is an angel investor? Most of the time it’s an entrepreneur or professional who made their fortune in a specific industry. And, for a number of different reasons they like investing in early stage businesses. The aim is not to lose money of course, but more often than not, making profits is not the main driver for their investments. Rather, it’s the need to stay active and to give something back – without suffering the burden of managing a business on a daily basis.
In short, angel investors are like a grandparent for a startup. They provide some resources (including treats), and are always there to give their valuable experience and advice with the best of intentions.
Venture Capital Investors
If a business makes good progress, then in most cases the angel financing will not suffice. Deeper pockets are usually needed to make the expected milestones. And that means VC financing. So, what is a VC fund? Basically it is a team of professionals who make investment decisions for a certain amount of money that has been entrusted to them by investors. This, for a closed period of time — often ten years or so.
There’s a saying in Thailand for when something is similar, but slightly different. The classic “Same-same but different.” And this kind of sums up the relationship between angel investors and VC investors. Here are some of the key differences:
- The angel investor invests their own money. VC investors are professionals investing other people’s money.
- An angel investor can wait as long as necessary. A VC investor has to generate returns (or, to write-off) in a bounded period of time.
- For an angel investor, the added value (advice, connections, intelligence, etc) is the primary offering and money is secondary. While most of the VC investors on the other hand claim that they provide significant added value (something that many actually try to do; and few actually efficiently do), in essence, provision of capital is far their most important offering.
A critical moment
Imagine then, the point when an angel-backed company is ready to raise a round of VC financing. At this moment it’s very important for the angel investor to judge whether their perception of the optimum strategy for the company is the same. Or, at least something close to the perception of the VC fund. If this is not the case, then it might be in the best interests of both parties that the angel investor’s stake is bought out by the VC fund.
If however, the existing angel investor shares the same perception as the incoming VC fund on the strategy of the investee, then a different course is needed. It’s then in everyone’s best interest to have the angel investor stay on the equity table of the company. Post-investment, both parties (meaning the angel investor and the VC fund) will better respond to the aspects which they are good at handling:
- The angel investor should remain active with the company, respecting their primary value as described above, and,
- The VC investor should provide the financial resources necessary for the business to flourish.
Bottom line…just be yourself
To sum up, both the angel and the VC investors need to focus on their most valuable offering. Which for the angels means advice/connections/added value services, and for the VCs means financial resources.
In this way, there’s minimal friction and everybody’s happy. Not only that, it creates optimal conditions for a very smooth cooperation to the benefit of all parties. Always bearing in mind the absolute constraint that they share the same views for the strategy of the business.
If, on the other hand, they have conflicting strategic views, then it’s probably best for everyone if the later-stage investors buy-out the earlier-stage ones.
Put simply, all that angel investors have to do, and vice-versa for their VC counterparts, is “just be yourself”.