Angels and Demons: Why Angels and VCs are getting along much better now


By: David Verrill, Hub Angel Investment Group, LLC & Chairman – Angel Capital Association

I recently had a conversation with a “recovering” venture capitalist who has been out of the game for five years, and was reminiscing about the good old days. The conversation quickly turned to the ever changing early stage ecosystem, and the increasing slice of the pie that angels and angel groups were eating. He asked if there was still a rift with VCs. I told him we were getting along a lot better now, for a lot of reasons. Here are the five I cited:

  1. Angels have become much better at negotiating the right terms for seed stage investments.
  2. Angels have become very good at syndicating deals amongst themselves, particularly the groups.
  3. A good portion of deals use capital efficient business models.
  4. There is a growing interest in enabling a company to have an early exit by taking in angel money, not VC money.
  5. VCs have been humbled.

So why have these particular four changes encouraged better relationships with VCs? Let me start from the top:

  1. Angels have become better at negotiating the right terms because we have become more sophisticated; we are using the KISS principle with terms and use NVCA standard docs (which also cuts costs); and we got tired of taking haircuts from VCs because we were pricing with our hearts not our heads.
  2. Angel groups, particularly those in the Northeast, are syndicating the vast majority of their deals with each other – because we have had to. In the past 8 years the number of VC firms has been cut in half. Without new sources of capital, we’ve funded our own.
  3. Virtual teams, offshore-based development, on-demand storage in the cloud, and digital/mobile oriented technologies, incubators/accelerators/business plan contests have made it cheap to start a company, so the seed requirements can be covered by angels and angel groups. We are even funding many follow on rounds in their entirety as well, doing or best to avoid the Series A crunch.
  4. Without a really robust IPO market, the other end of the spectrum – early exits – has become a real option for angel funded companies. Underperforming companies with promising teams are open to “acqui-hires”. Taking a 3x return in less than 5 years is a great outcome.
  5. While the amount of venture capital overall has increased steadily over the last 8 years, the number of firms and the average performance have been tough pills to swallow. Given the four items noted above, and a dose of humility, VCs have taken on a kinder, gentler approach with their angel brethren.

And yes, we are brethren. We need each other, and we must continue to foster strong relations for the good of returns, for the good of building strong companies, and for the good of our overall ecosystem. Now, on to the portals :-).

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