Angel vs VC?

AVC regular Charlie Crystle asked me this question yesterday in the comments:

Fred, it might be helpful to some of your readers to explain when a startup should seek angel vs seed/early stage VC. 

If I need $250,000 to get to 100 customers, or $1 million to get to X, and I can raise both amounts from either Angels or VCs, where do we turn? 

And let's say both have significant interest, and the terms are the same, which is a better choice? (I no longer have an opinion on this, having gone both directions).

There are really two questions in here. The first is when you should SEEK angel vs VC and the second is if you have the option of taking money from both what you should do.

On the first, I believe entrepreneurs should seek angel money when their product is not yet complete, is not in the market and thus they cannot demonstrate real market traction to investors. There are multiple reasons for this and I'll try to articulate the most important of them.

A company without a product in the market is a very risky proposition. Some VC firms will invest at this stage but I am not sure its entirely appropriate for VCs to invest at this stage. Our firm will do it when we are backing a serial entrepreneur with a super strong track record that we are very familiar with. Otherwise, we stand on the sidelines and watch with interest but no capital at risk. A syndicate of angels, each with a small amount of capital at risk in the project, is a much more appropriate source of capital for a company at this stage because the risk has been well syndicated among the group.

Angels are also more hands off and I believe hands off investors are better for a company where defining, building, and tuning product is the primary exercise. VCs have a responsibility to their partners, both the partners in their firm and the partners who fund their firm, to be highly engaged in the business. So like it or not, they are going to be engaged in the business. I think it is best when that engagement is applied to a product that is in the market and gaining traction, and building the business is the primary exercise.

Finally, selling a VC on a concept on a whiteboard is a very hard sale. It is extremely time consuming with very little chance of success. Selling an angel on a concept is much easier. So simply in terms of where you should spend your time raising capital, angels are a better target in the "concept to product" stage.

The second question, what to do if you have the option of taking money from both sources on the same terms, is more interesting in many ways.

My answer is do both, if you can. When we participate in seed rounds, we most often do it by ourselves with a syndicate of high quality angels. We have done this at least a dozen times now and it works extremely well. We behave as if we are one of the angels and try to be relatively hands off. And we hope that the angels will add value just as they do in their other syndicates where there is not a VC firm involved.

But when the company needs another round of financing, we are there to provide more financing. Sometimes the angels follow in the successive rounds. But mostly they do not. It really doesn't matter, because we can fund the company on our own as long as the capital requirements are modest.

This is our preferred model and we have used it with great success. I think it benefits entrepreneurs the most as well. There are a number of VC firms that use this model. I first saw it practiced by Brad Feld about a decade ago in the seed deals he was doing in the Boulder area when he was at Mobius and I admired it immediately.

If for some reason, you must choose between VCs and angels, then I would choose a VC firm, as long as you have a very good relationship with the firm and the specific individual who will be leading the investment from the firm. In almost every situation, you are going to need more than one round and VCs can and will do multiple rounds and angels often cannot.

I will end this with a comment on the emerging seed and super seed fund models. They exist somewhere between angels and VCs and some are growing and turning into full blown VCs as I have mentioned recently in another blog post on this topic. Seed and super seed funds are "institutional angels" and as such I would mostly categorize them as angels. But many of them do have more capital at their disposal and can, at times, provide additional rounds of funding. So in some ways they are a hybrid. A syndicate of a seed fund or super seed fund and angels is a great way to go if you can put that together. A syndicate of a VC, a seed fund, and some angels might even be better.

To finish this post, I think entrepreneurs should target angels and seed funds when they are pre-launch but if they have the opportunity to pair a VC firm with angels and seed funds into a single syndicate they should do that because it will provide most stable funding platform for the business going forward.

#VC & Technology

Comments (Archived):

  1. sigmaalgebra

    Let’s see:Assume an entrepreneur has identified what is clearly a problem something over 200 million Internet users would like to have solved and so far have no good solution, has written some difficult to duplicate, crucial, ‘secret sauce’, server side software that has some solid, powerful properties that do seem to be about the best way possible, with available data, to solve the problem and provide a solution users will like much better than anything else.Or, lots of people have headaches, and the entrepreneur has the first aspirin.Then,”A company without a product in the market is a very risky proposition.”So, somehow we can’t do better planning than that?The US DoD has done planning, even just on paper, long before anything physical, with a relatively high success rate for at least 70 years. GPS, shift register sequence encrypted spread spectrum radar, passive sonar adaptive beam forming, drag-free satellites and detailed mapping of gravitational anomalies, the Keyhole telescope (Hubble but aimed at the Earth), the turbo-ram jet engines in the SR-71, the stealth airplanes, and more. They all worked fine, just as intended. So did the creation of plutonium 239, the separation of uranium 235, the first compression plutonium bomb, the first gun barrel uranium bomb, the Teller-Ulam configuration. They worked fine, the first time.Next, once there really is “traction”, now in many cases there is, or if the project is getting popular, soon will be, enough positive, free cash flow to fund growth ‘organically’. So, it would seem that for a significant fraction of good projects, by the time there is “traction” for equity investors the airplane will soon takeoff or already has.There is an example at http://highscalability.com/…One guy, a Web site, two Dell computers, ads just via Google, and $10 million a year in revenue. So, for a Series A, he likely has more cash than that already in the bank.Okay.Sounds like the flip side of”A company without a product in the market is a very risky proposition.”is a good opportunity, that is, little competition!Also the old description:”We believe that X is important.”Here is what we have built”.with maybe six foils is now too long in the tooth.Okay.All across the US, coast to coast, entrepreneurs, in most cases essentially alone, start and run successful Main Street businesses. Web 2.0 just has some big advantages, but the planning should not have to be much more difficult.

