Glamour Of VC Funding VS Patronage Of Angel Nurturing
Two years back fear of missing out on a billion dollar idea erased, not blurred, the line between early stage investors and beyond. Birds of all sort of feathers including growth stage venture capitalists (VCs), hedge funds, private equity players, flocked together and nearly spoiled the party for angel investors. But as winter set in, everyone retreated except brave heart angels and angel/seed funds that cautiously kept playing the volume game. Since then, the ball has been into some promising start-ups' court – to choose between angels and angel/seed funds to raise capital. But, which one should they really pick without doing any maths?
Angels predominantly cut the first cheque for entrepreneurs, globally. The data by India's largest angel group Indian Angel Network (IAN) suggests that in the US, angels pumped in $26 billion in 50,000 companies against $25 billion bet by its VCs in 5,000 companies in last few years. In India, while the estimate for a corresponding figure is just 10 per cent but the fact remains that the angels invest four-five times more than VCs. But why so is the case, if the glamour and appeal knocks entrepreneurs' doors with VC money, (which is known for and cherished for creating famous entrepreneurial stories globally)? After all, venture funds are celebrated for having the ability to find and locate the future giants early on. Not just that, as an entrepreneur, you get to leverage the brand name of the fund, and its enormous network too. That's an offer, too lucrative to ignore. And among all this, what's most important is the support, followed by the money, to help the start-up hit milestone for its follow on round of capital.
"Both funds and angels help in getting a company from the garage to the road. However, the one thing that a fund offers and an angel doesn't necessarily, is a structured approach to the company's life cycle. A fund usually sits with founders and work on metrics to focus on, longterm strategy and in many cases tactical solutions as well," says Pankaj Jain, former Partner, 500 Startups. A global seed fund and accelerator, 500 Startups has backed over 1,300 technology startups and around 50 start-ups in India.
Among the latest lot of India's most prolific angels, Dheeraj Jain who also is the managing partner at London and Gurugram-based Redcliffe Capital that does early stage funding underscores similar thought. "If an entrepreneur gets multiple VCs for seed round, it means easy access to funding. Having a big VC also means that the start-up gets a brand name to leverage early on," says Jain, who has backed around 20 start-ups.
Angel Shouldn't Try to be a VC, for VC it's Hard to be an Angel
However, there is always a risk attached to having a large fund on board at an early stage. In case that investor who often invests in follow on rounds, pulls himself out of the start-up's subsequent funding round or Series A then it is highly probable that any other investor would not invest in you doubting the scalability issues, as the reason why the first investor stepped back. This is known as signaling risk. "I read the blog post by an American entrepreneur and investor, Chris Dixon, in which he said that if Sequoia is not investing in a follow on round of a company that it had backed with seed capital then you are probably dead," adds Jain. Whereas, after the first cheque is written by the angel investor, then the entrepreneur can pitch to VC funds for Series A round, as angels don't invest in second round often.
Going back to Pankaj's point of structured approach taken by the fund, angels argue of a better support to start-ups given that latter (angels) are successful entrepreneurs themselves unlike fund managers. "Besides money, it is hand-holding along with heart and mind that an angel brings to the table. Entrepreneurs can draw on the experience of angels, in getting their product right," says Anand Ladsariya, Founder, Everest Flavours, having backed above 95 companies like OYO, and Myntra.
Moreover, funds have a limited holding time in a company and hence might force for exits whereas angels won't push you for exits, when they really cannot exit. Angels at the early stage, which they invest in, don't have a controlling stake where as funds at growth stages control the business. Further, as rhetoric it may sound, angels not just invest their own money but the money that they can easily write off. This translates into staying for a longer time with entrepreneurs.
"Feed the winners and starve the losers; is the motto that VCs talk about, which means they know that out of 20-30 of their investments at least 15 will fail. So it is better to leave a struggling startup and back the ones performing better," maintains Saurabh Srivastava, Chairman, IAN. "I write off every investment I make the same day. Angels invest in a group so individual investment is not that high to worry about. At angel level, more startups fail than at a VC stage," he adds.
Out of the total investments by a VC fund, each of its partners usually has to manage around 10 investments. Hence, he/she is limited not just by time and effort provided to each of the investee companies but also by experience and sector knowledge. So the entrepreneur needs to know about his/her experience and sector knowledge to derive support.
This is in contrast to raising capital from angels. In an angel group, there would be few having domain knowledge that a start-up needs while rest would have knowledge of their respective sectors. "You can also reach out to other investors in the group. The help and support that you get from angels is much higher than the fund. At a growth stage, you don't need that much people to help you," explains Srivastava. In addition, unlike funds, angels don't have a commitment to invest in a particular number of companies. Does this mean that funds are greedier than angels?
Yes, quips Pankaj. "Funds usually spend more time on due diligence, legal documents and terms, and reference checks than most individual angels because they are in the business of generating returns for their limited partners and they need to be greedy. Or at least, greedier than angels," smiles Pankaj.
Another area of interest for entrepreneurs is whether there is a difference in treatment in raising lesser capital versus entrepreneurs raising much bigger money from the same VC fund. The focus unwillingly is bound to drift towards the latter where the investor has placed a bigger bet.
The decision of raising first round thus can be certain, of choosing angels over VCs. However the arguments can still be very subjective from one fund to another and one angel to another. For a proven serial entrepreneur, the ideal case can be a VC fund.
(This article was first published in the April issue of Entrepreneur Magazine. To subscribe, click here)