Friday, February 22, 2008

Value of *Certain* Angel Investors

Most of the companies Clearstone invests in have angel money. In the past few years, angels have become much more active than they were following the tech crash of 2000. As a VC, I divide angel investors into two buckets. The first group includes angel investors who know the space they are investing in. Perhaps they previously started a company in the same industry or were part of a successful company targeting the same market. These investors can spot a new idea with potential from a me-to copy cat with limited prospects. When a company comes to Clearstone with some money in the bank from smart in-the-know angels, we get interested quickly. As it happens, angel investors in this category usually know the VCs who invest in their space and can be a great help in introducing a start up to smart venture capital investors. Better still, these angels typically know the going terms for a start up in their market. Accordingly, they can help the entrepreneur get the best deal warranted given the progress of the business.

The second bucket of angel investors are those who have some spare cash to invest but don't have any familiarity with the target market. These investors are generally not known by VCs active in the specific market the start up is pursuing. In most cases, they can't help with follow on fund raising. Because they don't know what the going VC terms are, they often set terms for their investment that make it harder to raise money in the next round.

So, here is my advice to entrepreneurs when it comes to raising angel money. First, it can help a great deal if you raise angel money from a prominent person in the space you are targeting. This prominent person could be affiliated with a large potential customer or could be a brilliant technical person who lends street cred to the technical platform being built. Seek out the well known people in the industry you are involved in! Their money means something. VCs can't know everything about an industry. So how do they get comfortable with a new business? They rely on smart people who are accomplished and well connected in that industry. If someone of that caliber happens to already be an angel in your business, raising venture capital just got a lot easier.

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