    1. fredwilson

      The DOD is solving a very different problem. They are the customer. They know what they want to buyConsumer internet is a different animal entirelyI believe it makes sense to wait until the product has demonstrated market traction before you invest. Our best investments have been done this wayPlenty of fish is great. So is craigslist. And many others. If you can it without VC, you should

      1. ShanaC

        And B2B internet?

      2. sigmaalgebra

        Due to confused Web site logic, got a duplicate post and deleted it.

      3. sigmaalgebra

        Due to confused Web site logic, got a duplicate post and deleted it.

      4. sigmaalgebra

        “The DOD is solving a very different problem. They are the customer. They know what they want to buy”Consumer internet is a different animal entirely”I wouldn’t want to claim that consumer buying is like DoD buying.Still, there is good news: There are valuable lessons to learn from the successes of the DoD: DoD projects, consumer Internet, Web 2.0, B2B, enterprise software, semiconductor projects, … are all forced to follow the same steps: (1) Identify a problem, (2) create a good solution on paper, (3) implement the solution, (4) deploy the solution, (5) see if the solution solves the problem.Given good work at step (2), it should be possible to make a fairly accurate GO/NO GO decision then — the US DoD long has. It does appear that biomedical venture capital can also.So, that the DoD and others can execute these five steps and with considerable reliability and end up with successes, GPS, a new medical product, etc. but consumer Internet venture funding has to wait until step (5) is incongruous.Consumers are not always fickle and unpredictable: When they believe they have a serious problem, then they can be serious customers including for consumer Internet services.I’ve seen a lot of good problem solving and have done some, and what I have seen of consumer Internet is nearly always terribly low quality work: Apparently only a tiny fraction of entrepreneurs know how to write a solid plan, and only a similar fraction of venture partners know how to evaluate one. Indeed, apparently the partners rarely even make a serious effort. The quality of the work in DoD projects such as GPS is MUCH higher — NO comparison. Net, the difference isn’t DoD versus consumer and, instead, is the quality of the work.Apparently there was a memo. I didn’t get it so that this blog ‘Angel vs VC?’ is my best indication although I have suspected as much. Venture capital used to have a reputation for being able to fund projects off the back of a napkin. Now it sounds like some LPs met for lunch.It does seem that by the time a good Web 2.0 project has the coveted ‘traction’ it should be within a few months of no longer needing equity funding.So, there are two major effects: First, the lack of early funding means that there will be too few projects getting traction. Second, once a good project does get traction, it will be reluctant to take a term sheet, Board, and check.So, if the LPs were trying to get higher returns by adding ‘conservatism’ to their venture ‘asset class’, then they just shot themselves in the foot. Thankfully for US national security, the high end work of the DoD is MUCH higher quality than that.Whether an entrepreneur needs venture funding for a consumer Internet project is a bit irrelevant: When he needs it, it’s not available. When it’s available, he essentially no longer needs it.In my case, funding would have helped, but I should soon not need it and then will be very glad to own 100% of just a sub-chapter S corporation with very private, simple, and maybe very gratifying finances!Yes, whatever problems there are in venture capital, for some entrepreneurs the flip side is an opportunity: Fewer good competitors!

    2. RichardF

      Of those Main street businesses, many of the multiples will have taken outside money, angel and/or VC to expand, the opening of one or two sites proves the traction then they will look for the money for expansion (if they are not following the franchise model)

      1. sigmaalgebra

        My understanding is that there is not much venture capital for Main street businesses.

        1. RichardF

          I think you are probably right in the current climate.Thanks for the link by the way, useful resource.

    3. JLM

      You forgot Lazik surgery. The DoD ROI is not too good though they do have some damn good products. They are however truly developing for their own account.I once saw a demonstration of the “real” accuracy of GPS — which is purposely degraded for commercial use — and it was unbelievable. You could literally conjure up the spatial difference between your pinkie and your thumb.Or as the guy giving the demo said — we can tell what finger you are using to pick your nose. A very useful piece of info, indeed.

