Recently two separate posts ran here that argued in favor of technology entrepreneurs who need early-stage money taking it from angels. I, however, believe they should seriously consider taking it from people in my profession: venture capitalists. The current economic meltdown and its effects, which are expected to be felt for at least the next year, require investors with deep pockets and a long-term investment horizon starting from a company’s earliest days.
Entrepreneurs seeking funding usually turn to one of two sources: angels and venture capitalists. And given that I fall into the latter category, let me go on record as saying that both sources can provide exceptional outcomes. In fact, in many cases, some of the best deals that we see in venture capital come from angel investors. So angels and venture capitalists are not mutually exclusive sources of funding, as one can lead to the other. However, with the economy as it stands today, entrepreneurs need to think clearly about how to solve their funding needs from now all the way until better economic times.
I have known many entrepreneurs that have worked with angel investors and had great outcomes. Generally, angels are exceptionally smart entrepreneurial individuals who make fast investment decisions, take a smaller ownership percentage than venture capitalists in startups they fund and opt to have minimal involvement in the operational aspects of the business. On the other hand, some entrepreneurs note that angels are not focused enough on their business (anecdotally I have heard of some angels spreading their investments over 30 or more startups) and some have a fairly short expectation on the investment horizon for returning their capital.
For an entrepreneur, working with a venture capitalist is a different experience. Investing our limited partner’s money generally requires us to have a more diligent and lengthy investment process than angels, to work with a very limited set of companies (at Panorama Capital we limit our full-time involvement to 5-7 companies for each partner) and thoroughly study a market before investment. As venture capitalists, we would argue that this focus and investment commitment should equate to more ownership in a startup than is typically taken by an angel investor.
After the initial investment, we also give access to syndicates for additional financing, study the market landscape for partners and competitors and help with team building. In other words, while we are more focused on our investments, we are also working on behalf of our limited partners to provide a return on their investment and that, in some instances, can admittedly result in a conflict of interests between us and the entrepreneur. In my experience, this conflict happens less often than one might think, typically when there isn’t a strong and productive relationship between the investor (angel or venture capitalist) and the entrepreneur.
While there are objective reasons to take capital from both an angel or venture capitalist, in my mind the current economic downturn means that an entrepreneur needs an investor who will commit to a startup over a much longer time period than a typical angel investor. For example, before we commit, we ask ourselves if this is an investment that we would be excited about being involved with for 10 years.
The technology IPO market is dead and many predict it will stay that way for at least another 18 months. Debt financing for larger firms to use for mergers and acquisitions is practically non-existent. So unless you’re an entrepreneur working at a startup that is narrowly focused on getting bought by a company that is flush with cash (and there are a few of these, such as Google, Microsoft and Cisco), you’re going to need an investor with a long-term commitment to your business.
While I do know some truly remarkable angels who can help on all of these fronts, overall it seems clear to me that now, more than ever, is the time for venture capital.
Allan Leinwand is a venture partner with Panorama Capital and founder of Vyatta. He was also the CTO of Digital Island.