Co-investing with VCs in Angel Rounds
I read a blog post by Bill Burnham this week entitled Don't Take Angel Investment from VCs
. He gave the following example to make his point (my paraphrase): An angel/VC that invested in the angel round tried to pre-empt the Series A fundraising in a company with a low-ball term sheet. The entrepreneur thought he could do better and politely told the angel/VC “thanks, but I’d like to test the market”. The response was swift and furious. The angel/VC told the entrepreneur he had to accept the offer or the angel/VC wouldn’t invest in the Series A round - dramatically reducing the chance of raising money because other VCs would assume that the angel/VC wasn’t investing was because there was something wrong with the company.
Burnham’s post makes a great point: Entrepreneurs should complete due diligence on all investors and not take money from bad investors. Unfortunately, bad investors come in all flavors – angels, VCs and other private investors.
Many angel groups specifically pursue VCs (as individuals or representing their funds) to invest in seed and Series A rounds of interesting startups, for several reasons:
• The right VCs have substantial vertical experience to assist the angels in due diligence and will use their rolodexes to help the company find high-profile customers and partners.
• The right VCs can later lead the company to deeper-pocketed investors with interest in funding companies in their specific business vertical.
Frankly, most VCs are reticent to engage at the seed stage with new ventures, due simply to being busy with later stage investments and portfolio companies. When we angels can find the right VCs to invest with us in startup companies, most of us enthusiastically engage.
Perhaps the message for entrepreneurs should be: Sign on the best investors at all stages of startup development, that is, those with integrity, startup and operational experience and knowledge of your business sector.
It’s a GREAT time to be an angel. Find a group and jump in!
Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com