Monday, April 17, 2006

Investor Value-Add: Angels vs. VCs

Matt Marshall wrote a post on SiliconBeat about Kaboodle raising $3.55M in financing from 10 angel investors. (Jeff Clavier, one of Kaboodle's angels, also writes about the financing here) Mr. Marshall suggests that Kaboodle’s financing may signal a new trend of startups seeking larger angel rounds because a group of angels may provide more value-add to the startup than any one VC can.

I’ve heard this topic debated both ways.

The first argument says that VCs are dumb and arrogant herding creatures that foolishly invest in fads and who battle and fire the founders rather than really adding value. The second argument goes that if the VCs won’t invest or if you want a higher valuation, its an angel deal, which clearly implies that angels are less savy investors. Ad hoc examples can be found to support either argument, however, on the whole most angels and VCs are smart and successful people and the barriers to entering venture firms as a GP or becoming and accredited investor are fairly high.

At this point, I should add the disclaimer that I am a first time entrepreneur who has never seen a company from initial investment to liquidity event. However, this is a subject that I’ve spent an awful lot of time thinking and reading about so the rest of this post is based heavily on logic and what I’ve read but only lightly on my own experiences.

I believe that the value-add of angels vs. VCs is totally dependent on the individuals involved but on average VCs will add more value than angels.

As a general rule the VC value-add should be more consistent and is also likely to be more valuable than any individual angel because they are professional investors and their job is to facilitate the growth of their investments. Furthermore, the VC has the partnership (at least in theory) paying attention to what they are doing, which acts as a check to provide a baseline for their behavior. That said there are VCs who are known as good board members and others who are known as not so good board members. The more famous the VC, the more doors s/he can open but the less time you will likely get with him/her. It’s a trade off and the value will depend on the needs of the startup, ie, operational help vs. introductions. For example, a first timer at an early-stage firm will probably need more hands-on operational help from their investors, while a serial entrepreneur at a later-stage company is likely to be predominantly seeking investors for their connections.

As for angels, there are some very famous investors that practically build the company themselves. However, there are no institutions behind angels’ to provide checks on their behavior and some will have stubbornly held ideas about the way things work that come from left field. Also, many angels are senior executives at large corporations with demanding work schedules. While these angels may have all of the knowledge and connections necessary, they may not actually have any time to help their startup investments. Lastly, most angels don’t have access to the deal flow, nor the experience working with startups that VCs do. Some counter examples clearly can be found but on average a VC will look at hundreds to thousands of deals per year. I don’t think its possible for even the most dedicated angels to have access or time to review that many opportunities. Lastly, while more angels does mean more hands helping, it also means more mouths to feed. I highly doubt that all 10 of Kaboodle’s angels plan to take an active role in the company because managing them would drain all of the founders’ time.

So in conclusion, it really boils down to the individuals that the founder is working. Rather than just seeking capital (if one is lucky enough to be in the position of having any preference) founders should seek investors who’s opinions they respect, value and want to have about the business moving forward. If you don’t value the other person’s opinion, why would you want to give them levers of control over your business and lock yourself into a position of having to listen to them at every board meeting? That said, I suspect that as with all relationships, money changes everything and how two people get along when closing a first round will not necessarily be a good indicator of how well they work together when the shit hits the fan. I guess this just hammers home the point that it’s always important to do your due-diligence on the people you work with vigorously no matter what one’s first impressions are.

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