In the startup industry, there is a hierarchy of an illusory Table of Ranks, in which entrepreneurs, who form the foundation of the venture capital universe, hold on their shoulders the heroes of the next step – angel investors. On those, in turn, stand the thrones of omnipotent, windswept by the winds of new trends and brilliant ideas, sprinkled with the golden pollen of success celestials-VCs (venture capitalists) with “Big Xs” (i.e., with returns on investments of high multiples).
In reality, of course, everything is more complicated and prosaic: the real gods and titans of the startup business are the founders of the most successful “unicorn” startups – companies with a valuation of a billion dollars or more. They are the ones who turn air castles and dreams into the reality of the most successful technologies, products and businesses. They get the lion’s share of not only fame but also financial gain, and rightly so. The founders of the biggest startups are at the top of Forbes’ list of the world’s richest people. But the most successful venture capitalists, such as John Doerr, Jim Breuer, and Michael Moritz, rank much lower on the list.
While the world of innovation is made to spin by startup founders, it is investors, venture capitalists, and angels (as well as gas pedals, corporate investors, private equity firms, and a few other players) who provide the funding for the building blocks for their air castles. It is angels and VCs who play the major roles in funding startups, so it is particularly useful to recognize the advantages and disadvantages of getting investment from angels and VCs.
Let’s look at all aspects of angel and VC investing in terms of the advantages and disadvantages of these investors for startups.
The classic investor canon until recently interpreted any early investments in startups as “angel” and any later ones as “venture capital”. But in recent years, this dichotomy has rapidly become obsolete. Venture capitalists have realized that getting into early deals has its advantages, both for funds with deep expertise in certain segments looking for more depth and for laying the groundwork for quality deal flow. Even multi-billion dollar Sequoia and Andriessen-Horowitz have started getting into early deals in surprisingly small amounts for them (in the hundreds of thousands of dollars), and many funds have emerged that specialize in the very early stages of investment. Here, for example, is a list of nearly 100 such venture capital firms.
In other words, venture capitalists and angels/syndicates of angels have long been part of more or less the same deals, from pre-seed (the earliest) to pre-IPO (the latest). Though, of course, angels are still more likely to invest in the earlier stages and VCs in the later stages.
Venture funds as investors in startups
The role of venture capitalists is indeed colossal. In the U.S., venture capital investment accounts for less than 0.2% of GDP, but businesses in which venture capitalists hold a significant stake create more than 21% of GDP. The successes of some venture capitalists make the most fantastic returns on investment pale in more than just traditional industries. Peter Till earned perhaps 20,000-30,000x return on his Facebook investment (exact figures unknown).
In reality, the life of venture capitalists is far from glamorous. VCs, like the wolf, feed the feet. It is the proverbial legwork that day and night creates the main thing that distinguishes a potentially successful VC from the hopelessly unsuccessful ones: high-quality deal flow, thanks to which it is possible not only to find the best of the best deals and compare them with each other, but also to obtain invaluable insider knowledge about the industry that is unavailable to anyone else (neither journalists, nor analysts, let alone the public at large).