It's been a year since my article "Angel Investors More Powerful Than VCs". Since then, I have heard many questions and debates about whether Individual Investors (Angels) or Venture Capitalists (VCs) are better for entrepreneurs. I have come to realize that the topic does not always include the right definition of entrepreneur as it relates to Angels and VCs.
More importantly, what is not being identified is the stage of the company represented by the entrepreneur. When the stage of the company is identified, there should be no debate where Angels have their place and where VCs have their place.
VCs do not support an entrepreneur in a garage with a vision (many times referred to as a seed-stage entrepreneur). VCs do not support an entrepreneur who just got his first product out the door (many times referred to as an early-stage entrepreneur). VCs may support an entrepreneur who has a company that already has a history of sales growth or profit growth. Yes, the people who are leading sales and profit-driven companies may be entrepreneurs but I doubt these leaders represent the type of person who would be debating Angels versus VCs. VCs do have a place in business and that is generally to support a rapidly growing business that can be scaled in the very near future and one where the VC's main focus is how they can simply cash out. Many of the people who are already leading a growing sales-oriented and profit-oriented company are seasoned executives who may or may not be entrepreneurs.
There are situations where a VC will break the mold from the traditional definition. But many times the individual situation can be so unique and misleading that Seed and early-stage entrepreneurs become confused about the reality of what usually is best for them. There are some VCs who really are Angel Investors, such as Marc Andreessen (cofounder of Netscape Co., who started his own VC firm). I think of these groups more like Super Angels for entrepreneurs who are the dream-come-true investors who perform like an Angel Investors and have the capital of a VCs who take a company from one level to any other level it desires to go. But these Super Angels are not the norm and should not represent the traditional Angel Investor or VC.
Seed and early-stage entrepreneurs should not be too excited when talking to a VC, especially if they are reviewing their business with an analyst. VCs can get all the free market research they want by talking to entrepreneurs who work hard in the field all day to obtain all sorts of valuable experience and information. VCs will probably never admit how much they use an entrepreneur for their own portfolio companies. And yes, the VC will explain in so many ways the level of due diligence they need to do in order to "position" for an investment. Bottom line for 99.9% of Seed and early-stage entrepreneurs is that you are wasting your time with VCs. You may have one conversation that will sound promising, send all your information and then, if you are lucky, get one of the few canned responses on why the VC is not going to invest in your company. Make sure you clearly know the specific milestones that the Analyst wishes to see to pass the information along to others. Most times it is rarely being reviewed with others in the firm in the manner that the entrepreneur thinks is happening. I am not against VCs, it is just that I am more for Seed and early-stage entrepreneurs who are looking for the right type of partner to build upon an idea or startup business that has just got its cycle moving forward.
I am also not talking down to VC Analysts because they too have their place in the investment cycle. But in reality, who do you want analyzing your Seed or early-stage Business? Do you want someone who manages spreadsheets? Or do you want someone who has been in the trenches and thrived in all sorts of circumstances?
Have you ever seen Band of Brothers, a true story of a group of soldiers in World War II? During the final episodes a new lieutenant fresh from West Point joins the group of soldiers and wishes to lead a mission. The group wants anyone to lead, all lower ranking other than the lieutenant. The West Point lieutenant had educational prestige but that didn't provide the confidence of those already in field. The analogy I am trying to make is that sometimes it is better to have people with real experience on your side to achieve objectives as opposed to having people who may have a higher stature (meaning more money in the case of VCs), but not the relevant desires and experience.
Angel Investors are visionaries. Angel Investors are more aggressive when it comes to taking chances. Angel Investors understand the sleepless nights entrepreneurs go through to get their business from one point to the next. Angel Investors will provide an emotionally vested interest in getting things done. And unlike VCs who will probably have many terms to protect themselves from the negative challenges of moving a business along, Angel Investors will be more receptive to adjusting to all the twists and turns that one must take, especially in this new age economy. These are among the many reasons why Angel Investors are the people who should be the focus for Seed and early-stage entrepreneurs.
MyOnlineToolbox.com has had the support of Angel Investors to withstand the financial crisis. These Angel Investors supported me through all the challenging stages of getting our product into the market. The same Angel Investors supported me through a recent transition in our revenue model. Now we seek our last investor(s) to scale the company. I would prefer to stay within the Angel Investor community based on my own perceptions as an early-stage entrepreneur. Or perhaps it may be my turn to consider a VC to help me be proven wrong.
[Image: Flickr user aussiegall]