Wednesday, October 28, 2009

Myths about Angel and Venture Capital Investors

Most entrepreneurs have been exposed to myths about angel investors and venture capital investors. Let me dispell some of these myths:
  • Myth - Venture capital investors invest in technology, not the people. Wrong. Venture capital investors invest in the management team far ahead of the technology that is the basis for the company. Their experience is that a highly qualified management team will engage the market, react and change the product or service the company offers as needed to succeed. Since most companies don't succeed with the first version of its product or service, a management team that can assess the market and make changes will more likely succeed.
  • Myth - Angel investor groups act quickly when presented with an investment opportunity. Wrong. There is a trend toward angels forming groups to evaluate investment opportunities, select from the many opportunities they see, negotiate the terms of investment and make the investment. However, in most groups, this takes an inordinate length of time, especially if the angel group does not have a paid managing director to keep things moving. Most angel groups don't have a paid managing director. The reasons for the slow moving process is that the group often only meets once per month, a single naysayer in the group often causes the process to stop until others in the group override the negative opinion and the group has a preferred set of terms that may not be acceptable to advanced entrepreneurs, slowing the process down to get the group to accept other terms. It's not unusual for a company to make a presentation to an angel group one month, come back the next month to answer questions, begin negotiations lasting 30 days, then waiting another 30 days for the legal documentation to be completed before a closing occurs. Is it any wonder advanced entrepreneurs don't want to deal with angel investor groups? On the other hand, early stage entrepreneurs often have no choice but to raise capital from angel groups and don't realize how long the process will take.
  • Myth - Venture capital investors want to control your company from the start. Wrong. Professional venture capital firms do not want to take control of companies when they make their first investment. First, they aren't staffed to exercise that degree of control over the companies. Second, if they have to have control in order to make the investment, they have concluded the management team is incapable of running the company which should lead to the decision not to invest. On the other hand, there are individuals and groups out there who hold themselves out as venture capitalists, but who will only invest if they obtain control. These individuals and groups are not true venture capitalists and advanced entrepreneurs should usually avoid them.
  • Myth - Angel investors invest to make money. Usually wrong. Most angel investors are successful entrepreneurs who have cashed out. They invest to "be in the hunt" or to join with other angels who they want to be associated with or to have the opportunity to watch an entrepreneurial company go through the growing pains and, hopefully, succeed. Since, by definition, angel investors are wealthy, they don't have to make highly risky investments to increase their net worth. But, they HATE to lose money. Yet, angels will lose their entire investment in most of the investments they make in young companies. How do angel investors reconcile the risk-taking with hating to lose money? It's a mystery.
  • Myth - Angel investors bring good advice to the table for the entrepreneur in addition to money. Usually wrong. The best thing an angel investor can bring to the table other than money is relationships, i.e relationships with potential investors, relationships with investment bankers, relationships with potentially large customers, relationships with law firms, accounting firms and banks, etc.

I've run out of time today. I'll continue this another day.

3 comments:

  1. Myth - Venture capital investors invest in technology, not the people. Wrong. CORRECT

    Myth - Angel investor groups act quickly when presented with an investment opportunity. Wrong.
    CORRECT

    Myth - Venture capital investors want to control your company from the start. Wrong.
    CORRECT

    Myth - Angel investors invest to make money. Usually wrong.
    NOT CORRECT. Angels really do invest to make money, although it's never the only thing. But despite the name, they're not charities. if the company won't make money, they won't invest.

    How do angel investors reconcile the risk taking with hating to lose money? It's a mystery.
    ABSOLUTELY CORRECT, AND THEREIN LIES THE WONDERFUL INSANITY OF ANGEL INVESTING!

    Myth - Angel investors bring good advice to the table for the entrepreneur in addition to money. Usually wrong.
    USUALLY INCORRECT. ANGELS CERTAINLY AREN"T INFALLIBLE, BUT MORE OFTEN THAN NOT, THEIR ADVICE IS WELL WORTH LISTENING TO.

    -David S. Rose
    Chairman, New York Angels

    ReplyDelete
  2. Bill:

    Good post. I saw the article in the NY Times (october 28)and wonder if one of the reasons that the amount invested by angels in the first half of 2009 dropped so sharply is that they have lots of others places to invest their money. I'm thinking of distressed investments, real estate, etc. as places that their financial advisors are presenting them with opportunities that are less risky and perhaps more lucrative. Your thoughts?

    Tom Kruczek

    ReplyDelete
  3. I just came across this insightful article while researching on "myths about investors" though I did not find the myths I was looking for. We have a technology start-up Stagirus. I often get mixed views from my friends and advisors regarding investors. Many of them rule out the possibility of getting funding simply because we do not have "rock stars" yet in our company. I face this dilemma - which comes first? Funding or the team? One of the VC I have spoken to stated that they are comfortable taking "execution risk" meaning they can help build the team. Any thoughts PLEASE!

    ReplyDelete