Angels and VCs

I have attended a number of early-stage investment conferences over the past month and I've taken note of some common themes and controversial comments that I thought I would share over the coming days. 

The most controversial comment I heard was from a prominent U.S.based angel investor who said during his presentation (and I paraphrase) that “Angels and VCs should never co-invest”. His rationale? The interests between the groups are not aligned. Angels are investing their own money as opposed to VCs who invest the money of other people and institutions. Angels are not interested in or motivated by raising their “next fund” and therefore are much more patient investors, are not motivated by IRR (which has a time to exit aspect to it) but rather cash on cash return. Therefore time is the angel’s most valuable resource and the strategic decisions to be made by the Company are very different.

I personally don’t buy this, and neither do many of the angels I have spoken to, both locally and in the U.S. We at Brightspark have been developing a strong relationship with the angel community because we believe that our vision of early-stage investing is very much aligned with angels, and have co-invested with angels on occasion. Angels investing their own money are motivated by the same end-game as early stage VC funds – creating tremendous value for the shareholders and founders and positioning the company for the appropriate exit at the appropriate time. Angels I have spoken to are not interested in tying up their own money for 10-15 years in a single investment and while I agree that cash on cash returns are important to VCs as well, the time aspect to an exit has an absolute bearing on investment decisions for any investor. A 5x multiple on an exit within 5 years is much more motivating to an angel than a 5x multiple in 15 years. There is always a time value to money. In the latter case, they may as well buy a 15 year bond and there is much less risk.

At a Early stage investing conference in the Valley, there was a whole panel on how angel organizations presently work together with the VC community – and to a man, they all expounded on the importance of bringing the VCs into the process early on.

In my mind, this was one angel trying to motivate the angel community and give them a feeling of self-importance that they don’t need – the VC community already values the important services they provide to the start-up ecosystem.

Comments

[David S. Rose]

Steven, you are *absolutely* on target, and I'm actually quite surprised at the 'prominent' angel you describe. Certainly the vast majority of serious, 'prominent' angels in both the US and Canada are fully committed to integrating our operations with appropriate VC funds.

If anything, I believe that there is a much greater disconnect between "early stage" and "late stage" regardless of where then money comes from, than there is between angels and VCs.

Here at New York Angels, the majority of the investments that we've made in the past year have been co-investments, sometimes with other angel groups but usually with simpatico VC funds, including First Round Capital, Next Stage Capital, RRE Ventures, Milestone Venture Partners, iNovia Capital, and, of course, Brightspark.

Bottom line: you're right, and he's all wet [grin].