By Stephanie Gates, Redherring.com, June 17, 1999
copyright =C2=A9 Red Herring Communications
Raising seed funding for a technology start-up is not always fast deals a=
nd
easy money. Just ask Amura. The e-commerce services company was set to cl=
ose
a $500,000 seed round funding from Sevin Rosen Funds, Anthelion Ventures,
and 13 angel investors on Tuesday when one of the angels backed out for
personal reasons.
Backing out of financing deals is not an uncommon occurrence when dealing
with angel investors. Amura founder and CEO Mukund Mohan says two other
individuals have also backed out of funding commitments during the past f=
our
months. One cited personal reasons, and the other preferred to wait until
Amura's next financing.
Matchmakers introduce entrepreneurs to angels.
Flaky angels aren't the only funding danger for the entrepreneur.
Mitch Kapor, founder of Lotus, is a celebrity angel.
This is a classic problem when dealing with the idiosyncrasies of angel
investors. Unlike institutions or professional organizations, individuals=
'
motivations can change quickly and for unpredictable reasons.
"The motivation for angels to invest in startup companies is more an
emotional issue," says Lucinda Linde, partner with Genesis Technology
Partners, a venture development consulting firm. Often these angel invest=
ors
are former entrepreneurs who want to "give back to people who are just
starting out on this entrepreneurial road," she explains.
CATECHISM OF ANGELS
Until recently, information on angel investors, including their preferenc=
es,
areas of expertise, and impact on the startup industry, was limited and v=
ery
fragmented. To improve this understanding, MIT Entrepreneurial Center and
Harvard Business School commissioned Genesis Technology Partners to prepa=
re
a study on angel investing. This study will be incorporated into material=
s
for business school classes on entrepreneurship. "I do think they [angels=
]
meet a need in the marketplace," says Ms. Linde, a coauthor of the study.
Since venture capital funds and their investment deals keep getting bigge=
r,
a "capital gap" is being created in the $500,000 to $1.5 million funding
space, she says. This isn't a new story, but it is becoming more apparent=
as
the number of angel investors and angel groups increase. Ms. Linde estima=
tes
that the pool of angel capital is at least equal to the pool of venture
capital and may be three times as large.
For the study, Ms. Linde and coauthor Alok Prasad interviewed 25 angel
investors and 12 angel groups, as well as multiple venture capitalists,
lawyers, and investment bankers. In order to differentiate the wide range=
of
individual investors, Genesis Technology Partners broke them into four
groups: guardian angels (industry veteran angels), professional entrepren=
eur
angels (less experienced angels), operational expertise angels (large
company senior executives), and financial return angels (wealthy
individuals). As well as a tendency to suddenly renege on a deal, the she=
er
number of angel investors often required to finance a startup round can b=
e a
problem.
For example, Amura's Mr. Mohan thinks a roster of 13 seed investors is
manageable, but he will need to co=C3=B6rdinate with and gain approval fo=
r all
major decisions, like the next financing round, from the new owners. This
could rapidly become an unwieldy process. According to Mr. Prasad, who is
also a partner at Genesis Technology Partners, "VCs do not want to deal w=
ith
too many angels."
COACHED BY AN ANGEL
Angel investors have their advantages. Ms. Linde points out, "Angels can
provide -- especially when they're experienced entrepreneur angels --
industry insights and can help build a company's team." And angels genera=
lly
spend more time nurturing companies, according to Mr. Prasad. "VCs tend t=
o
have less operational experience, based on what we've heard," he says. Mr.
Prasad adds, "An angel is more likely to coach a management team, whereas=
if
a management team isn't working out, a VC is more likely to replace them.=
"
This is possibly a repercussion from the escalation in venture capital fu=
nd
size.
WING AND A PRAYER
With several of Amura's angel investors hailing from Netscape and Cisco
Systems (Nasdaq: CSCO), Mr. Mohan believes he has a strong pool of
experience -- and connections -- from which to draw. For example, he says
that three of the original angels brought in an additional nine investors.
In fact, he acknowledges, "I've not met three or four of our investors at
all." He has never pitched his company to them and they don't really know
what the company does, he says. So why did these angels invest? "They've
heard my name, seen my r=C3=A9sum=C3=A9, and they know someone else who i=
s investing,
and they send me money," Mr. Mohan says.
Ms. Linde explains that some angels are passive investors who invest "on =
the
coattails" of an active angel or VC. They basically rely on the judgment =
of
someone they trust. Hopefully, that "someone" is doing their due diligenc=
e
on investments.
Amura.
source: http://www.redherring.com/insider/1999/0617/vc-angels.html
Tushar J. Mehta
email: [email protected]