Angels vs. VCs

An angel investor in Knowledge Reef Systems sent me a copy of Basil Peters presentation (no link at this time) to the Angel Capital Association Summit in San Francisco this month. Absolutely spot on with one minor complaint (see a couple paragraphs below). Basil’s key points:

  • Target an early M&A exit (get out in 2-3 years)
  • Build a product that a larger company can grow as part of their portfolio (leverage their expensive sales organization)
  • Aim for the sweet spot of the M&A market ($15-30 million)
  • Run lean (a cliché but true)
  • Seriously consider angel investors even if your capital requirements are in the $2-5 million range

This is stunningly contrary to conventional institutional VC wisdom that demands entrepreneurs build Oracle “Mini-Me” clones. Why do they do so? My assessment is they simply have too much capital that must be put to work, they need to limit the number of bets they make and management fees tend extend the exit horizon beyond what is reasonable for angel investors. VCs have no choice but to swing for the fences on every investment even if a more rational strategy of base hits wins more games. Is there a relationship between this “home run” approach and the dismal VC returns of the last decade? The answer is far too complicated for my pay grade…;-).

As Basil points out, angel investors may be more aligned with founders than VCs are. It certainly gives me pause for thought as I get ready to launch my fund raising effort for veloGraf Systems. The VC path is the default but my strategy for building the company is probably more aligned with angel investors. I enjoyed working with angel investors in my last company and if I can meet my capital targets with angel investors this time around, it certainly beats being forced into the wrong business strategy simply because of excess capital in VC funds.

My exception to Basil’s presentation was his discussion of the “weekender” startup. I know I’m an old war horse when it comes to creating value in startups but I remain convinced that it takes more than a couple guys in a garage over a weekend to build a meaningful venture. If it can be done by these, why won’t another team (or ten teams?) be able to do the same thing the following weekend? What is the barrier to entry to a startup product/service that can be developed and deployed in a few days, weeks or a couple of months? I can’t help but believe that this type of investing is like buying lottery tickets. Maybe you can win the jackpot but the odds are much higher that you will spend a small fortune on $10,000 investments and never hit the jackpot. A couple small wins perhaps but your overall IRR will be negative.

I am in 100% agreement with Basil that the cost of building software solutions is far less than what it was 10-20 years ago but it simply isn’t $10,000. This “weekender” myth (also called startup “boot camps”) drives me crazy because it makes angel investment look more like a weekend in Las Vegas than an effort at reasonable due diligence on the capabilities of the founding team, the market opportunity and differentiated technology with a sustainable advantage. Yes, angel investing is risky but investing in this type of venture seems to heighten the risk.

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