      1. sigmaalgebra

        Early in my career, I was a programmer at the JHU/APL in the group that did the orbit determination calculations for the first version of the GPS, the one the Navy did. They had an antenna on the roof and routinely found its position within one foot. GPS is better. Apparently if average over time, can get within a few millimeters. So, can use it to measure plate tectonics.Actually, my work there was software for passive sonar and, later, the fast Fourier transform and some power spectral estimation (Blackman and Tukey).In part the ‘ROI’ of the DoD is that we are not all speaking German, Russian, or Chinese.In what I’ve seen in DoD and elsewhere, I admire the DoD for their effectiveness, efficiency, and motivation to serve our country. Looks to me like their ROI is terrific. One example is the Manhattan Project: Compare with the estimates of the costs in US blood and treasure for invading Japan. So, the Manhattan Project cost about $3 billion then (read the books by Richard Rhodes), and the invasion of Japan would have taken X soldiers, A months, with Y casualties and Z deaths. Plug in any reasonable estimates for A, X, Y, Z, and the ROI will look terrific, just in terms of dollars, e.g., maybe just $3000 per soldier.For the SR-71, it was a small project that let us fly over the USSR at will, never get shot down, and see what they were doing. Since we knew what they were doing, we saved money by not overreacting. MONEY; ROI.For the F-117, ask the pilots who flew it over the Baghdad flak about the ROI.Here’s a big connection: Computing, including Web 2.0, takes in data, manipulates it, and delivers results. Well, the manipulations are necessarily mathematically something, understood or not, powerful or not. So, for more powerful manipulations, it is from helpful up to crucial to proceed mathematically where we can establish some powerful results just on paper well in advance of any software, etc. That little fact is a major part of how the DoD has been successful and why we are not speaking Russian, etc. I kid you not: Math is taken VERY seriously in relevant parts of the DoD. Most of those DoD projects I mentioned are awash in math, uh, well beyond calculus.Well, the power of appropriate, possibly new and advanced, math is nearly as relevant to Web 2.0 and, in my view, is also in line to be the new ‘Moore’s Law’ for the rest of this century. Uh, how to make effective use of, just from current computing, 4, 8, 32, 40, 48, 96, … processors effectively?Are there plenty of examples in Web 2.0 now? NOPE! Maybe I’ll supply one! Uh, the DoD can evaluate such math, etc., but venture capital essentially cannot. Yup, this is a problem, the flip side of which is an opportunity.Where might better computing have financial value? First, what a Web site delivers is the results of some computing. Users will like higher quality information, and better math is one of the most powerful relevant tools. In the problem I am solving, what’s out there now for about one-third of the obvious market totally SUCKS, and the suckage is mostly just from poor math abilities from those other guys. Net, it’s really just all about the math; the rest is routine. No joke: Sorry, guys who see everything in business as challenging, it’s routine.For something more specific, consider ad targeting. No getting around it, are trying to estimate a probability and then maximize an expectation, and the gains go to the bank. Subtle the results are not. Yes, it isn’t all just math because also need a coordinated ‘business model’ to get the eyeballs, data on them, and base data for the statistics.Ad targeting in ‘consumer Internet’ is in line to suck the air out of old media. We’re talking a major change in our civilization.So, the crucial work for more powerful Web 2.0, computer applications, and ad targeting is some advanced, possibly original, math. So, for my project of this kind, I want on my Board people who don’t like math, don’t know math, don’t trust math, resent math, have no examples of where math was valuable in Web 2.0, see a refined user interface as the best competitive advantage, and are trying to exercise their Board responsibilities where the crucial material they have no clue about? I’m TERRIFIED of having such a Board.I was a teacher; didn’t want to be; didn’t like it; don’t want to be now. I can’t teach a Board about math.It was good to get the memo, although I did suspect it.I need to write a few more Web pages, get some more data, go live, get ‘traction’, i.e., revenue. Back to work.

      2. sigmaalgebra

        Due to confused Web site logic, got a duplicate post and deleted it.

      3. sigmaalgebra

        Due to confused Web site logic, got a duplicate post and deleted it.

  2. RichardF

    In the UK at the moment more and more angels are wanting to see the product in the market and some sort of revenue first before investing.

    1. Deckerton

      That follows along with guidance given by Venture Hacks AngelList here in the U.S. They suggest having either a great team, or great traction, or great “social proof” (which I interpret as multiple other investors indicating interest). Right now, great team members are reluctant to join a startup without significant financial backing. Multiple angels are unlikely to be interested unless you have traction. So really, the thing that seems to move the needle most of the time is traction. If that’s the case, it may be that angel’s requirements and seed-stage VC requirements are starting to converge: all seeking those post-traction deals. I think this convergence is what’s driving a lot of confusion on all sides of the table. Its not just in the UK.

      1. RichardF

        Interesting to know that.

      2. ShanaC

        Doesn’t this mean that in some ways Angel?seed and Vc money are merging at the low end?

      3. Matt Mireles

        While I can understand how you’re arriving at this conclusion, that’s not actually how things work. Even on angellist, it is the rare company that has awesome traction.

        1. Deckerton

          Most funded deals don’t have traction? Interesting. Maybe my deal is closer to being fundable than I thought.

          1. Stephanie

            If you need Traction to get Money, and you need a Team to get Traction, and you need Money to get the right Team, where does one start – esp if the founder doesn’t code? It is a virtuous circle. It suggests that the only viable starting place is either:1) finding a true angel that invests in great ideas and is confident in the power/track record of the founder to execute it – and give up a big chunk of the business in exchange, or2) “pay” for technical co-founder/team (even if freelance) with one’s own money or equity (if you can convince people to take equity – less and less popular these days given the competitive market conditions for technical talent, esp in NYC.)

  3. Evan

    On the VC v angel question, doesn’t it pretty much comes down to whether the specific VC will add value or whether the entrepreneur would rather have a less involved partner?

    1. fredwilson

      that is certainly a big part of it but there are other issues as well that come into play

  4. Harry DeMott

    I really think these discussions around angel, super-angel, seed stage VC etc… always get way too complicated for the entrepreneur. The difference lies in just how they are organized and what they bring to the table post funding.At their heart – all provide one thing necessary – and that is cash.Assuming the cash is the same then the entrepreneur has to ask what else are they bringing: domain expertise (would be great), more cash later if things go well (very much appreciated), business development connections (both on the market side and in helping recruit), opinions (do you want passive investors or highly active ones).Read Ben Horowitz on Ron Conway http://bhorowitz.com/2010/0…Is Ron an angel or super-angel – or now that he has a small fund, is he a VC?Does it really matter? Sounds like a guy who is worth having in the deal if you can get him – and that’s the point. It doesn’t matter what people cal themselves – what matters is that you end up with partners that can help you move the ball forward, whom you can count on to reply to an 11 pm e-mail, who have the ability , either through their brains, work ethic or Rolodex to potentially save the company.Forget the titles – give the those partners.

    1. fredwilson

      i largely agree with you Harry that we may be making too much of this. but there are subtle differences and if you can optimize your syndicate, then it makes sense to understand them

  5. dlifson

    Isn’t having only one VC in a seed deal create unnecessary signaling risk? There are a number of VC firms who use seed deals as an “option” to invest in the A round (not saying USV is that way, but I’ve had other VCs admit to me they do). It seems to me the better approach would be a syndicate of pure angels (who won’t follow on in any meaningful way) or a syndicate of VCs (as long as one of them invests, you’re good).I guess one thing that might temper my concern for only have one VC in a seed round is if that VC was a smaller firm (< $250M fund) because then it’s less likely they are doing 30 seed deals a year and planning on only picking 5 winners.

