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The Advantages of Being an Angel (vs. a VC)
This week, we helped organize an Angel Bootcamp where some of Boston’s most successful angel investors shared their experiences and lessons learned to a crowd of aspiring angels and entrepreneurs. It was a terrific event with some really unique content and stories. If I were to give a talk at this event, I would have spoken on the following topic:
WHY BEING AN ANGEL IS BETTER THAN BEING A VC
In the informal conversations during and leading up to the event, I noticed a bit of a sentiment that angel investing was somehow less appealing or less interesting than being an institutional VC. While I can’t speak to the specific motivations around this, I found this somewhat puzzling. I suppose there may be a sense of prestige or credibility garnered by managing a fund of capital, but there are some major advantages to being independent. I think if one has the means to pursue angel investing in a relatively aggressive way, investing as an angel can be way better than being a VC. There are a lot of reasons, but it really boils down to two. Fist, the difficulty/ease of getting into a deal and second, flexibility across multiple dimensions.
#1: Difficulty/Ease of Getting Into a Deal:
The dynamics of a round differ case by case. But for angels that are writing relatively small checks (sub $200K, or perhaps much less), it’s relatively easier to get into an interesting deal than if one were a VC.
The reason is that most seed syndicates have room for 5-10 angels or more, but only room for 1-3 funds. If an angel is value-added and low-maintenance, it’s a relative no-brainer decision to allow that person to invest $50K into a company. In probably every investment we’ve made, if the founder asked us to make room for a high-quality angel, we would have done so without hesitation.
This dynamic is very different for VC funds, where there is often a struggle for allocation. We’ve faced situations where we’ve been unable to get our allocation in competitive rounds, but would have been able to participate fairly meaningfully as angels (which was decline as a firm policy). It’s a very different ball game.
Because of this, there is a lot of pressure for VC’s to get to an investment early, differentiate themselves meaningfully, and move with a huge amount of conviction. Great angels do this as well, but can be a little more relaxed about it and still get great results. As an angel, it’s possible to get to an investment a bit late, or follow the signal of a strong syndicate and still do pretty well. Even if an angel gets to an investment very early, one is able to hedge their commitment a bit by saying that they are “in for $X pending market terms and a strong lead.” This may seem like a bit of an annoying caveat, but I think it’s totally fair game for an angel that isn’t making investments for a living but wants to show early support (as long as you don’t go back on your word).
Finally, angels can also pro-actively go after rounds that are pretty close to closing. Because you are making decisions unilaterally, the ability to commit on the spot allows you to be very aggressive. Why not cold-email a founder and say “my name is X, I can help in these ways, if you’ll take me, I’m willing to commit $Z to this round right now. Your choice whether you want to do a call to check me out or not.” The best angels hunt for investments, but it’s much easier for them to squeeze into rounds than VC’s.
The last example above also highlights the second benefit of being an angel – flexibility. Most institutional VC’s present a coherent strategy to their LPs about how they will focus their efforts, what kinds of companies and rounds they will invest in, and how they will construct their portfolios. Most VC’s have target ownerships, target stages, target sectors, target geographies, target returns, target time frames, etc. They also should be doing due diligence of some sort. Angels can do whatever they want. Angels also aren’t investing a fund with a finite amount and time horizon, so he or she could think about each investment as an independent, money-making endeavor.
Some examples of stuff an angel could do:
- Invest $10K into an incubator (many VC’s have a policy against investing in any entity that charges an additional layer of fees)
- Invest in a bunch of angelist syndicates (most VC’s don’t want to follow other VC’s or angels blindly)
- Invest internationally (many VC’s are geographically constrained)
- Blindly follow other investors without even meeting the founder or doing any due diligence (most VC’s would get killed by their LPs for doing this)
- Invest in a company or entity that has great ecosystem benefit, but probably won’t yield a huge financial return (VC’s have a fiduciary responsibility to invest in a way that maximizes the return for their investors)
- Invest in companies or sectors “as marketing”, or “to learn”, or “to build relationships with syndicate members”
- Invest in a company to establish brand credibility to expand their network, even if the price or terms or other factors are crazy
- Invest any amount they want into any company (most VC’s care quite a bit about internal consistency and coherency of their strategy)
- Invest in companies that may never have a liquidity event (VC’s need to get their money out within 10 years)
- Invest in a company that is a very solid 4X, but has absolutely no chance of being a 10X+ (VC’s need to invest in outlier companies to move the needs on their funds)
- Invest in a hardware company, followed by a biotech, followed by a consumer product, followed by a consumer internet company (again, most VC’s care about consistency and coherency of strategy)
- Stop investing for any period of time for any reason without any accountability to anyone
As a VC, I do believe that having a very focused strategy is the best way to drive fund level returns and to fulfill our commitment to our LPs. But angels can manage multiple incentives, and the flexibility and independence of being an angel is a wonderful thing. There isn’t one obviously right answer for any person, but there are some major benefits of being an angel that should not be underestimated.