The Changing Venture Funding Landscape
Because
of changing dynamics in the venture funding environment,
there is increasing collaboration between Angels and VCs. This is
occurring because of the need for early stage investors to be better positioned
to manage high risk, to add more value when
making an investment, and to expand the options to trigger a liquidity
event - with a high ROI.
This is
occurring because Angel investing has been on an upswing since 2003 and it is
attracting high-net-worth individuals who want to take a more proactive
approach to early-stage investing. According to Ernst & Young, since
2000, the number of venture capitalists has
declined by 50% while the number of angel groups has more than doubled.
Why have
venture capitalist positions declined ? In
the last three years, VCs have had record years for raising capital, totaling
over $70 billion. This has led to VCs being much more averse to seed and
start-up stage companies because of the inherent risk and the small amount of
capital that is deployed in these types of companies. Overall, VCs have
been trending toward doing larger, later stage deals that have a number of
other VCs investing alongside. This has left the door open for individual
investors or Angels to support early stage entrepreneurship.
In
conjunction with this, a growing number of Angel investors are becoming more
sophisticated at venture investing, understand the need to manage risk,
can contribute operationally to move the venture forward, and add
value with other like-minded successful entrepreneurs to improve the
probability of venture success.
The idea
of Angel investing is gaining new popularity. Angel investing has become
prevalent by accounting for approximately 40% of seed and start-up capital in
the first half of 2007 - representing the
largest single investing group.
As well, Angel investing has become much more organized and
professional over the last few years, according to the Center for Venture
Research at the
Angels
are well positioned to support entrepreneurship because they are typically a
business person who sold or runs a company and is well versed in a variety of
business disciplines including - product development, establishing an
organization to meet current and new company needs, finance, sales, marketing,
mgmt, corporate planning, legal, etc.
Early
stage investing is a fairly risky proposition with only a very small percentage
of the population considered Angels. Even more telling is that only
a small portion of this group actually makes money !
Because of this, Angels tend to
collaborate with other people (other Angels, VCs, etc.) when considering an investment. According to the
Kauffman Foundation, early stage investors have seen a 2.6 times return
in three and a half years on their initial capital, from investment to
exit. That is roughly a 27% internal rate of return (IRR) - which is what
private equity funds look at garnering when they make their investments.
Much of the return for an Angel is really based on how many capital deployments
have been made over how many different types of industries
(ie: based on a portfolio of
quality venture investments).
In
conclusion, the real difference between Angel
investors and their corporate counterparts is the ability to contribute
operationally to “ making the numbers “ versus “ analysis of
the numbers afterward “. However, an
important VC value add is once the business starts to scale, they can
provide much more funding and a whole new set of options to help ramp the
business. Because early stage ventures have these different needs is why
Angels and VCs are collaborating more. And by doing so, a huge
benefit is Founders can spend much time on addressing operating issues and a
lot less time on funding issues. For entrepreneurs familiar with
the significant challenges of ramping a business, you
are uniquely positioned to appreciate this is a significant value add provided
by sophisticated Angels and VCs. And for new entrepreneurs who aren’t
aware, ask one who is !
Andre Peschong,