For most early stage high tech companies, getting the attention of a top notch Venture Capital firm can be harder than getting an audience with the Pope on Easter Sunday. Having exhausted the traditional sources of early stage financing (friends, relatives, looking under the couch seats for $1 million in loose change) they often look to Angel Investors.
Angel Investment is often done by groups of wealthy individuals and reformed entrepreneurs who are eager to give money to complete strangers. I’m not saying they’re naïve, but if you were trying to sell a bridge, this would be the group to get in front of. The Venture guys are much more cautious and would want to make sure it was a really big bridge, preferably an all new category of bridge, say built from patented genetically engineered seaweed, before they were willing to invest with you.
Angel Investors invest in companies that are at such an early stage that the Venture firms can’t really make a significant investment. So it’s not really even worth their time. It used to be that for these types of companies the Venture firms just left bags of money in the lobby near the guest register with "help yourself" signs, but those days are gone for good.
Angel Investing originated in the world of financing Broadway plays where wealthy patrons were asked to help get a production off the ground. These days, many associate the term Angel Investment with the question "Why in Heaven did we put money into this God forsaken company?" With Broadway investing at least you get tickets to the opening night. Think of Angel Investing as God’s way of telling you you’ve got way too much money.
Typically Angel Investors invest smaller amounts of money (unmarked $10s and $20s) into early stage companies. Its not uncommon for them to hang out at Buck’s Woodside Café and just leave $20 bills around in the hopes that some of it ends up getting them into some new top-secret startup. As a result, Angel Investment is a more gradual process rather than losing the money in a single Venture investment such as WebVan.
Still, when it works, Angel Investing can be very lucrative. For example, one prominent angel who invested $10,000 in Amazon.com ultimately saw the value of his investment rise to $2.6 million. That was the price of a single share of Amazon stock at the height of the Internet frenzy. Unfortunately, if you rode the stock price back down, then the typical Amazon investment is worth slightly more than the price of a Double Decaf Latte and Apple Potato Soy Muffin at Starbucks.
Heaven in a Handbasket
There is a certain thrill to be had in early stage startup investment. Lets face it, if you’ve got enough money to finance cloning of race horses over the Internet, its not likely that placing $2 trifecta bets is going to get your adrenalin going. So you typically want to do something more exciting and on a bigger scale. As a result, Angel Investing has a lot of prestige associated with it. When you’ve already got the mansion in Atherton, the his-and-her Ferraris and the get away chateau in Napa, nothing says rich like losing a couple of million and not flinching. And you can always claim you’re in it for the long haul, hoping for a rebound in DrKoop.com.
The most famous Angel Investor is Ron "Long Gone" Conway. He’s the founding general partner in Angel Investors LP, an investment fund catering to the rich and foolish. Investors include prominent silicon valley tech mavens like Bill Joy (Sun Microsystems), Marc Andreessen (Netscape) and Goldie Hawn (Private Benjamin).
Ron was a successful executive at several silicon valley companies which no longer exist, and managed to make a ton of money. Since he wasn’t very good at golf, he ended up becoming an investor. When you get right down to it, there’s not much else to do out here. Either you’re in a high tech company, you’re investing in one or you’re on the sidelines and pretty much of a nobody. Ron managed to bankroll a small fortune into a larger one by making Angel Investments into several successful high tech IPOs like BroadVision, Ask Jeeves, Marimba. At one time the market caps of these companies was rapidly approaching the GNP of Sweden. Today, shares can be bought for slightly less than Abba 8-track tapes.
Ron’s notoriety earned him the title of Godfather of Silicon Valley ("I gave him a valuation he couldn’t refuse"). Still, I don’t think I’d lend him my car keys without a collateral deposit, if you know what I mean. Nonetheless, at the height of the Internet frenzy, Ron put together a couple of Angel funds raising $180 million from private investors. This might sound like a lot, but by Silicon Valley standards, its quite modest. Girl Guides raise the same amount year in and year out in Atherton by selling Lear Jets door to door.
Angel Investors LP put money into about 200 different companies which generally had two things in common: they all had ".com" in the name and they were all losing money. Now I may not have as much investment experience as ol’ Ron has, but this does not seem to me to be a recipe for success. Sort of like putting money in a hole and hoping that if you keep digging, you’ll make its through to China and come out the other side. The only problem is it ends up being a very deep hole.
But presumably a lot of rather smart, or at least rich, people put money into Ron’s funds only to find that by early 2001, 43 companies were shut down and bankrupt and the rest were pan handling along University avenue in Palo Alto. ("Will work for Series B Funding.")
Angel Investors usually provide enough seed money to get the company going from prototype stage until they are big enough to fund their own superbowl commercials. At this point their funding needs are significant enough to attract the attention of traditional Venture Capital firms whose partners never carry bills in less than $5 million denominations anyways.
Unfortunately, there is also a certain amount of tension between Venture Capital firms and Angel Investors. Many established Venture firms say they want to work more closely with Angel investors. Which is code for saying they want to get in earlier and cut the Angels out of the loop. Still, both parties are held together by two of the most powerful forces in modern business: fear and greed. The fear comes from the fact that no one wants to get left out of the next big deal. And greed because everyone thinks they could have had a bigger slice of the pie if they’d done it on their own.
One common element that both Angel Investors and Venture Capitalists are both critical of is the valuation. They complain that entrepreneurs are too focused on the valuation and the impact of dilution. They believe that good Entrepreneurs should focus on execution and not how much of the company they are giving up to investors. This is a little like the wolf telling the sheep not to worry about what’s for dinner, if you get my drift.
If you’re thinking of getting into the Angel investing game, I have a better recommendation. Right down the names of the companies you’re considering investing in. Then go down to the local race track and bet on horses that have the closest sounding names. You most likely won’t hit it big, but you also won’t have to wait long for the losses.
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