2010 ACA Summit: Angels and VCs – Friend or Foe?

Thanks goes to Wall Street Journal‘s Russell Garland for taking us to the recent 2010 Angel Capital Association Summit in San Francisco and recounting how angels and VCs rivaled for the top spot. We all like a good scrum!

According to Garland, attendees listened intently to speeches about the need for angel and VC harmony, and about angel investors’ slow-but-sure rise to fame.

Garland further reports:

An informal electronic poll of attendees found that 48% sometimes look for investments that subsequently will require venture capital and 55% thought relations between the two groups are okay but have room for improvement.

Co-Invest with Angels Only

As exit strategist Basil Peters put it during a passionate speech at the conference, it’s angels’ time to rise above the VC “dinosaurs” and reign supreme when it comes to offering startups the proverbial booster they need to make it to the big time.

“VCs are essentially dinosaurs saddled with too-big funds at a time when entrepreneurs can create companies cheaply and quickly, sometimes over a weekend.” Peters asserted.

Peters has a point. Many startups need only a limited amount of outside capital which can be best provided by angel investors who know when to exit by “selling to corporations hungry for dynamic young companies whose revenue can scale from [US] $10 million to $100 million or more.”

Those who target small exits will find that their interests are better-aligned with those of angels than with most VCs, such as the case of venture firm Charter Life Sciences, which bets on relatively capital-efficient health care companies that can get to an exit on US$3 million to US$12 million.

Co-Invest with VCs

But angels sometimes need to connect with VCs too, said James Geshwiler, managing director of Boston’s Common Angels — even though it took him 5 to 6 years to learn how to syndicate well with venture firms.

Geshwiler later comments:

I think the best answer [to whether or not to syndicate with VCs] is “it depends.”

As our panel highlighted, the decision depends first and foremost on the best financial strategy for the company to optimize value; and second, on aligning the incentives and capacities among the investors.

Neither angel investors nor VCs are one size fits all. Entrepreneurs and both parts of the capital markets need to understand the various trade offs in much greater detail and have much more open discussions these days given the state of the capital markets and of exits.

What’s that saying about keeping your friends close and your enemies in your pocket?

Just kiddin’.