Wednesday, November 24, 2010

Angel Capital vs. Venture Capital

Angels and VCs are often very synergistic.

The line between venture capital and angel capital can be blurry.   I know some VCs who have invested $500,000 in an deal and I know some Angels who have invested $3,000,000. I know some small VC funds have only $10-20M and I know some angels have placed more than that.

For purposes of discussion here though, I go with Angels being smaller an VCs being larger.

There are also huge variations in the degree of sophistication and backgrounds so there are no hard and fast rules but...

Angels can often:

1 - Spend more time monitoring the investment. I like to even dole out money monthly based on milestones and performance rather than giving a huge lump sum amount up front. VCs love this detailed attention and the feeding $ in over time can often save them money. If required, the terms on the money going in sometimes need to change based on performance.

2 - Spend time coaching, training and mentoring the entrepreneurs. Many Angels are successful business people with deep experience on growing and scaling businesses. This coaching can add significantly to the value.

3 - Be more in the detail of the business. Their background in operations of a business often makes them more suitable to do the detail work.

4 - Care more about the business. For many Angels, the investment is more significant so they will watch things closer than a VC might. The same goes with personal touch. For many Angels, their investments are personal and they take things personally. I find Angels do not give up as quickly and that can add value to the VC.

VC can often:

1 - Provide more money and more follow on rounds of financing. This added cash is often needed to get the company to profitability.

2 - Provide introductions. Many VCs have deep rolodexes and respect that gets calls with key parties returned.

3 - Provide more mature views on business, exits, growth etc. VCs often think big which can inspire companies to be great.

4 - Provide due diligence. I know some angel groups like Golden Seeds do awesome due diligence but on the whole, VCs are better than Angels at it.

5 - Help in negotiation. Negotiation is much of what VCs do is negotiation so they tend to be good at it.

There are overlaps and there are synergies. Angels and VCs can be synergistic and good matches.

I know this differs from some peoples' view of early exits.


At 5:16 PM, Anonymous Dr. Leslie Roberts said...

Thanks for this post Jim; great food for thought. I posted a response on GoForth's blog and let our readers know about your post.


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