Don’t Take Angel Investments from VCs – a dissenting opinion

April 19 2010 No Commented

Don’t Take Angel Investments from VCs – a dissenting opinion

In his recent blog Don’t Take Angel Investments From VCs, Bill Burnham cautions entrepreneurs not to include venture capitalists among investors in an angel round.  His premise is that these same VCs may choose to offer the entrepreneurs an onerous term sheet (low valuation, etc.) at the point the entrepreneur need to raise more capital.  If the entrepreneur chooses to ignore this “low ball” offer, the VCs may then attempt to dissuade other investors from making an offer.  Burnham’s logic is sound – it is possible that a VC could choose this strategy for taking control of the company.

But, so could a wrong-minded angel investor!  Entrepreneurs should always do “due diligence” on potential investors.  Don’t take money from any investor who (a) isn’t likely to have the long-term best interest of the entrepreneur and company at heart (malevolent money) and (b) doesn’t bring appropriate skills and experiences to assist in company growth (dumb money).

Frankly, entrepreneurs are often best served by engaging with VCs at the earliest possible opportunity.   Angel groups routinely invite VCs to invest in seed/startup entrepreneurs.  Once the entrepreneurs meet early milestones with angel money, these same VCs, now familiar with the deal, are often interested in leading subsequent fund-raising.  As we all know, the VC industry is troubled with fewer VCs investing, especially in earlier stage deals.  Any tactics that entrepreneurs and their angel investors can apply towards raising subsequent and larger rounds of investment should be given adequate consideration.

It’s a GREAT time to be an angel.  Find a group and jump in!

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com