Tag Archives: venture capital

What’s the Difference Between Angel Investor and VC?

Angel investment, Business Financing, Venture Capital, , ,

I see this confusion a lot: People use the terms “venture capital,” “venture capitalist,” and “VC” to apply to any outsider investing in a startup. However, it’s really useful to draw some distinctions in this area, between three important classifications: venture capital, angel investors, and anybody else. 

angel investment VC

Venture capital means big-money investment managed by professional investors spending other people’s money. The money comes from extremely wealthy people, insurance companies, university endowments, big corporations, etc. Think of Kleinert Perkins et al., First Round, Softbank, Oak, etc. Venture capital usually comes in millions of dollars. 

Angel investment is people who are accredited investors as defined by the U.S. Securities and Exchange Commision (SEC), which sets wealth criteria:

they must have a net worth of at least one million US dollars, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and have the expectation to make the same amount this year.

Those rules were going to relax with the Jobs Act of 2012, which people would open the gate to crowdfunding, but hasn’t yet.

The most important distinctions between angels and VCS are: 

  1. Angels invest their own money; VCs invest other people’s money. 
  2. Angel investment is much more likely to be in hundreds of thousands than in millions of dollars. 

Aside from those two distinctions, it is generally true that VCs will be more rigorous in studying (called “due diligence”) the investment before they make it. Both angels and VCs will have similar processes for looking at summaries, then pitches, then business plans. 

Anything else is called “friends and family,” which really means “not VC” and “not angel investment.” The laws on investment allow a few so-called friends and family, but there are limits. The intention of all the regulation in this area is to prevent the kind of stock frauds that were rampant during the great depression. 

Understand the Critical Difference Between Ideas and Opportunities

Business Planning, Management, Starting a Business, , , , , ,

Ideas are a dime a dozen. Opportunities are much more important. An opportunity is an idea that’s passed the test of planning. It has potential. You can implement it. An opportunity has some of the following elements:

  • Industry and market potential: look at market structure, industry structure, growth rate, margins, costs, etc.
  • Economics: capital requirements, fixed costs, cash flow, return on investment, risk.
  • Competitive advantage: degree of control, barriers to entry, availability of sufficient resources.
  • Management team: people who know the industry, the market, the operations, the logistics, the road to market. filter_istock_small

The business planning process is about filtering the opportunities — a precious few, requiring focus, and planning — from the ideas.

Whether you’re working on a new start-up business or growing an existing business, you need to encourage lots of ideas and then use your planning to filter them down into the real opportunities.

Remember displacement … recognize that you can’t do everything. You want your plan to help you focus in on the best opportunities among your longer list of ideas.

There is no external meter of good and bad opportunities. What you’re looking for is the right mix between business potential and your ability to reach that potential, given your position, core competence, strengths, weaknesses, and resources.

Enhanced by Zemanta

Is Venture Capital Gone Forever

Angel investment, Venture Capital, , , ,

I completely agree with Steve King of Small Business Labs, in Is the Venture Capital Industry Broken? He says:

The news here isn’t that the VC industry is broken. This has been actively discussed for years. The news is who’s saying it’s broken.

Which is, in the flap this month, the Kauffman Foundation.

The Kauffman Foundation has long been a close friend of the VC industry.  In addition to investing many millions of dollars with VCs, Kauffman’s mission of supporting entrepreneurs and high growth companies has resulted in them closely collaborating with the VC industry.

The foundation recently published We Have Met the Enemy and He is Us, a blistering critique of venture capital and its role in startups.

Here’s the problem in one simple business line chart (why I like business charts). It shows how the rate of return on venture capital looked great during the first big Internet boom. It’s not a pretty picture.

On the other hand, those low points in the last few years aren’t uncommon, are they? How is your industry doing since the great recession? The chart shows pretty much what Steve summarizes as follows:

Kauffman has many reasons why the industry is broken.  But the quick summary is the industry simply hasn’t performed well.  Only 38% of the funds Kauffman invested in over the last couple of decades beat public market small cap indexes.  This is primary due to the expensive fees VC firms charge.

So does this mean hard times for startups? I doubt it. I see is a shift towards smaller seed rounds and more angel investment as a web and software technology have reduced the capital needed by the average high-end web startup to get from nowhere to proof of concept and validation. In an oversimplified general sense, what took $2.5 million in 1998 takes probably $250,000 today.

Business comes in cycles. Suppose the huge camelback hump in returns in the late 1990s (the boom) were a temporary aberration. The hard times afterwards (the crash) are probably a temporary aberration too.

Steve recommends this story in GigaOm and this one by Fred Wilson of AVC for further reflections on the Kauffman findings.

Enhanced by Zemanta

True Story: Why We Bought Out Our VC Investors

Venture Capital, , ,

It started in 1999. We had already grown Palo Alto Software from zero to more than $5 million in annual sales in five years, without investment. But valuations had gone crazy, and our bplans.com site was already getting millions of visits every month. So we decided to look for venture capital to grow the company and sell it.

The boom seemed temporary, and we decided to take advantage before it waned. We had a sense of a very large open window that was going to close.

But we were too late. We signed a deal early in 2000, just a few weeks before the dot-com bubble burst. Very quickly we saw our web properties, which had been worth tens of millions of dollars, settle into more realistic valuations. And more realistic wasn’t interesting to us. We didn’t want to sell the company for what it was worth in 2001, based on sales multiples. We had wanted to sell it in 1999, when valuations were based on website traffic.

Which left us and our investors with incompatible goals. They wanted to flip the company, while we wanted to build it, grow it, and keep it.

We liked our investors. They believed in us, wanted the same thing we did, and offered useful suggestions. They were smart, honest, and respectful. But we ended up with minority owners who wanted only to sell the company, and we no longer wanted to. So we negotiated a deal, and bought their share back from them. That was in 2002.

The buy-back deal wasn’t easy because we’d spent the money to grow and didn’t keep it liquid. But we didn’t want minority investors to be trapped in our company with no hope of a near-term liquidity event.

It all worked out. We still see them on occasion, and they are still friends. But it is one good example of a case in which you don’t want incompatible goals in the ownership of your company.