The Graduates

Goals And Available Funds

Different goals: Both sets of investors are looking for a healthy return, but the angel's required rate may be somewhat more moderate. Why? The professionals are interested in managing the fund and reporting to their investors. Tannenbaum says that when professional investors ask about his previous ventures, "they're only interested in the bottom line. They don't care that the companies served a purpose or that they created jobs. They judge us by our previous monetary success."

By contrast, however, individual investors often fund companies for motives that may not be purely financial. Some reasons include a desire to put something back into the industries that made them successful, a longing to provide the resources that they wish they had starting out, a desire to be mentors, and the opportunity to relive their past successes.

The difference between these two types of investors can be tantamount to the difference between an alumni booster at a homecoming football game and a nuclear power plant inspector. There's little you can do to overcome this reality except to expect it and not be offended by it.

Bigger bucks: One happy difference to keep in mind is that professional venture investors have a pool of capital set aside to make initial as well as add-on investments. When they're in, they're in. But individuals have less to invest, and their situations are often far more complex. Remember, individual investors probably already have money invested somewhere else. They may have to liquidate; if so, there are tax implications they have to consider. That means angel and individual investors are considerably less liquid and have much less tolerance for putting in more capital down the road.

As a result, your strategy with angels and individuals should be to get as much financing as you can up-front. But with professional venture investors, you shouldn't raise too much more funding than you actually need. There's plenty of money left in their till-and if you succeed, you'll get it the second time around at a much better price.

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This article was originally published in the March 2001 print edition of Entrepreneur with the headline: The Graduates.

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