Lately we’ve been discussing the many reasons why taking smaller, angel-sized investments instead of larger venture capital stakes often makes more sense for startups in a wobbly, exit-bereft market like the current one.
Today, Ron Conway, the well-known founder of the Silicon Valley-based Angel Investors LP fund, now associated with Baseline Ventures, weighs in with his own assessment of the benefits of the “all angel” investment path.
A former semiconductor executive who went on to co-found Altos Computer Systems, Anchor Intelligence and, most recently, SNOCAP, Conway took up angel investing in 1998. He’s seen his share of both hits and duds, but among the investments that earned Conway his “super angel” status are Google(s GOOG), Digg, PayPal(s EBAY), and Ask Jeeves (now Ask.com(s IACI)). He is also an advisor to Facebook. In other words, Conway knows what he’s talking about. So, if you’re seeking funding, you’d do well to consider his advice, dished out below the fold.
1) Angels are not fiduciaries. Angel investments are always going to be smaller, but the due diligence process is also going to be less rigorous, because angels are not acting as a fiduciary to another investors. VCs are duty-bound to put your company through a thorough review process because they are investing other people’s money. This is why I enjoy being an angel and not being a fiduciary: I can make my own decisions based on my intuitive process, my own opinion and gut feel about a company, because I am investing on my own account. This means I can make decisions faster, which is also good for the entrepreneurs.
2) Angels are often vertical specialists. Some VCs tend to be generalists when it comes to an industry (e.g., retail), or technology (e.g., mobile). Because angels often come from a successful industry background, you can do a better job of hand-picking a partner who will add expertise and value relevant to your precise market area — not just money. If your company operates in social networking, you might be enticed to go to a bulge-bracket, or marquee VC firm—and they would consider you because the space is so hot. But chances are that even some of the biggest VC firms won’t have someone with deep domain expertise in social networking, it’s just too new. But you could go see Owen Van Natta, who just left Facebook. You’re in cloud computing? Go get Diane Greene, the former CEO of VMWare. They’d both make great angels.
3) Angels have one-degree of separation from people in their professional network — not two, or three, or four. But because angels tend to be operational types, the business relationships they bring to the table are personal, not transactional. Angels also tend to invest in concentrated themes, consistent with their operating experience. So when it comes to accelerating your business development — through things like recruiting, partnerships, cultivating sales, etc. — angels tend to connect the dots. The combination of first-hand relationships and focus means an angel can might get your company to an “exit” sooner.