Angel funding is only for the very early stages of the funding cycle, right? Wrong, according to Jessica Mah, founder and chief executive of inDinero. “By 2019, I will have raised $20m in angel funding,” she said.
This presents the question, why should a startup choose angel money over institutional money? What are the benefits?
Have you ever tried to book a meeting with a VC? If so, you will know that for the most part it can be incredibly challenging. The average VC has 8 board seats, despite the recognition that 6 is the optimum number.
The result, VCs have less and less time to roll their sleeves up and get involved operationally. By contrast, the majority of angels are retired or semi-retired, hence their desire to get involved in angel investing.
This time arbitrage means angles have significant time to offer strategic advice. This can be in the form of altering go-to market strategies to offering highly relevant intros. As the famous saying goes, ‘time is money’ and in this case, angels have more of it.
Raising institutional money brings many pressures to the founder and CEO. The first is simply the pressure of having an institutional breathing down your neck.
As Mah states, ‘institutionals are never patient capital’. Simply put, they have to return more capital than they were given by their LPs in a set time frame. This results in certain expectations and exit desires on behalf of the institutionals.
Mah highlights this pressure for the founder when she suggested ‘the clock it ticking when you take their money’. However, angels do not have this pressure from LPs that VCs endure as it is their own money. As a result, their time horizons and exit desires are not as rigid or exorbitant as those of institutional capital.
Founders will experience further pressure when accepting institutional capital with the recognition that they are now subject to the signaling function. Essentially, this is the need for your early investors to follow on their funding into subsequent rounds.
If they do not, this suggests that there are problems with the company. Mah asserts this was a fundamental reason she did not raise institutional money stating, ‘we did not want the signalling risk’. However, this risk is not relevant to angel money as there are no expectations of angels to invest in subsequent rounds. Therefore, when they do not, there is no signalling risk.
This is very much dependent on a case by case basis. However, if a startup is able to attain domain experts in their field as angels, they can offer benefits that more generalized VCs cannot. For example, domain experts are able to ask highly technical and specific questions. This provides the founder with a system of checks and balances on their IP and core technology.
Domain experts also tend to have strong operational backgrounds. As a result, their network in the specific ecosystem will be vast and will allow the founder to be introduced to highly relevant and better people. Mah illustrates this when stating ‘Steve Blank has given me some truly amazing introductions’.
Ultimately, angel money can only scale so far and institutional capital is required at some point. However, as Mah states ‘we need to change the mentality towards fundraising’.