    1. fredwilson

      dave, chris dixon left a comment in this thread asking the same question. see my reply to him.

  6. Deckerton

    I’m not sure entrepreneurs should seek angel money when their MVP or prototype isn’t complete. Most angels want to see traction, so most startups without it are perceived as “too early” before that. (I always think entrepreneurs define “early-stage” as “I have an idea”, investors define it as “you have revenue and at least three customers or 10,000 users”). ; )What entrepreneurs *should* do is try to network, build relationships, and describe their vision to prospective angels well before they have a product or traction. Then, if they get to those proof points, both sides have some information about the personalities and capabilities involved, which is the biggest part of the equation.

  7. chris dixon

    I’m surprised you don’t mention the signaling risk of letting VCs in the seed round. I think you are assuming all VCs are like USV and participate in seed rounds with every intention of following on. In fact there are lots of VCs who are explicitly writing small checks for “options” (at least internally they admit this) which is generally very bad for entrepreneurs. You know who I’m talking about.

    1. Alan Warms

      Chris -I think that’s in Fred’s point about knowing and having a good relationship with not only the VC but the actual person who is leading the round. Only way to mitigate that risk. I think Fred’s right if you know the person, they are a good actor, and you know they are honorable.

    2. fredwilson

      i think you and others have done a very good job of explaining that issue to entrepreneurs and i think the market is reacting. VCs who treat entrepreneurs and their companies as options aren’t going to get to do too many seed investments going forward. so i think there is a lot less of that happening these days.

    3. Harry DeMott

      In terms of signaling, I have a slightly different take.From the point of view of the VC’s – this is just good business – seed a ton of companies – get inside – and have a lot of options to up their commitment when they see traction without having to battle it out. Smarter VC’s should have had option positions in Foursquare – to avoid the expensive bake-off.From the company standpoint, you certainly do risk a signaling problem by taking VC money at an early stage – but you also potentially gain a good early partner who may help you get further ahead than you would have with just an angel investor. Of course, if you take VC money and they don’t follow through – there will always be the question as to why they did not – but if those VC’s are well known for taking option positions – this is pretty easily explained.I’m always amazed at the herd mentality in investing (not just in VC but in the public markets as well). I would really hope that people did their own work and made an independent decision on a company rather than just look at the “signal” that is sent by a “name” investor. Just because John Paulson (who made over $1B for himself shorting sub-prime mortgages and is thus considered a genius) signals that MGM is cheap – by buying up over $1B of stock in it – doesn’t mean that I can’t take a contrary viewpoint. I may have a better understanding of consumer psychology, or the competitive set in Vegas – or any number of other factors – whereas Paulson may just have $40B to deploy and a longer term horizon.I’m not sure it is any different in the VC world. VC’s don’t invest for a lot of reasons. Partnerships have falling outs – funds get used up on other investments – investment themes go out of style (online video anybody). Signaling is important, but it’s not the most important thing.

    4. Harry DeMott

      In terms of signaling, I have a slightly different take.From the point of view of the VC’s – this is just good business – seed a ton of companies – get inside – and have a lot of options to up their commitment when they see traction without having to battle it out. Smarter VC’s should have had option positions in Foursquare – to avoid the expensive bake-off.From the company standpoint, you certainly do risk a signaling problem by taking VC money at an early stage – but you also potentially gain a good early partner who may help you get further ahead than you would have with just an angel investor. Of course, if you take VC money and they don’t follow through – there will always be the question as to why they did not – but if those VC’s are well known for taking option positions – this is pretty easily explained.I’m always amazed at the herd mentality in investing (not just in VC but in the public markets as well). I would really hope that people did their own work and made an independent decision on a company rather than just look at the “signal” that is sent by a “name” investor. Just because John Paulson (who made over $1B for himself shorting sub-prime mortgages and is thus considered a genius) signals that MGM is cheap – by buying up over $1B of stock in it – doesn’t mean that I can’t take a contrary viewpoint. I may have a better understanding of consumer psychology, or the competitive set in Vegas – or any number of other factors – whereas Paulson may just have $40B to deploy and a longer term horizon.I’m not sure it is any different in the VC world. VC’s don’t invest for a lot of reasons. Partnerships have falling outs – funds get used up on other investments – investment themes go out of style (online video anybody). Signaling is important, but it’s not the most important thing.

    5. JLM

      The solution to the “cheap option” provision is a buy-back provision which allows the entrepreneur to repurchase the original investment of any investor who fails to perform as expected or who goes to the 4-corners.I have done this literally hundreds of times in partnership environments. It is an essential discipline and is the legal equivalent — roughly — of a pre-nup.A simple Chinese double dare buy back — one guy values the investment and the other guy decides to buy or sell. If either party defaults on their obligation or to make a decision then the other party is empowered to buy at a substantial discount.It cuts through all the baloney pretty damn fast.

      1. fredwilson

        play or payi’ve seen (and done) plenty of deals with this type of provision in itbut this actually doesn’t solve the signaling/option issue that Chris talks aboutthe thing that solves it is VCs who do this getting blackballed by entrepreneurs

        1. JLM

          A good beating helps too. This is in accordance with my desire to bring back dueling as a dispute resolution technique. I think it would be rather quick and would certainly help with thinning out the herd but hey, I am a bit old fashioned on these things.

    6. John Frankel

      Totally agree – see my comment above.

    7. LIAD

      I get the signaling risk and remember your post about it a couple months back.But – turning down VC investment in a seed round as a hedge against a possible negative signal in follow-up rounds is a big ‘ask’ and one I think goes against the grain of the optimistic entrepreneur.If going into your seed round you don’t have confidence (whether grounded or not) that you can carry the business and investors through subsequent rounds – do you have any real chance of even closing Angel funding?

