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Angels? Sure. VCs? Sure. But Not Both.

Written by: Paul Kedrosky

Article Overview: This paper's result makes me think we need to augment the martini model of venture investing with a martini and olive model:

Angels? Sure. VCs? Sure. But Not Both.

This paper's result makes me think we need to augment the martini model of venture investing with a martini and olive model:

We examine the impact of business angels on 182 Series A financings and subsequent company outcomes. Our studied rounds have a varied mix of business angel and formal venture capital investors (VCs). We find that when only angels participate in a financing round and VCs are absent, control rights are more entrepreneur-friendly, legal expenses are lower, and investors are more geographically proximate to the company. Such angel-backed companies are less likely to fail and are more likely to have a successful liquidity event. We find that companies financed exclusively by VC investors also perform well, particularly when deals are large. Companies financed by both angels and VCs experience inferior outcomes. Our results suggest that entrepreneurs consider business angels to be preferred investors and VCs investing in small deals face adverse selection. For larger deals, where deeper-pocket VC participation is required, these roles reverse and angels face adverse selection when investing alongside powerful VC syndicates. [Emphasis mine]

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Article Tags: adverse selection, business angel, business angels, entrepreneur, financings, formal venture capital, legal expenses, liquidity event, martini, participation, syndicates, vc investors, venture capital investors



