Issue No. 64 - April/May 2012
Key Players in the Venture Capital Game
by Conor McKenna
The Angel Investors
The first set of equity investors a rising entrepreneurial venture typically encounters are the Angel Investors – the informal network of the high net-worth individuals who invest their own money into ventures where they usually have domain knowledge, first-hand commercial experience and where they can add value over and above the capital they supply.
Angels typically invest between $50,000 and $500,000 individually although deals of up to $3 million can occur. As they invest at an earlier, more risky stage than Venture Capitalists, Angels seek a higher Internal Rate of Return - usually between 30% – 40% IRR. Angels tend to be the most patient of investors and their investment horizon is typically between 3 and 7 years.
The Good, The Bad & The Ugly
The ‘good’ angel can be worth their weight in gold as they will have a wide and relevant network of contacts and will strategically and constructively work with the entrepreneur and management team as a mentor, advisor and director.
Importantly, this type of angel has enough personal wealth to lose the money invested without feeling the pain too heavily. As a consequence, she typically has enough funds available to invest in further rounds to avoid dilution of her shareholding. There is no point in attracting investors who can’t afford to “pay to play” in the inevitable follow-on funding rounds – they will just get diluted down to nothing and blame the entrepreneur as a result.
The ‘bad’ angel is one who can’t really afford to invest – and lose - the money. It’s not unusual for these types to have little or no commercial experience or value-add. They generally take up a great deal of the entrepreneur’s time answering a constant stream of unnecessary questions...