    8. Gabriel Gunderson

      Heh, I was going to mention this and refer to your post, “The importance of investor signaling in venture pricing.” Fittingly, you beat me to it.Great post Fred. Full of useful, practical and timely information. We’ve been able to get our product from inception to near-launch without angel money. Naturally, as we launch, these are the types of questions we’ll be dealing with.Thank you both for your input.Best, Gabe

    9. shafqat

      Chris – I’m going to blog more thoroughly about this, but just want to chime in here. We rook a small amount of money from a large VC last year who is not able to follow on. It was ‘option’ money, but they did provide occasional help during the year. I just went to SF to raise a large follow on round and was quite apprehensive about the signaling issue (especially from reading your posts).As it turns out, it was a complete non-issue. Of the 25 investors I met/called that week, I believe only one was concerned. No one else had a problem with it – in fact, it helped tremendously on a few occasions for references, social proof, connections etc (we even met some new potential investors in the office of our ‘option VC’!).So while the signaling issue is definately a concern in theory, from our experience it is theory only. In practice, it had NO negative repercussions – in fact, it helped tremendously and got us multiple term sheets in less than a week of doing the rounds with investors.So to all other entrepreneurs I would say – it might be worth to keep the signaling issue in the back of your mind, but don’t kill yourself thinking about this and especially don’t turn down great VCs in those early stage rounds if you don’t have options. I would go as far to say it can actually help. Your mileage may vary etc.

  8. Alan Warms

    Fred, Completely agree. One other point/argument in the favor of getting a VC on board for the seed round if possible. A VC completely gets/understands the bet they are making – understands it may work out and it may not. While some entrepreneurs may be able to corral a group of *only* experienced Angels – my guess is within most angel investor groups are family and friends constituencies.If 2/3 of the way through the seed round, the entrepreneur realizes, “you know what, this isn’t what I thought it would be, and the market is not where I thought it was,” and chooses to return the last third of the money, I think in most cases the VC would respect that decision and understand it. Worst case, it’s one conversation. Can the entrepreneur have that same conversation with 20 other folks? Will they understand it and get that they want to move onto other things? Or will there be an expectation that no matter what, for the next x years they need to pay back the angels.BTW, this also ties a little back to a comment I made on Mark Suster’s post — as you say in your post: “A company without a product in the market is a very risky proposition.” Why I want participating preferred as an Angel – it’s the riskiest stage of investment and I want best chance to earn a return – I also give it as an entrepreneur at this stage.

    1. fredwilson

      the only problem with that Alan is that you are setting a precedent for all future rounds.why not just take some extra warrants or something that doesn’t have to stay in the charter for the rest of the company’s life?

  9. Cindy Gallop

    I find this discussion v interesting and topical. Alongside my primary venture http://www.ifwerantheworld.com, I am currently looking for seed funding for the next iteration of my secondary venture http://www.makelovenotporn.com, in order to convert it to a business model-driven venture (with a rather, ahem, creative approach to monetization), in line with my belief that the businesses of the future should ideally combine a higher order agenda with making money. I am doing this because since I launched MakeLoveNotPorn at TED 18 months ago it has received an extraordinary response. I get huge amounts of emails about it every single day from young and old, male and female, literally from all around the world, making me feel that even though it is my secondary venture, I have a responsibility to take it forward in a way that will make it more far-reaching and effective. So far I have had no funds or resources to dedicate any time to it away from IfWeRanTheWorld (the site is still v basic as I put it up on no money). On zero promotion (and carrying no advertising, which I have declined to do so far), MakeLoveNotPorn gets 2,000 hits a day. When someone posts my TED talk, as The Atlantic did a couple of months back, that shoots up to 10,000. It is a global concept; again I have done nothing actively about that, but it gets traffic from and is tweeted in countries all around the world; currently the second highest source of traffic after the US is China, and it is currently being tweeted and RT-ed extensively in Brazil.I am talking to several angel investors about my monetization plans, and very selectively, in this case because the nature of the subject matter means it’s not for everybody (ironic though that is; in the midst of discussions about the influence technology is having on human nature and behavior, MakeLoveNotPorn is designed to address one of the single biggest impacts technology is having on the most fundamental areas of human nature – our sexuality – one that as a market happens to be a potentially very, very lucrative proposition).I’m interested to know – would the above constitute enough of ‘a product in the market’ evidence of potential traction to be of interest to investors generally, nature of subject matter aside?

  10. Jan Sessenhausen

    Interesting post and really great input. This pretty much matches the way the firm I work for (a German PPP for Seed stage fund) handles this. In a typical seed stage investment, we can invest ourselves or together with a co-investor. Often these are one or more angels that belong to our network. One of the key advantages the angel has is that we invest much more time (and money) into a sufficient Due Diligence, something a BA can or will hardly do. In addition, as part of our role as lead investor, we handle most of the organizational / legal aspects – something an angle will struggle with once he starts having a substantial amount of investments. Since almost all of our investments follow standard terms (PPP fund), the angels pretty much know what they are getting into upfront.Another aspect is finding angels willing to co-invest: some teams bring along their own angels whom we then work with (if we agree on terms etc), in some cases we approach our network and thus help bringing additional money to the table.Overall I like the approach of VC / BA combinations and consider them a great option for all sides – including the team raising money.

  11. Mark Essel

    An interesting post on what color of money an entrepreneur should consider. Largely the source and choice of funding is like worrying about scaling before you have traction, or premature optimization. Deciding to fund raise (a full time endeavor) or when to seek external cash/resources is the primary concern for founders.