Related Forum Posts
My collectibles - I collect two things; Marilyn Monroe items and Angels. I have all sorts of statues, pictures, mugs and ornaments in both these fields of interest. Including one 6 foot cardboard figure of Marilyn Monroe in my bedroom! I have it against the wall behind the bedroom door and she scared the life out of my husband when I first placed it there...(He thought someone was in our room one night) LOL.
The time I spend collecting - Hi Kevin, to address your questions, honestly, I do not spend a lot of time or even money on regular basis. I've been collecting these items for about 8 years now. The way I collect is basically in my spare "I have nothing to do" time and when (or if) I happen to come accross a piece I like, I purchase it. Some of the items were gift given, like most of the Angels I've collected, while others just fell into my lap such as my 6 ft cardboard figure of Marilyn Monroe that came from my neighbor and best friend down the block from me. She happened upon it in a store and saw they were going to toss it out and she asked if she could have it...they simply gave it to her and she pasased it on. Other items I do search for when I have the time. I've even come across some pictures that I adore and printed them on my photo printer on photo paper and framed them. You can't tell they were just printed from the computer.
Re: Sports is queen! - Playoff time is always a profitable time for me.... The baseball playoffs are now going on... I've got a website for a young star named Jacoby Ellsbury - he made a great defensive play and did some good things offensively in the Red Sox' first game against the Angels on Wednesday, and today the hits on his site are going through the roof. Only one Google Adsense click,though! But I'm hoping to see somethign from Amazon tomorrow, as I've got his jersey, and a poster, and the 2007 World Serious win DVD for sale there.... As long as the Red Sox stay in the playoffs, I anticipate the hits on his website to continue to rise to probably treble what they are during the regular season... I just hope they start hitting those google ad sense ads!!!! Doesn't matter how many hits you get on a website page if nobody clicks on those ads....
funding nightmare recovery and PPM - My company has just finished being raped by two firms in Atlanta 1 a networking group and the other a capitalization group that are supposed to help growing companies raise capital. We shelled out close to $50000 to these two groups and have been strung along for 6 months on "why this isn't completed"; "we need to do this or that" etc. and we are fed up. Out of it all the first firm at least has introduced us to Angels and VC's that are interested and very serious about investing in our company. However the 2nd firm (which we were sent to by the 1st firm) was supposed to actually handle the capitalization structure; offering and prepare the investment docs. As you've probably guessed we paid for this upfront and we still do not have a ppm. We have our own CFO now and have done all the prep work ourselves internally and I don't want to engage another company to prepare the docs unless they are recommended by another entrepreneur. Does any one know of a reputable group to prepare a ppm expediently and introduce our project to additional investors? We have everything ready.
Different Types of Funding - Finance for business can be obtained through a number of different sources. Let's review some of those channels to help you decide what's right for your business needs: Grants There are over 930 different EU and UK grants and loans available from over 100 issuing bodies. This is the cheapest form of finance and an important part of the funding package that companies and individuals need. We can help you find your way through this maze. Technology Micro Projects: 50% of eligible costs up to £20,000 Research project: For a technical and feasibility study of an innovative idea for new technology 60% of costs up to a grant of £75,000. Development project: For development up to pre production 35% of costs up to a grant of £200,000 Developing an innovative idea: valuable for small companies and individuals at the start of a technical project: 75% of costs of hiring a mentor and consultants. Export To start exporting or moving into new markets grants of 50% of costs up to £20,000 each. Training and Education Knowledge Transfer Partnerships, Achieving Best Practice in Your Business, Investors in People Modern Apprenticeships New Deal for various grants. Environment BOC Foundation for the Environment: 25% to 50% of Project cost, typically £20,000 to £100,000 Clean up Fund: Emission reducing equipment up to 75% of cost Community Chest Fund: Up to £25,000 for projects near active SITA sites High Impact Fund: £150,000+ for larger projects near SITA sites Assisted Areas Regional assistance grants of between 10 and 35% for capital expenditure in less favoured areas of the UK. Loans Loans are an excellent source of finance if you have suitable security to borrow against or a reliable earnings stream. This needs to be planned and presented well to obtain funds. Credit cards Provides up to 56 days free credit if you play the game! Overdraft Banks are surprisingly supportive when presented with a well thought through plan and competent management. Bank Loans Lenders tend to look for a good business plan and security. Typically the loan is approved by a centralised back office function rather than the person you meet. Terms and rates depend upon the risk. Repayments can be very flexible to meet your specific needs. Mortgages These can include flexible repayment terms to meet your business needs. This can even be incorporated into your overdraft finance so that you have one flexible account for both personal/ business mortgages and overdraft Small Firms Loan Guarantee Scheme Up to two years trading: Up to £100,000 Over two years trading: Up to £250,000 However these are difficult to obtain and are a loan of last resort. Export Guarantee Scheme This is government backed insurance against appropriate export documentation. Mezzanine This is a halfway house between loan and equity. It can be an innovative way of raising funds for the more established business. Mostly for expansion capital. Equity This is not as easy as the papers would have you know. Only 1% of business plans received by Venture Capital Funds are successful. However, a good business proposition consisting of a strong demand for the product or service, management track record and a sound financial plan will enhance the chance of success. Business Angels These are high net worth individuals who are successful businessmen looking for investment opportunities. They can provide both time expertise and money. Typical investment size is £25,000 to £250,000 but can go as high as £2m for the right opportunity. Exit within 3-5 years. Venture Capital These are investment funds seeking high rates of return. However typically investments are over a million pounds. Some funds are targeted at lower amounts depending upon the sector and region. These funds are looking for exponential capital growth over 3-5 years. Asset backed finance This can cover machinery, sales invoices even sales orders. It can be a very flexible source of finance to the growing business Leasing This will cover your capital expenditure and spread the cost over a three to five year period. It is particularly useful if you do not have taxable profits to maximise your capital allowances. Sale and leaseback of a property you own is another good source of funds. Factoring Factoring offers a sales ledger administration and debt collection service. Up to 95% of an approved sales invoice is paid within 48 hours, quicker if required. Credit protection is also available to protect against a bad debt. The Factor will own and place a first charge over the book debts and they might also take other charges, depending upon the strength of the financial information. Invoice discounting Invoice Discounting can be Confidential or Disclosed; it depends upon the strength of the financial information. The service is the same as Factoring, except that the sales ledger administration and the debt collection is the responsibility of the client and not the Factor. Pre payment of the approved sales invoice is still up to 95% and the factor will still have a first charge on the book debt and therefore own the debt. This service can also have credit protection cover. All sales invoices need to be for a business to business debt, and some proof of delivery is generally required. Trade Finance This is funding provided against stock purchases, signed contracts and orders whereby the funder will prepay a certain percentage of the value Pension fund It may be possible to use your pension funds for a loan back to the business What do u think about it?


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