A Story About Angels And Venture Capitalists
Feb 5 2008

angel_button_frame.jpgSeveral readers who saw my Fundraising Toolkit post have asked me about my experience raising funds from angels and VCs for my first entrepreneurial endeavor.  We raised about $15 million of which $3.5 million was from angels or what I would call boutique VC firms (i.e. a group of angels under one investment roof).   Keep in mind that was all before the bubble burst back in 2001.  Here are some of my observations based on my experience and from stories I’ve heard from other entrepreneurs.


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Angels

They tend to invest their own money and reputation in earlier stage companies that can benefit not only from dollars but also their advice and contacts.

The really good ones (yes, there are fallen bad ones) have built their own businesses from the ground up.  They have a great appreciation of what it takes to build a business and are creative with solutions to the inevitable unexpected issues that arise.

They tend to get their ‘hands dirty.’  Our lead angel investor for my first company was Marc Seriff, founding CTO of America Online.  You may recall that in 1999/2000 talent was scarce and the Internet bubble was close to its biggest.  Marc actually manned a career fair booth that we had at The University of Texas at Austin.  He also participated in the interview process of finding great developers!  Needless to say we found some good people.  Since Marc was our lead for our first round, he even assured our vendors that he would make sure (i.e. personally guarantee) they got paid if for some reason we couldn’t close the round! 

They tend to bring their friends along for the ride.  Marc and another of our angel investors, Jack Baum, brought in their friends and contacts making the fundraising process a little bit easier.  Jack also introduced us to the owners of our very first big paying customer who ended up doing a nationwide rollout with us.  I remember framing the check! He and his partner Steve Winter brought in two of our three venture investors.  The two good ones!  Steve even served as our interim-CEO between the time we parted ways with the first CEO we hired to replace me until we found the next one.

They don’t necessarily have to invest money to be an angel.  Richard Benkendorf was one of our advisors who introduced us to our first key customer in the Coca-Cola bottling system that helped us achieve our first $1 million in revenue!  We framed that check too!

When the dollars needed get big for future financing rounds, angel investors usually voluntarily step back or can’t provide the needed growth capital.

Some of them may not have sat on a Board or been involved in building their own businesses making some board meetings interesting to say the least.  In other words, an angel who made his/her money from their own business versus someone who came in later at Google, Microsoft, or Dell have different perspectives and experiences.

Venture Capitalists

They tend to invest in later stage companies with some revenue, product completed, and market traction.  They seem to like to come in after an initial angel round of investment (if the deal structure is not too messed up).

The really good ones (yes there are bad VCs – in case you haven’t heard) have had repeated success with other portfolio companies, have built their own businesses, and come with a big rolodex of contacts and partners to help you cross some of the early hurdles.  One of our venture investors, SAP Ventures, led by Jeff Nolan who blogs at Venture Chronicles (the only former investor I found who blogs publicly) introduced us to departments within SAP who were targeting the same customers that we were.  He also gave me a copy of The Monk and The Riddle by Randy Komisar (see below for book link) that was a great read at a time when I think he sensed I was no longer enjoying the journey.

They tend to be more bankers/financiers than operating (i.e., built their own business) people.  They tend to look at a business with a black/white eye on numbers and how fast they can get their money plus a nice return on their money out.

The good ones will often bring along investment partners in what is called a syndicate.  A few VC firms who have worked together before will join forces to fund a deal which makes life easier for the founders because they can go back to building the business versus fundraising sooner.

They seem to use and apply a formula that they have achieved financial success with before which often means replacing the founding CEO or other key founders with people they have worked with many times before.  If more often than not something has worked for them with a portfolio company in the past, they’ll apply the same logic to future deals companies.

They are investing other people’s money (i.e. their limited partner’s money – insurance companies, wealthy individuals, other corporations) and if they perform well those people will give them more money to invest.  In other words they are risking more than just their finances and reputations, they are risking other people’s finances and reputations as well.

Who To Choose?

Personally, I think it all comes down to the investor fit and the stage of the start-up game you are in.  It’s definitely better to have people who have built businesses on your side.  It’s also good to have people who have backed high-growth businesses if you plan to IPO or sell to an established business in the near future. 

Most technology start-ups don’t make it big.  It’s a unique combination of talent, dedication, luck, timing, and great people that make the difference between the companies who become household names and those who shut down on the wayside or find another comfortable existence.   We often forget that it is more than OK to start a good profitable business that provides value to your local community.  If you want to play with venture capitalists, then you need to aim for the ‘household name’ category like Google or Yahoo! even if chances are high you won’t make it to an IPO.

My biggest learning was how important it was to be able to communicate with your investors openly and honestly.  Trust your gut and if they respect and trust you as a person and you respect and trust them, it will be much easier to weather the inevitable storms.  It’s easy to take money for money’s sake but in the end it can end up being more costly than what it was worth.

As Ben Yoskovitz says in his Startup CEO School of Hard Knocks post, you must have fun!  When you are no longer enjoying the journey, take a break and look around to make sure you are doing what you should be doing.  Make sure you are in the right place at the right time for yourself and don’t be afraid to make changes.

Author: | Filed under: angels, entrepreneur, entrepreneurship, fundraising, marc seriff | Tags: , , , , , , , , , , , , , , , | 15 Comments »

15 Comments on “A Story About Angels And Venture Capitalists”

  1. 1 A Founder’s Tale: Angels vs. VCs « FoundRead said at 2:00 PM on February 5th, 2008:

    [...] for “shaking the can” for her current startup, BabbleSoft, in My Funding Toolkit. On her blog today, Aruni shares some insights from her funding experience. We offer the [...]

