

Angels vs. VCs - jdavidson
http://blog.pmarca.com/2010/03/angels-vs-venture-capitalists-1.html

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grellas
The best angel investing in my world (Silicon Valley early-stage startups) is
based primarily on _relationships_ , not on formalities. This does not mean
that formalities are dispensed with. On the contrary, everything is done by
the book. But it is done on _friendly_ terms, with the wealthy individuals who
open their pocketbooks knowing and believing in the founders and coming beside
them to offer not only money but also strategic advice and long-term guidance.
These are basically former founders themselves, and successful entrepreneurs,
who consciously seek to guide the new ventures toward the path to success
_without_ using VC resources in the early stages.

And this is the wave of the future. VC investing is basically still largely
frozen today, but the early-stage efforts of such angels are active and
thriving. They might raise $500K or $1M or $1.5M, depending on the need, but
the terms of the investment will always be preferred stock on _balanced_
terms. Often, the round will be styled as a Series AA to distinguish it from
the typical VC-type round.

This piece has one of the best conceptual discussions of the differences
between angel and VC funding that I have ever read. Nonetheless, the model
documents still derive from a VC mindset (a good tip-off is the term sheet
provision that the startup will pay $10K of the investors' legal fees for
making the investment). Thus, while I believe the Andreessen Horowitz fund is
trying to distinguish itself by taking a simpler approach than is traditional,
I believe it remains VC-style. One will not get the equivalent here of the
benefits of what one would get from an angel investment made by a few wealthy
individuals with whom one has existing relationships. The latter, and not the
former, is the optimal angel investment.

The approach being pioneered here is a very good step in the right direction,
but it represents more a _VC firm_ trying to expand its range than it does an
optimal form of angel investing.

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breck
First, Great to see new content on pmarca again.

Second, saying "it takes a lot less money to build a company nowadays" has
become a cliche. Unfortunately few people really explain why this is. I
thought this was an excellent explanation.

> I emphasize product to distinguish it from building the company. Building
> modern companies is not low risk or low cost: Facebook, for example, faced
> plenty of competitive and market risks and has raised hundreds of millions
> of dollars to build their business

Important point. People use the term "startup" nowadays to refer to products
more often than companies. Building a company is a totally different endeavor.
It's surprisingly easy to build a profitable, popular product on the Internet.
But turning that into a global, thriving company is a totally different ball
game that few people have managed to do. I think it starts by picking an
important problem to solve. Most of the startups I've seen (some of mine
included), have gone after small, niche problems that won't lead to large
companies.

> When we invest in angel rounds, we behave like an angel. As angel investors,
> we can invest as little as $50,000, we do not take board seats, and we do
> not require control.

That's an awesome pledge. Anyone know other VC's that also do this?

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lisper
Beware: just because they don't have a board seat or formal control doesn't
mean they won't have a lot of influence, and possibly even de facto control.
In particular, if you need to do a follow-on round (and if you only get $50k
the first time around it's almost certain that you will have to) you will
almost certainly have to do it with them, because if your initial investor
doesn't follow on it's extremely unlikely that anyone else will.

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josh33
Very insightful comment: If the VC wants to be in the angel round, but refuses
to behave like an angel, then entrepreneur beware"

