Why angels are wary of VCs and what they are doing about it

Had a very interesting early stage investor summit yesterday afternoon with a little help from our friends at Orrick and Intel Capital. Like any good summit, this one was ‘high level’.

Tower 42, London. From the street.

Tower 42, London. From the street.

View from Tower 42

View from Tower 42

A fascinating group of early stage investors participated who seem to have virtually single handedly kept early stage/angel investment alive in the the UK over the past 18 months. One topic of conversation kept coming up, ‘How do you manage relationships with VCs more effectively, and how can early stage investors prevent the venture community from taking advantage of their risk taking?’ (Or slightly more robust language to that effect). This touches on something that Fred Destin at Atlas Venture has been thinking about with respect to entrepreneurs recently but it seems there are other people who have reasons to be wary of some VCs. (And amongst this group, I would point out that Fred was seen as an excellent and honourable investor).

As VCs has grown into larger funds, there has been a gap created at the early stage market which is being increasingly filled by an emerging troupe of highly experienced entrepreneurs who have cashed out of a number of previous ventures and are now making a go of investing time and money into new ventures.

There is a problem that seems to regularly occur when those ventures go for additional rounds of funding and a small, but significant number, of venture investors enter into funding discussions with a company with the intention of screwing earlier investors whenever possible – by adding toxic, unreasonable liquidation preferences, terms and conditions. Often a term sheet is offered that is not actually a term sheet but the start of a longer negotiation that can mean that a company stops running their business and focuses on fund raising and meeting the demands of the VC. All the while the company will be running out of money and have less and less room to manoeuvre until it is forced into a deal that it didn’t want to do.

So what can early stage investors do? How can entrepreneurs, especially first timers, protect themselves?

A few thoughts emerged from this discussion that might be useful to others.

  • Raise money much sooner than you need/expect to in order to allow enough room to negotiate.
  • Make sure companies are doing well and hitting milestones. Companies that are doing well will have more competition from investors.
  • Avoid working with partners and deal makers in firms that are not yet proven. Many of the worst stories that were discussed were perpetrated by firms that didn’t have a significant track record or experience. VCs felt they had to make a name for themselves and to do so they needed to do deals that made them look good. Often, this plus rampant egos, transforms itself into a desire to wash out early investors.
  • Spend more time collaborating and co-investing with other early stage investors in order that you can capitalise a company properly and make sure that when you raise further capital, you have other options – extending the involvement of angels for example instead of being reliant on venture.
  • Share information about investors that you wish to do business with, and those that you don’t, through informal networks. Reference individuals, not just the firms.
  • A number of people stressed that aggressive investment behaviour typically comes from individuals wishing to make a name for themselves, rather than firms.
  • Try to work with early stage investors that have experienced the cut and thrust of both fund raising and growing a business multiple times.

Would be interested in hearing any other views/experiences of the early stage/venture investor schism and how it might be solved. (Or is this all imagined by the angel?).

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9 responses to “Why angels are wary of VCs and what they are doing about it”

  1. Alex says:

    First, you are drawing a distinction between angels and VCs, and clearly they are different groups, but the first-time principal with his first hot project is happy to meet anyone who will invest. It’s hard enough to find, let alone get a meeting with, a genuine investor, and virtually impossible to line up a list from which to ‘make the right choice’.

    In the course of my own (successful) project I was lucky to know someone who had worked in VC previously. She introduced me to 2 or 3 VCs, none of whom understood what we were talking about and blew us out in the first meeting. We used all our contacts to find other avenues, without success, and then our ex-VC lady set up a meeting with a group of ‘angels’ (a business term that should not be interpreted too literally). We did our deal with them and went away happy. For a while. We learned that one should never forget the Golden Rule: the one with the gold makes the rules. They found an excuse to change the rules, and as the only game in town we were forced to accept it.

    The moral of this tale is that it would help if angels and VCs made themselves more visible and more accessible, and were honest about their specialisms. I have broken down many big doors in my time but for others who may be great at tech but less so at P2P communications it’s tough, and investors could miss out on the super-nerds who will make the biggest breakthroughs.

  2. Thanks Alex, more transparency in the market would always be a good thing.

    This can be a massive problem for angels, even at the top end of the market however. They are highly constrained as to the number of deals that they can or wish to do a year. If they become easily accessible, and easy to track down, they get deluged with plans, cannot respond to people and find their reputation suffers as a result.

