Mind the (Angel VC) Gap

In the area of angel investing, there can be a fine line between the amount of money an angel is willing to invest and the amount of money that generally enters into VC territory. It is quite understandable that an enthusiastic entrepreneur in front of an angel with an open check book would push for as much as he or she could get. But understanding how to push without closing the checkbook is an important part of getting money from an angel investor in the first place.

According to Mark Macleod, a startup CFO and advisor focused on funding, growing and exiting tech startups, there is a big gap between angel capital and the traditional sweet spot of the bigger VC funds. For those who are pitching to angels looking for capital efficient deals, the one doing the pitching must understand where the ceiling is. You have to know the max you can raise in general before you get into VC territory. [1]

Aside from the fact that angels are only looking to invest specific – and lower – amounts in startups, the venture capital space is shrinking. According to the National Venture Capital Association, only 882 firms had raised a fund in 2008, down from 1,019 the year before. This puts even more pressure on the startup to secure specific seed funding from angel investors, and to expand their search to get as many as possible on board. [2]

Within Europe, there seems to be a different type of angel investor emerging. Positioned as possibly filling the equity gap, these “super angels” are often former entrepreneurs who have had a big exit from their startup and now consider themselves to be potential investors. While some are good at this, others are proving to be somewhat of a fluke as they tend to follow what is “hot” in the market and haven’t done it long enough to weather the storm. Many consider these individuals anomalies who won’t last. [3]

In reality, the gap between angel funding and venture capital will only grow wider, and not necessarily in terms of money. Part of the ongoing problem is the number of VC organizations that are disappearing everyday. This is not necessarily a problem for the startup that hasn’t reached the VC funding stage, yet. But it could make a difference in their approach to angels if they worry that their options will be slim when it comes to time to seek VC funding.

Typically, angels are investing their own money and they are generally investing well below the US$1 million dollar mark, whereas VCs tend to stay away until at least US$2 million. There appears to be no relief on the horizon to bridge this gap – at least not something that will ease the process for the average startup. But there is one ray of hope in an entrepreneur’s ability to network and negotiate and then put together a powerful team so that angels are knocking down his door. Unfortunately, this is the exception and never the rule.

Notes:

[1] The Startup Funding Gap – From Angel to VC
[2] The incredible shrinking venture capital industry
[3] The Coasy World of UK Venture Capital