  12. Elad Gil

    I think this is a great post but as Chris (partially) points out, I think this is very much the “investor” perspective on having an investor participate in a seed round.I think some of the issues of having a VC in your seed round are:a) Signaling (which Chris mentions). I get into this in a recent blog post: http://blog.eladgil.com/201…b) VCs are much less likely to do follow ons for companies they don’t feel are getting fast enough traction (opportunity cost of partner’s time). This can be a death knell for the startup as other people may not want to fund the company. So while VCs _can_ do follow ons, they will only do them for companies that already are doing well and who could raise money otherwise.There are also some positives you don’t mention, e.g. VCs can put in what for them is a small amount of capital quickly into the angel round, which helps fill up the round and decreases entrepreneur time spent on fundraising.In general though, I think raising money from a VC for your seed is typically bad for the first-time entrepreneur.

    1. fredwilson

      i disagree Eladi have not seen much of this “VCs not investing in follow on rounds” activitysure it would be hurtful if it happened, but i don’t see much of it

      1. Elad Gil

        Unfortunately I have seen a few examples of this.One friend of mine in San Francisco just shut down his company due to this dynamic. 🙁 He raised a $1 million seed largely from a venture fund. 1 year later he was told that the venture partnership could not support putting any more partner time into the business and they would not help with fund raising for the next round.Anyhow, thanks for the great blogs.

      2. John Frankel

        The signaling issue is a real worry when I talk with CEO’s. The next round becomes about whether the VC participates or not, and not about the merits of the company itself. They are also concerned that the VC might be willing to participate at a given price, but below what the CEO wants to raise the money at – that can also be a conflict. Coupled with this is the concern that the investment has to be meaningful to the investor, and if you are running a $500mm fund why would you be doing a $200k investment? It is not big enough to be meaningful to your fund, so the only conclusion is that it is to get an option on a later round that your might otherwise not have inside access to. Is it in the best interests of the company to be writing these options?

        1. fredwilson

          i know that entrepreneurs worry about the signaling issue but i think that is becoming less of an issue for reasons i’ve articulated elsewhere in this comment threadbut the mismatch between investment size and fund size is a serious issueask how big the fund is and what percent of it will their investment in your company beif it is less than 0.1%, that’s an issue

          1. John Frankel

            Time will tell is signaling has gone away, but it is something CEO’s are worried about. I would argue that less than 0.1% is an issue, perhaps even below 1%. Should an investment below 1% of a fund garner disproportionate attention of the fund’s managers?

          2. fredwilson

            i don’t agree that less than 1% is a worryfor us, that is $1.25mmand we pay a ton of attention to a sub $500k investmentdelicious, etsy, disqus, heyzap, foursquare, and a bunch of other of ourinvestments started out in that territoryit is our sweet spot to be honest

          3. sigmaalgebra

            I no longer get very surprised at whatever behavior, but the 0.1% problem seems to conflict strongly with the importance of ‘terminal value’.Or, the obvious point is, if the terminal value looks bad, then f’get about the project.However, if the terminal value looks good and the 0.1%, for whatever reason, is considered too small, then, SURE, go ahead and write the check for 1%. So the hard working entrepreneurs, while typing software, get good quality Chinese food or pizza delivered instead of just, say, cold beans from a can. Maybe they buy a supercharged red Corvette and each week loan it to the guy who wrote the best code that week! Or, each programmer gets a 4 core workstation with two monitors, each 22″. It actually could help, the ‘fat vs. lean’ debate aside.Uh, maybe hire another programmer and let one founder cut back to 60 hours a week and save his marriage. Might not be good for that founder to have a divorce or for the founder’s stock to be split in a divorce settlement.The screaming obvious point is, if the terminal value is good, e.g., worth the 1% and the VCs time and effort, then at 0.1% it is worth at least 0.9% more of the VC’s and LP’s money and is a BETTER deal and not a worse one.Uh, if a $200 million fund returns something reasonable, say, $10 billion, and did this investing only 10%, that is, ends still having not invested $180 million, then the LPs will be unhappy?Gee, if the LPs were so eager to get rid of the $180 million, then there are ways to do that.Looks like some people are not really looking at terminal value. Again, I’m not much surprised at anything, but this does seem ‘somewhat’ surprising.Sorry, I’m looking at terminal value or better yet a long lasting company with high value in any sense. If others I work with are mostly looking at something else, then we have a problem.Does look like there are some VCs with various problems. If they are making good money, then okay. Otherwise, not so good. Those LPs are trying to pay for pensions, university profs, and life insurance benefits — not so good for them not to make money.

  13. JLM

    At the end of the day, money is money. It’s just a commodity and there are some folks whose only business is inventorying money and dispensing it. That simple utterance is probably the core bit of knowledge that entrepreneurs need to remember — you are dealing with guys whose job is to put out money. Oh, yeah, and they only make money when the deals they invest in work — well.Entrepreneurs need money to fund their ideas and to build great products and great companies. Entrepreneurs without money are called “dreamers”. Entrepreneurs are motivated by their own brand of craziness and the similar desire to make money. But enterpreneurs are dangerous folks because they also trade in other currencies — fulfillment, problem solving, good to great to perfect. Dangerous cats.In many instances, the dispensers of money are differentiating themselves for their own money raising purposes.Angels know what they know and are comfortable in their knowledge space.VCs must pitch somebody to raise a fund and they must discriminate their pitch amongst the great number of other VCs in order to convince an institutional investor to invest substantial money in the VC fund.My take is very simple — the most important decisions you ever make in life are with whom to associate, sleep with, bear children with, go fishing with, go hunting with — and, oh, yeah mortgage your future with. Choose your funding sources wisely.Never, ever, ever go into business with anyone who has a spotty reputation or with whom you don’t feel a chemical level of comfort. You cannot change people and you cannot rehabilitate funders. I know this to be true beyond all possible speculation.The angel, super angel, seed, super seed, nano-VC, focused VC, etc distinctions must also be tested by a very simple proposition — what else does this bunch bring to the party? Can they guide you through the maze to the PAY WINDOW in some meaningful way and can they educate you on the BEST PRACTICES for your industry, product, etc?Ask yourself — would I trust this guy to be the executor of my estate?Would I be proud to do business with this guy?Can this guy add value to my quest?If you have any “NOs” — pass, cause it’s just money.