    I agree that investors should be clear about their interests and specialisms. It is as valuable for an entrepeneur to get told, ‘No’, rapidly than to get strung along. Too much of this still goes on.

  3. London VC says:

    Angels typically cannot value their investments realistically from the outset and only realise they have failed to do so when they start to deal with professional investors who know the market rate. Then they cry foul. Most of the time it is not worth working with angels on deals as they get in the way of rapid decision making and don’t allow founders to make rational decisions.

  4. ‘London VC’

    Interesting comment and there is some truth in it as many angels would agree and have indicated to me privately. Shame you post anonymously and leave a dead email address as contact.

  5. On a related subject, three things you should never tell VCs when fund raising by the already name checked Fred Destin.


  6. Fred Destin says:

    @London VC

    In Europe there are many craps angels … and many craps VCs.

    There are also some really good ones, who appreciate the hard and complex of building early stage businesses. I have only good things to say about the likes of William Reeve, Simon Murdoch, Sean Park, Robin Klein or Sherry Coutu who have all been adding real value around the Zoopla table.

    Bizarrely I have found that VC’s often stand in the way of fast decision making, particularly those who have no operational experience (yes, like me:-)) and who are too careful in analysing situations.

    You have a valid point around a bunch of angels deals being priced way off market. Usually angels fall in love with abstract tech project they do not really understand and give silly price in hope of vast riches, all distracting to what we try to do. Greed…

  7. Mike Butcher says:

    Hey Mark, great post. Good to catch up with you in Cambridge – enjoyed the Union debate but our seats could have been better huh! 😉

    I thought I had better interject because whoever is calling themselves “London VC” on these comments should not be confused with @LondonVC who writes for TechCrunch Europe. I have spoken to them and they have not posted a comment on this blog. So whoever is commenting here under that moniker is not the same person. Just to be totally clear.

    It also may interested you to know but they don’t agree with the posts by ‘London VC’ above. Best watch TechCrunch Europe for their next column which may touch on this issue.

    In addition, the genuine TC Europe columnist @LondonVC doesn’t leave dead email addresses – they’ve published their email (it’s easy to work out where, if you read TechCrunch Europe).

    Best wishes, and Mark, hope you are free on Dec 15 for Christmas Crunch – ping me for details.

    cheers all


    Mike Butcher, Editor

    TechCrunch Europe

  8. Sorry for the repeated posts from Mike. Now gone, as is my new spam filter management tool…

    I think it is great/entertaining that London VC, an anonymous columnist on Techcrunch UK , is now so important that he has imbecile impostor impersonators. I am sure Oscar Wilde would have some witthy aphorism that summed it all up.

    I am also glad that this might turn into a proper discussion (although unlikely on a blog commentary).

    For me, it all comes down to the fact that there are ‘good’ and ‘bad’ people in every job in the world. Some VCs lie & abuse power. Shock horror, so do some angels. Most in both group don’t. (And shock horror, not every entrepreneur is beyond reproach).

    Some sensible dialogue between all groups, and a whole lot of transparency later, and we might all be getting somewhere.

  9. Paul Auston says:

    From a different perspective: I am active in approaching investors to ensure that our innovation is able to cross “The Valley of Death” this is the gap that tends to occur post completion of proof of concept. From this point the innovation moves forward into a complex engineering phase that leads to commercialisation.

    In the current market many investors are now looking for a payback from cashflows much earlier than say ,2 years ago, thus a project that will take 4-5 years to engineer into a commercially installed wave energy generator is in danger of being dismissed before getting through the door.

    So, how to go forward? We decided that a full independent technical due diligence should be carried out by recognised World leaders in the field, a very expensive route!

    This document will be presented, with a narrative, along with a full business plan and management structure etc. When presented, the VC or other investor has a complete and verifiable picture and can assess the opportunity correctly.

    Stating the obvious I hear some of you say, but there are a lot of good projects out there deserving of support and investment but, sadly, the presentation and planning that goes into the offering lacks detail, structure and purpose, the VC or other investor has to wade though waffle and tripe to find the nugget that might exist. I have seen a number of presentations that are long on rhetoric but short on fact and delivery. It is all too easy to “blame” the investing community when the screw tighten’s and yes there are many VC’s out there who are fast buck merchants, —avoid them by ensuring that the project and terms offered are able to withstand, robustly, the probing that any serious investor is bound to carry out.

    To me its a bit like decorating, its all in the preparation!