Angels vs. VCs – the curse of the Devil’s spawn
It’s time the 'warring factions' put differences aside, argues venture capitalist Alex Macpherson of Octopus Investments
I recently heard an angel investor describing venture capitalists as “the devil’s spawn”. To me this seems a bizarre comment. A number of today’s venture capitalists were first and foremost entrepreneurs, before becoming angel investors and then managing third party funds through a venture capital firm.
Far from being at odds with one another, angel investors and venture capitalists are very alike, not least in their desire to help build successful businesses and help the entrepreneur deliver his or her vision.
What’s more they have the capacity, through the differences that do exist, to offer entrepreneurs significant value. When it works well, joint investment between angel and venture investors can be an entrepreneur’s dream.
Different investment needs
It would be naive not to recognise that each party has different investment needs, which in turn can create tensions. But, it is these tensions that can help create additional value through the complementary capabilities both parties can bring. Each party has its place in the funding ecosystem and together they can help businesses realise their growth potential and deliver returns.
There are mutual benefits available for a business that can draw on a diversity of skills and expertise that angels and venture capitalists alike can bring. Angel investors frequently bring much more to the table than the mere provision of finance and it is often their knowledge, experience and network that are of most long term value to growth businesses.
Venture capitalists bring their own expertise, complementary contacts and value; they can also provide more flexible funding solutions as the business develops and provide a depth of pocket beyond that of an angel investor.
There are those that argue the amount of money necessary to join a funding round is the primary source of tension between venture capitalists and angels. The angel investor typically has a smaller amount of money at their disposal, requiring the business to find additional sources of funding as they develop, and arguably a greater freedom with their investment decisions being accountable only to themselves.
However, if an investor adds no further value to the team and is unable to invest further then there has to be the question of what value they now bring. Venture capitalists on the other hand tend to have larger amounts of capital to invest, but they are managing other people’s money and are accountable to their investors for their decisions and spending.
Each party’s appetite to risk is different. Venture capitalists build portfolios of investments and accept that some of them may not succeed in the same way as others. This is often not true for angels. Individual investors typically have fewer investments with a greater concentration of their available funds in these few businesses, thereby concentrating risk rather than diversifying it. But, this is exactly where venture capitalists can be of benefit to their angel partners.
Why angels need VC collaborators
A common challenge faced by angel investors can be initial over-investment. With high growth businesses there will be further opportunities to invest at a point when there is greater clarity about a company’s prospects. Yet often angels don’t have the available funds for this second injection of cash, having used all their resources in the first round. This is where teaming with venture capitalists in the first instance can make their investment – and therefore their portfolio relationships – go a lot further.
At Octopus we draw on the benefits of angels and venture capitalists working together through our Venture Partner group. The Octopus Venture Partners is a group of experienced entrepreneurs and angels who collaborate to invest and mentor entrepreneurs through the venture capitalists. This is a fantastic example of how drawing on the skills and expertise of both groups can be harnessed to benefit both the investors and the business they are investing in.
The truth is that investors are like gears on a bike. Some are great at starting, some are good at getting you up that hill and others are better suited to racing. The needs of the business must always come first – after all, building and exiting hugely successful businesses is the common objective of any investor and will create the best outcome for everyone.
Smart angels working closely with venture capitalists are the best bet for businesses. And that’s why it is in everyone’s best interest to forget the names and the politics and just concentrate on the job in hand – helping build successful companies. To my mind, angels and venture capitalists can and should be partners in helping businesses realise their potential.
Alex Macpherson heads up the ventures team at Octopus Investments, where portfolio companies include Graze.com, Zoopla, Swiftkey and SecretEscapes.com. www.octopusventures.com