With the venture capital industry shrinking, many entrepreneurs have started looking to angel investors for funding. There are two main differences in the funding practices of venture capitalists and angels: (1) Stage of investment, and (2) Size of investment. How do these differences affect your fundraising strategy?
Angels Invest in Earlier Stage Companies
In 2009, VCs continued to invest less in very early stage companies. This means less venture capital investment in seed rounds. While venture capital investment in early stage companies and seed rounds has traditionally accounted for between 50 and 70 percent of all VC investment, that figure plummeted to 35 percent in 2009.
By contrast, angels increased their investment in seed rounds or Series A rounds. BC Insights reports that the number of angel investments increased by 33 percent in the first quarter of 2010 over the same period 2009.
Angels Invest Smaller Amounts
In 2008, VCs on average invested $7.4 million in 2008 per funding round.
By comparison, whether investing individually or in a syndicate (such as Harvard Angels or Keiretsu Forum), angel investors typically invest small amounts in a startup. Investment amounts for a round generally range from $10,000 to $500,000, and sometimes more. Indeed, the average investment by an individual angel is $77,000, while the median is much lower at $10,000. Angel syndicates on average invest less than $250,000 per round of funding.
However, angels have recently invested larger amounts. Some angels report that entrepreneurs now ask for and get $750,000 or more, while in late 2008 angel rounds did not exceed $500,000.
The reason angels invest less than venture capitalists is that angels invest their own money, while VCs invest someone else’s money.
Conclusion
This discussion raises several questions:
Since even fewer startups can obtain venture capital in this environment, will the role of angels in helping companies grow change? Will they need to play a greater role in operations and governance? Are they up to it?
At the same time, how will the rise of super angels affect the role of venture capitalists? How will super angels affect the way entrepreneurs think about VC funding? As angel rounds get bigger, and as entrepreneurs become better at doing more with less (e.g., in web businesses), will they feel less of a need to secure VC funding?
Douglas Y. Park
Twitter: @DougYPark
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