Good article in Business 2.0 about how to attract angel investors. This is good because it highlights a significant trend in private equity which interestingly mimics what has been going on in philantrophy for a while now – younger participants who actually participate. Even 5 or 6 years ago being an angel investor was synonomous with also being an AARP member, but not today as people like Mark Cuban and others of his generation have made loads of money and decided they wouldn’t be content to dabble in private equity as a secondary interest to their golf game. Not only are angel investors today more likely to be highly active in their investments, but also highly relevant in the broader market space because of the range of their activities.
Secondly, the reason I point this out is that there is an interesting dynamic unfolding because of open source, startups need less money than ever before. Angel investors used to be looked at as filling that “friends and family” stage of a company’s inception, only later to be pushed aside when the “real venture capitalists” stepped in. Not that anyone really minded all that much because everyone in the chain made money, ideally. However, in a world where a company requires as little as 6-8 million in capital, angel investors who are stepping up are more likely to have a larger chunk of equity than in years past because they suffer less dilution due to the lack of anti-dilution clauses they are likely not to get.
If I were to be advising would be entrepreneurs about raising capital I would definitely put more emphasis on attracting angel investors than at any time before. For venture capitalists, who generally dislike angel investors who they claim always overpay and have unrealistic return expectations, I would suggest that this segment of private equity will not only increase as more money enters the system (e.g. Google) but they will be more demanding from a participation standpoint and quite possibly exceed the value that venture investors themselves are capable of delivering.
Angels play a critical role by investing in companies that venture capitalists consider too unproven and risky. In fact, during 2004 only 3,000 new firms were funded by VCs, while an estimated 48,000 businesses received startup capital from people who identify themselves as angel investors.