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
Also, as noted above, there is a small resurgence of investor interest in early-stage companies. While not definitive enough to constitute a trend, dollars are slightly more accessible, which will help to close the angel / VC gap, at least for some lucky companies. The involvement of venture capitalists could hurt if there is a big down-round. However, valuations today are such that many angels will want to stay involved with their companies and participate with later-round investors. They can, in fact, help to reduce VCs’ anxiety about valuation by maintaining or building both their presence and their investment in the target company. The prudent angel talks with VCs about valuations and how to realize intrinsic worth in their investees . BUILD RELATIONSHIPS BASED ON TRUST VCs are looking for quality deal flows. For this they need good relationships with those in the business community – including angel investors. Angels can provide access to a world of deals that VCs wouldn’t otherwise know about. This change in philosophy has been noticeable in the term sheets turning up recently. There is no question that some VCs – driven by fear and the need for quick returns – squeezed some early investors unconscionably. There were more than a few very ugly deals. But the good faith required for successful business dealings cannot grow when one side is taking untoward advantage of the other. The ridiculously lopsided terms that were common in the recent past have begun to give way. The prudent angel will look for mutually rewarding relationships and will not judge all VCs by the actions of a few. BE PREPARED TO COMPROMISE The key to a new relationship between angels and VCs is compromise. Relationships take time and both sides have to learn to trust one another and to support one another’s objectives. Even when the goals of the parties no longer align, if the relationship is strong, it is possible to get through with grace and dignity. The benefits of compromise also apply to investment targets. Given the current environment, investors should aim for smaller profits on more deals and greater diversity in their portfolio to spread risk and enhance income. This goes for angels and VCs both. BUT ARE VCs WILLING TO TAKE LESS INTERNAL RATE OF RETURN? VCs are beginning to look at things in the longer term. The late 1990s saw an unbalanced market and a very demanding and somewhat unrealistic set of investors. Today, many VCs have learned that, as an early-stage investor, a short-term approach to making money just doesn’t work. Many are beginning to realize that the tough provisions inserted in term sheets when valuations were unrealistically high need to be altered now that valuations are more reasonable.
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