Sunday, December 16, 2012

Perspectives on Angel Investing - Part 1


I read an unusually interesting article by financial advisor and former venture capitalist, Andy Rachleff, regarding advice to would-be angel investors.  The gist of the article was that few, if any angels make any money on their investments.  I somewhat agree with Mr. Rachleff, but have a different view as to the future of this important financing resource.  There is little doubt that the system is broken, especially when you consider the low returns tolerated by angels.  In essence, angel investors take the same risks as venture capitalists.  By virtue of their structure and organization, however, VCs enjoy far more protections, and subsequently make more money.


Regardless of Andy’s “skepticism,” I believe that angel investing plays a crucial role in allowing new companies to get off the ground.  Many entrepreneurs don’t have friends and family with the substantial means it takes to help them get a company off the ground.  Without angel investors, these would-be superstars have few options.  And it’s highly unlikely that these entrepreneurs could simply just jump right into VC funding without some seed capital. There are emotional benefits to Angels as well; the term ‘Angel’ connotes romantic visions of mentorship and tenacity, driving an entrepreneurial chance of a lifetime.

Angles are critical in building value in more than one way. While VCs dictate larger exit valuation, angels provide companies with flexibility to ultimately choose VC funding or opt for organic growth once the initial model works. As Rachleff suggests, VCs may have reasons to go “double or nothing” or take meaningful commercial risks.  After all, they are later stage investors and are protected by special liquidation terms and other such fail-safes.  Angels generally do not have these protections, and therefore must take some unintended risks.

While angels may typically be the linchpin for the creation of a beautiful company, they are susceptible to “grinding” by more powerful investors and are often increasingly ignored as the company matures.  Angels are an import ingredient to any start-up, but their vulnerability and how they are treated by later stage investors as a company grows shows that the model is broken.  This demonstrates that in many cases, angel investing is a romantic hobby, not a profession.  Changing this formula might very well improve more investment outcomes.

15 comments:

  1. Angles are critical in building value in more than one way.Angels are an import ingredient to any start-up. I agree!

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  2. Some from the investment world make money just from losses to others particularly, the angel investors. Else, there would be no business for zero productivity of the whole investment world.

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  3. This is indeed an informative article I should say. Honestly, I'm not very good in any business term compared to other people. I do like business or having a business but not really like the other businessman. And the secret of success is having a passion towards what you do.

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  4. I agree with you. Thanks for sharing this article. I learned a lot!

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  5. Thanks, I have no idea about Angel Investment and I learned it. I want to know more.

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  6. Thank you for the information.It's very helpful to me...

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  7. I suppose I have to look for angel investors if I can't have enough fund in my bank to turn my new invention into business. I will never ignore them and will try my best to return them what they deserve.

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  8. Something like Angle and Devil romance building the value, angles are critical, but devil is the risk which is import ingredient to build the value.

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  9. nice blog! I learned a lot of information. It's useful specially to me because i don't have too much knowledge about investment

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  10. It is a fact that any investment includes some percent of risk, but at the same time taking such risk is also very important if one has to build a successful business in long run.
    I agree that Yuval's guidelines are much more stronger and can help new investors to make right decision while investing money in particular type of business.

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  11. Good to know more about Angels investment. We must be very careful before investing our money and do a lot of search and research to avoid scams. Thanks for providing this valuable article

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  12. This is a great opportunity for serious investors who are looking for bigger profits under their belts,this uprising industry could be beneficial for many of us in the long run,but to successfully get rewarded,one has to be more dedicated towards what they are actually doing.........

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  13. This is really interesting. One gets to learn so much here. Definitely a heartfelt gratitude for the author's efforts here.

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  14. Nice blog! I came upon this blog while browsing, and I must say you have a very gripping style of writing. You have gotten me interested in a subject I do not know much about. Thank you! :)

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