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A Founder's Tale: Angels vs. VCs

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Editor’s Note: Founder Aruni Gunasegaram has written about the virtues of ignoring “the experts” , things no one tells you about VCs, and her 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 highlights.

Several readers asked me to write 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.


They tend to invest their own money and reputation in earlier stage companies …
The really good ones (yes, there are bad ones) have built their own businesses from the ground up…

They tend to get their ‘hands dirty.’ Our lead angel investor for my first company wasMarc Seriff founding CTO of America Online… Marc actually manned a career fair booth that we had at The University of Texas at Austin [and] participated in the interviews [of our] developers! … 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!

Angles tend to bring their friends along for the ride.
Another of our angel investors, Jack Baum 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 (late of SAP) brought in two of our three venture investors (from SAP Ventures). Steve even served as our interim-CEO when we parted ways with the first one who had replaced me.

They don’t necessarily have to invest money to be an angel.
Richard Benkendorf an advisor, introduced us to our first key customer in the Coca-Cola bottling system that helped us achieve our first $1 million in revenue!

When the dollars need [to] get big for future financing rounds, angel investors usually voluntarily step back …

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…

Venture Capitalists

They tend to invest in later stage companies with some revenue, product completed, and market traction…. after an initial angel round has been done.

The really good ones (yes there are bad VCs – in case you haven’t heard) … come with a big rolodex of contacts and partners to help you cross some of the early hurdles.

Jeff Nolan of SAP Ventures 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 KPCB’sRandy Komisar, 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 people…

They tend to look at a business with a black/white eye on financial numbers [Returns!]…

The good ones will often bring along investment partners in a syndicate.

They seem to apply a formula
…. If something has worked for them with a portfolio company in the past, they’ll apply the same logic to future companies. [Study their portfolio!]

They are investing other people’s money
… and if they perform well those people will give them more money to invest. [Motive!]

Who To Choose?

* Personally, I think… 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.

* … it is more than OK to start a good profitable business that provides value to your local community. [But] if you want to play with venture capitalists, then you need to aim for the ‘household name’ category like Google or Yahoo! …

My biggest lesson
: how important it was to be able to communicate with your investors openly and honestly… it will be much easier to weather the inevitable storms…

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 [to] make sure you are doing what you should be doing. If you find you’re not — don’t be afraid to make changes!!