As promised, I am posting on the topic of angel investing. I started as an "angel" investing in start up companies with hopes of hitting the big homerun. At the time, I didn't know it was called "angel investing", but as venture capital has become popularized, so has the label of the "angel."
The impetus of this post is a conversation I had with Andy Klein of SkyBridge Capital. Andy is a seasoned serial entrepreneur that I have posted about twice on the topics of entrepreneurship and the serial entrepreneur. He has successfully started a few companies and is on his newest venture, SkyBridge Capital. At any rate, Andy relayed to me that he would rather invest as an angel versus into a fund as a limited partner. I was surprised at this, as most of Andy's initial investors have been individual angels, followed by VC funds.
His main reason is that angels have the chance to get in before the VC round and that VC money is the money that will reduce your risk. If you can get your money in right before a VC every time, then surely you will do at least as well as a VC.
There is a lot of truth to this, as I am always pleased when one of my angel investments is followed by an institutional venture round. This usually means that I don't have to worry too much about the investment, as the "pros" have their money in and will do their best to get a return. The downside is that angel money is often "easy money," somewhat like "dead money" at a poker game. This is usually the first money to come in and usually at somewhat nebulous financing terms. What I mean by this is that sometimes, the terms are not favorable. This usually comes in the form of a financing that does not "protect" the angel from future venture rounds that will likely hammer down the angel investment into a lower tier preference. Sometimes, there aren't even established terms at the time of the angel funding. We have all heard the stories of the professors at Stanford who have written the big checks before the company was even formed. Was valuation at that point even discussed?
So here is the question: would you rather invest as an angel or in a top-tier VC fund? In a top fund, you will have to pay fees and a substantial carry. But, you will usually get what you pay for - access into the best club deals, future financing for these companies, and a top-quartile return. Will you hit a Google or Skype homerun? Probably not, but then again, probably not if you were an angel as well.
As a VC myself, I do a mix of angel investing and investing in other VC funds. People often ask me why I would invest in other VC funds. Well, the answer is that I love the category of venture capital and I want my money to access good deals across the globe. Venture capital by its nature is somewhat of a local practice. Firms that don't have a niche either by industry or geography usually don't do as well. So I like to spread my seeds across the best funds with the hopes that they bear lots of fruit.
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