  14. Ian Bentley

    Hi CharlieI’m from South Africa, a land where Business Angels are apparently in scarce supply!I have been trying to get funding for a venture that’s still in the setup phase. It is truly a great concept and will certainly make a LOT of money … but until the business is up and running and the company has established some kind of track record, its well nigh impossible to get any local funder to show any real interest.Do you have any suggestions or advice for a very frustrated would-be entrepreneur with a Blue Ocean Strategy stuck up his sleeve?!!!

  15. kris

    Angel investors are more hands off?I thought exactly the opposite was true. At least that’s what I was hoping for.Some of the entrepreneurs in the comments are basically saying they want the angel investors to get out of their way. This too comes as a surprise to me.

    1. fredwilson

      hands off means out of your shortsif you want them, the good ones will be there for you

  16. Stephanie

    If you need Traction to get Money, and you need a Team to get Traction, and you need Money to get the right Team, where does one start – esp if the founder doesn’t code? It is a virtuous circle. It suggests that the only viable starting place is:1) find a true angel that invests in great ideas and is confident in the power/track record of the founder to execute it – and give up a big chunk of the business in exchange, or2) “pay” for technical co-founder/team (even if freelance) with one’s own money or equity (if you can convince people to take equity – less and less popular these days given the competitive market conditions for technical talent, esp in NYC).

  17. Ivan Gaviria

    Great post Fred. One thing that I’ve found surprising in much of the VC/Angel discussion the last few weeks is that people seem to approach it as though it is binary. As a corporate lawyer at a startup focused firm, we see a ton of venture financings across the spectrum from angel to late stage (something like 800 a year). What I’ve noticed the last 12-18 months is that this thing is evolving super fast. There are many VCs out there who are learning and innovating super quickly and finding ways to alter both their deal making and their process to be more competitive with the super angels. Whether that’s making an investment decision faster or living without board representation or whatever. There are also plenty of angels and angel networks out there who can be brutal to work with and will generate $25K of legal fees on a $50K investment while they try to negotiate every possible corner case (gee, what if we IPO before the Series A and it’s between our valuation floor and our cap, blah blah). I think even the stigma issue around a VC not doing a follow on is going to change as people adjust their thinking from a world where it was a major black mark if a VC did a $1M to $3M Series A and didn’t want to do the B versus a VC who does $50-$100K as part of a $750K debt round and doesn’t choose to buy more in the A.In any case, I think there is a ton of good thinking/writing on these issues but I would definitely encourage entrepreneurs to apply the same discipline that they would to any critical decision and really do the research, check the references, read what’s out there and try to understand each potential investor (angel or VC) as an individual. I think THE huge difference in the 15 years I’ve been doing this stuff is the proliferation of great resources and info available so easily and the change in attitude that guys like you and Suster and many others have pushed with the open discussions on these topics. Anyone who puts in the effort can pretty quickly find out a great deal about potential investors before they commit.

    1. fredwilson

      yup, things are moving faster than any time i can remember in my 24 years in the VC business

      1. JLM

        Nobody has 25 years of experience any more, we all have one year of experience 25 times. The whole world is moving faster and faster but that is what opportunity looks like.You could not even contemplate conducting business like we did just 5 years ago.

  18. Donna Brewington White

  19. Fred T

    thanks for the idea, fred w. we are most definitely grateful for vc firms and angel investors contingent upon circumstance, traction, etc; but we are most grateful for those who truly understand the entrepreneur’s technology to a tee. i was very amazed that one of many awesome partners of a vc firm actually knows so much information than i do that i just ended up listening quite intently and learning from the dialogue between him and our cto.yes, there are amazing vc’s / angels out there.

  20. Melih Onvural

    I think the simplification of angels as folks who don’t have the funds to participate in ensuing rounds is a really interesting one. I know you later come around talk about super seed funds, but I’m curious as to what you think an angel’s role is as a company matures beyond the product-market stage.

  21. Toshi O.

    Any chance you could write an article about the people under the CEO/founder level?Like finding good product managers.Toshi O.

  22. desmondpieri

    Fred, there was a good article in Boston Business Journal this week about what they are calling a “surge” in seed funding (angels or micro-VCs).http://bit.ly/bH22OWDes

  23. William Mougayar

    I wonder what you think of a strategic partner round, somewhere b/w a seed and A.

    1. fredwilson

      i’m not a fan of that

  24. Dwisek

    I currently have a new product in “testing”. Of course I think it is a fine product and market surveys show that the public is ready for it. Right now I need seed money to purchase tooling and get things started. I have contacted several Angel investors and I am told that they would be much more comfortable investing if we could show proof of sales. No tooling – no sales. Now what?

  25. Tereza

    I’m personally more interested in whether they’re the right “person”, rather than if the label is angel or VC. The wrong person is the wrong person, period.In my short period of talking to both I’ve observed there is so much variation in capability among investors. Almost all are very smart. Many are deep in tech or finance or both. Each is deep in his own personal user experience.If the strategic thrust of your company is in the ballpark of the life they live and the work they do, whether angel or VC, you are more likely to find a match, someone (or a group) who “gets” what you’re doing. So if the investor maps, demographically, to the market you’re targeting, there’s a chance.After all, early stage investing is as visceral as it is analytic….if not more so. The investor needs to swim in the product and think, “Holy crap this is so cool!” Hard to be visceral about an experience you can’t directly relate to.I’ve been somewhat surprised at relatively low sophistication around marketing. Some businesses have marketing as part of the strategic core and require much more than vanilla tactics, and these must be baked into the product. (I don’t mean expensive, just different). In fact at the stage of maturity around consumer tech I’d argue there will be more of these and some winners will wrap more of this knowhow into the business earlier.But I’m seeing tactics which are standard and proven in the ‘advanced marketing repertoire’ which are not really understood. My feeling is if it takes 20 minutes of explaining for the prospective investor to “get it” then it’s a bad match. This is more common among the less experienced investors who have pretty narrow experience.My take is that 20-min cutoff is a sentinel that you’d have to spend significant time downstream with them trying to teach them about your basic anatomy rather than taking it to the next level with their help and introductions. You may as well find ‘dumb money’ with fewer strings.There’s an old adage in dating: Some people are high maintenance. Some are low maintenance.Watch out for the ones that are really high maintenance but *think* they’re low maintenance.That could be a big time suck with limited benefit coming back to your business.