  2. 2 A Founder’s Tale: Angels vs. VCs teasered @ Feed UP !! said at 4:25 AM on February 6th, 2008:

    [...] for “shaking the can” for her current startup, BabbleSoft, in My Funding Toolkit. On her blog today, Aruni shares some insights from her funding experience. We offer the [...]

  3. 3 Deborah Smith said at 7:29 AM on February 6th, 2008:

    Thank you for sharing your experiences here. This is so helpful to me as you know I’m getting ready to launch a new company and weighing all of these options. In Steve Chandler’s book 9 Lies That are Holding Your Business Back, he makes a great argument against the “It takes money to make money” myth. I’m hoping he’s right. In the 9 years I’ve been in business I’ve never relied on outside investors. I don’t know that I want to start now, but then again, I may not have a choice. Thanks again, very helpful.

  4. 4 Aruni said at 8:46 AM on February 7th, 2008:

    Thanks Deborah. I think it depends on the type of business you are trying to start. Often in technology companies you need up front capital to build out the applications.

    Also, in this day and age (in my opinion) the design, look & feel, and usability of your application is extremely important to get close to right when you come out these days. The customer experience needs to be pretty darn good from day one and if you don’t happen to have the ability to design, architect and code yourself (most people don’t) then chances are you have to pay someone (or a firm) to help you.

    Then of course there’s all the marketing costs to make sure people know you exist!

    That’s great that you haven’t had to take in outside investors! Hopefully you can continue that way. :-)

  5. 5 A Founder’s Tale: Angels vs. VCs « SLO Entrepreneur - In Video said at 5:53 PM on February 9th, 2008:

    [...] preparations for “shaking the can” for her current startup, BabbleSoft, in My Funding Toolkit. On her blog today, Aruni shares some insights from her funding experience. We offer the [...]

  6. 6 Erin Defosse said at 8:36 PM on February 11th, 2008:

    One general comment regarding the external funding vs. no-external funding question: some businesses simply need external capital. For example, if you were trying to launch a new fabless semiconductor company you would need to invest somewhere in the $5-$10 million range just to PROVE that you can build a product. Zero sales, zippo. That sort of business requires external capital. Other businesses don’t. It’s all a matter of the up-front capital needed to get the sales rolling in. So, don’t judge VCs or angels or the funding process by nothing more than whether or not it is a requirement to do business or not. If you need it then get it and don’t convince yourself that you can do without it if it doesn’t make sense. Similarly, if you can bootstrap then don’t get external capital because it will only raise the stakes in the game and make it riskier since you will need to accelerate revenue and generate a return faster than you would have to if you bootstrapped the business. That sort of high speed approach is fraught with danger. If you do hit it out of the park then the returns, of course, are substantial.

    Erin Defosse’s last blog post..Risas y Sonrisas – Spanish for Kids in Austin

  7. 7 Tony K said at 10:41 PM on February 11th, 2008:

    Hi Aruni,

    In your opinon, do you think its easier to get funding these days then during the late 90′s? Also, what do you think the trend is? Would we see more Angel, VC, funding startups? In addtion, do you think economy performance have any direct impact on funding startups; meaning if the economy is not doing well, are VC’s hesitant to fund?

    Thanks.

  8. 8 Aruni said at 8:34 AM on February 12th, 2008:

    @Erin – you said it really well!

    @Tony – I think it’s always hard to get funding, but I think it might have been easier back in the late 90′s. People still remember the crash so they have typically been a bit more cautious since then.

    I’m not an expert on the trends but I have seen the emergence of many angel groups. Here’s a link to several angel groups: http://www.angelcapitalassociation.org/dir_directory/directory.aspx#4

    I think the economy definitely has a direct impact on funding startups. The VCs will a) invest what is remaining of their fund or b) return it to their limited partner investors. When the economy gets rough, the VCs also have a harder time raising money for their funds.

  9. 9 Todd Jordan said at 3:13 PM on February 18th, 2008:

    Dugg!
    http://digg.com/business_finance/A_Story_About_Angels_And_Venture_Capitalists

    Todd Jordan’s last blog post..Social Media Club of St. Louis – 1st Official Meeting

  10. 10 Tony K said at 9:08 PM on February 22nd, 2008:

    Hi Aruni,

    Quick question, Do you know how to search for Angel or VC’s that focus on particular sector? For example, if you are intrested in finding Angels or VC’s that into Celebrity social networking startups, how do you search for them?

    Thanks

  11. 11 Aruni said at 10:06 PM on February 24th, 2008:

    Hi Tony – Unfortunately I don’t know how to search for angels based on their interest in social networking plays. I wish I did…right now it is a very manual process for me.

  12. 12 Cost of Customer Acquisition - What Is It? « FoundRead said at 9:02 AM on March 12th, 2008:

    [...] and have had a couple of meetings and a few more set up in the coming weeks. Since many of these angel investors are really busy, getting on their calendar can take [...]

  13. 13 Women 2.0 Conference - The Rest Of The Story | entrepreMusings said at 11:43 AM on May 16th, 2008:

    [...] before I left, but he seemed to be one of the good guys.  I mentioned him in a post I did about angels and venture capitalists a while [...]

  14. 14 What They Don’t Tell You About SEO - Part 3 | entrepreMusings said at 3:57 PM on May 19th, 2008:

    [...] correct?!  I had hoped we would see better results by now especially since I was tying some of our fundraising success to SEO.  I don’t know if I’m alone in this or if everyone just has stellar SEO [...]

  15. 15 Opportunity Knocked. I Opened The Door. | entrepreMusings said at 8:21 PM on June 15th, 2008:

    [...] know, I went out to raise funds in early February 2008.  By end of March and early April (because I’ve raised funds before and could see the writing on the wall) it became clear to me this was not going to happen right now [...]