C HAPTER 5: B RIDGING T HE G AP : H OW T HE P RUDENT A NGEL C AN S URVIVE T HE D OWN -R OUNDS
This tough environment intensified the inherent conflicts between angels and VCs. While many angels pointed to VCs as the source of their problems, the truth is that both angels and VCs found the investment climate trying, albeit for somewhat different reasons. However, with a little perspective, angels can understand the venture capital process better and thereby improve their own positions.
The prudent angel knows and understands his competitors and his allies. VCs AND ANGELS ARE BOTH EARLY-STAGE INVESTORS
The earliest investors frequently include the company’s founders, the management team, friends and family, and angel investors. Some venture capitalists may enter at this early stage, though this is unusual. It is often a mixed crowd that supports an early-stage venture, but what these investors share is a powerful interest in growing the company. These people are investing in the future, based on what they know about the talents of the management team and its ideas and products. In contrast, later investors generally have a better sense of the business’ prospects, and are investing on the basis of visible results rather than personal knowledge, instinct or experience. These later investors, who are almost exclusively venture capitalists, are interested in making deals that will bring a good return within a specific time frame. While some VCs look at the bigger picture and are comfortable with long-term investments, many prefer to earn a healthy return with a quick turnaround. Liquidity is a key consideration, as venture capital funds must generate a steady return for their investors. This need for relatively quick returns on investment often push VCs to sell an equity position sooner rather than later. In so doing, they may leave early investors and managers with nothing but bitter experience. Naturally, this is a key source of tension between angels and VCs. However, since this is a well-known element of early-stage investing, it is sensible to plan for the eventual entry of secondary investors. The prudent angel will learn as much as possible about the role and motivations of VCs, and will also attend closely to the start-up’s stage of growth and need for new capital injections. BEGIN WITH A REALISTIC APPRAISAL OF THE INVESTMENT Entrepreneurs are enthusiasts by nature and will occasionally woo investors with grandiose predictions of how much revenue they can generate over a short period of time. It has not been unheard of for start-ups to boast expected revenues of $5 million or $10 million or more. And yet, a simple review of available statistics quickly reveals how inflated such projections can be. A recent survey ranking the top 100 independent software companies in Canada in 2001 (Branham 100, www.branham.com) noted the following:
• Only 63 of the 100 had revenues of over $10 million a year. • The companies had, on average, been in business for 15 years. • The 100 th ranked company on the list had revenues of only $2.8 million.
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