  26. Paul Johnson

    While I can understand the inherent risk in VC’s investing seed – if the ultimate aim is to add value (to make more), I’m suprised more don’t get involved earlier to aim the business in the right direction intead of altering the steering later

  27. Casey Cheshire

    Really helpful, insightful post! Great post Fred!

  28. Paul S Germo

    FredThank you very much for your amazing insights. As a CEO of a natural Skin Care start-up – this post is invaluable. Our products are ready for market – just need to get ’em there. Your helping me focus where I need to at this point.Cheerspaul

  29. Chris Voss

    When you run your ideas by Angels and VC’s is it best to have a confidentiality agreement signed to protect your idea?Chris

    1. fredwilson

      they won’t sign them and they shouldn’t

  30. Dmitry

    Fred, from our experience I can only agree with “angel-then seed fund-then VC” approach. We’re at our very early pre-launch period so when only alpha prototype of the engine existed we showed our demo to several funds. They literally have there jaws dropped when they saw it but all we heard was – “you’re too early, no users, etc, etc”. But guess what happened after we managed to get 100K from the angel? “Oh, you’re only 2 months old and you already got 100K invested? Come to our office, lets talk a little bit”. My point is seed and VC funds will be much more interested in you after they see that angels are there already. Correct? 🙂

  31. TechnoratiWannabe

    Is it appropriate to cold email angels asking to pitch? Or should you always use a warm intro? What’s the appropriate protocol in approaching them?

  32. Marie

    This is not at all true in life sciences/biotech/medical devices/diagnostics where almost all the investing takes place before a product is on the market, and the investments and time to get to market are much longer.

  33. fredwilson

    i agree with your analysis Charlie

  34. nedned

    Good points. Also, “active” angel groups can be particularly distracting, wanting to be engaged, but offering little value add. Given the average size of an angel investment, if an angel isn’t going to be a passive investor, evaluate he/she carefully. Spending several hours a month justifying your cloud strategy to a retired frozen food magnate’s CPA won’t be fun.

  35. JLM

    Funny thing, sometimes I prefer dealing w/ folks who need a bit of education as to how to make a deal work.Years ago I pitched KKR, Leon Black, Ace Greenberg, Herb Allen, Olympus Partners, Blackstone, etc — sophisticated investors all — but more LBO and PE (that term was not in use in those days) type of guys on a distressed asset approach to the S & L crisis.Everyone of those SOBs — except for Greenberg and Allen & Co with whom I ended up doing a bit of business — stole my idea. In one case, they even used my pitch materials to pitch institutions to invest in THEIR funds.So sometimes, it is useful to provide a bit of education and not be dealing w/ the sharpies who know everything.Not a perfect analogy but a real one.

  36. JLM

    What you did was set and manage the investor communication expectations proving that this was not your first rodeo.This is the real value of experience, gray hair, a bald spot — you, uhhh, ummm, KNOW WHAT THE HECK YOU ARE DOING!It is no different than the way you manage Boards in a public company environment. It ain’t hard if you know what you are doing.

  37. Elad Gil

    The business was doing so-so. They had some revenue and customers, but definitely not on the path to be a “break out” success. I think the entrepreneur also had the disadvantage of moving to the Bay Area recently and so he did not have the relationships to other investors to overcome the signaling/lack of support by his VC.

  38. sigmaalgebra

    Yes, there were some good remarks there on scaling, data base usage, etc.My analogy is, the data flows in the server farm should be something like the material flows in a large gold mine — simple operations done on a large scale.

  39. jaredbrandt

    I am curious if you think convertible notes or a priced round are generally considered better? I have heard arguments both ways.

  40. Cindy Gallop

    Charlie – thanks so much for responding – that’s good to know. And just fyi, business model has two clear revenue streams with potential for more; yes; and yes – in the last case, extremely substantial ones 🙂

  41. Cindy Gallop

    Charlie – thanks so much – am just in the process of starting to reach out now (have lined up team, have new iteration wireframed and ready to go, business plan completed and the minimum amount of seed funding necessary identified ).

  42. Cindy Gallop

    Couldn’t agree more with this piece – am all about bootstrapping and deliberately designed IfWeRanTheWorld to innovate in terms of how we operate it as a business (crowdsourced venture as well as crowdsourced platform, designed to be self-populating, self-generating and self-propagating) to keep overheads and burn rate as low as possible. Alongside seeking seed funding for http://www.makelovenotporn.tv, have also been investigating how to make it happen without funding (I’m an old-fashioned girl, that’s always my preference and I believe revenue is the best source of funding if you can make that work :)) but as it is my secondary venture that route is likely to take longer and be more difficult – and I have an entire global community building up around MakeLoveNotPorn that have made it clear how much they welcome it and want to see it be more far-reaching, so would like to speed up launch if I can (three months from funding if I can get it).Really appreciate your responses – many thanks.

  43. Mark Essel

    Great read Charlie, got this from my disqus following feed!

  44. PhilipSugar

    Second time you’ve brought this up and 1989 was a long time ago….was First Boston a big partner??? If so we’ve met 20+ years ago.