Angel investors deserve respect from VCs

Rick Segal from the VC firm JLA Ventures has an excellent post about the importance of Angel investors to the startup ecosystem... and how some shortsighted VCs stomp on them every chance they get. Entrepreneurs remember this; a VC who abuses your angel investors will also be quick to fire you and replace you with one of their inside guys.

Angel investors are critical to the startup ecosystem. They invest seed stage money when no one else will. Angels have invested more in startups than VCs the past four years. They take enormous risks, and work hard to help these small companies get to the next level. Angels are former entrepreneurs themselves. They have built companies, have an extensive network of friends in high places, and many times have specific domain experience that can be extremely valuable to your business.

In my day job at Microsoft I work with VCs every day. Most of them are seasoned professionals who understand the ecosystem. They love building companies and have great respect for entrepreneurs.

Sometimes you run into arrogant B-School jocks, turned VCs, who think they are experts at financial engineering. They take joy in squeezing angels and even the entrepreneur. They negotiate hard on terms and put all kinds of complicated preference provisions in the deal. These are the same guys who will fire a founder and put their own people in...just because they can. Listen to this true story from Rick Segal from JLA Ventures;

I recently had a conversation with two 'grand old men' of the VC community regarding an investment they had just completed.  It was a small start up which had taken angel money to get going.  The terms of that original deal were a simple debt instrument that converted (at a discount) upon the next round.

These two guys were all high five like because they had killed the discount upon conversion.  The phrase that bugged me the most was: "We made the angels blink and understand the real money had arrived."

Over time these guys will get squeezed themselves, and left out of good deals because of their history. To be fair, there are also "devilish" and greedy angel investors who will try to take advantage of you. Here the VCs will come in and pound down the bad angel.

The VC business is a small world built on reputation and trust. Most VCs and Angels I know are honest, hard working, former entrepreneurs, who do this because they love building companies. They understand the importance of angel investors to the whole ecosystem. Brad Feld, Rick Segal, Ron Conway, Luis Villalobos, and the people at Common Angels, eCoast Angels, and many others are critical supporters and financial backers of seed stage companies. VCs would do well to embrace them.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.

Comments

[Knox Massey]

Thanks, Don. Nice to have a forward thinker who understands the current financing ecosystem.

[Lauren Flanagan]

Good post, Don. Entrepreneurs need to seek smart money, whether from angel or VC sources. Smart money investors truly add value: domain expertise, key contacts and company building experience. The best investors understand there has to be enough pie for all if it's going to ever be worth eating.

[cke]

Spot-on comments. The next obvious question comes up: how can entrepreneurs find the previous reputations of these VCs to determine if they're the kind who engage in this cram down BS? Here's one suggestion: www.thefunded.com

[Brandon Cotter]

Great post Don.

Entrepreneurs/hackers are increasingly having the luxury of choosing which money to take. So it is wise to consider the people first then their checkbook.

Many angels I talk to are worried about A-round cram-downs. So I just sent out your post to a couple dozen of them--reminding them that the kind investors we will be pursuing in the A will be the guys that respect the value of their money.

[Venture capitalists]

It is a great post don and i agree with what you have said because angel are former entrepreneurs and they take heavy risks in building up a small company as they have wide range of network

[jointventures]

I agree with segal as angel investors are critical for the small business as they take huge risks in taking up a business to next level.

[Ramsay Hoguet]

Nice post Don and great advice for everyone invloved.