Angels or Devils?

By Neda Navab

At lunch this month, Ray Rothrock of Venrock threw out some crazy statistics: in 2012, 30,000 ideas received money from angel investors, while only 1,500 received Series A funding. That is, 5% of seed-financed companies were able to secure Series A! Obviously there is a lot of (not so smart) angel money out there, but is the proliferation of money itself the real problem?

Let’s take a step back to ask, What are the benefits of receiving funding? Yes, capital injections help entrepreneurs build teams, products, and markets. But, that money also comes with “strings attached” from the investor side, like providing mentorship and access to professional networks. Increasingly, however, early stage investors are not as willing to help startups beyond writing a check. They are placing many bets with the assumption that there will be a long tail of losers and one or two blockbuster winners. Thus, angels are not providing the time and attention that are a minimum requirement for early stage success.

To compound this problem, the latest generation of startup CEOs do not have the prior experience required to build a company. In fact, not only do founders not know what is required to start a business, they also don’t know what they don’t know. Startup CEOs face challenges everyday, ranging from hiring talent, building a company culture, selecting product features, and developing a revenue model. This is where mentorship comes in. The thought leadership, strategic guidance and professional access that an early stage investor can bring are invaluable.

So, just as Ray referred to VC as an “idea-limited” business, early stage entrepreneurship could be described a “mentorship-limited” business. What opportunities does this situation create?

For service providers: “Startup consultancies” could help facilitate best practices at early stage ventures. Shared services providers could help startups obtain legal, HR, or finance services more cheaply. Accelerators that bring together entrepreneurs could increasingly create a self-sustaining network of mentorship.

For angels: Investors could increasingly focus on making their current investments more likely to succeed by providing some of the support VCs offer their portfolio companies. Further, the unmet demand that the Series A crunch is creating could be filled by follow-on seed deals, and angels making the jump to writing $1-2 million checks.

For entrepreneurs: Entrepreneurs could focus on super angels who can stretch seed rounds a bit further. They could also take seed money from VCs. While not receiving Series A from your seed VC is risky, it could also serve as a leg up in raising later rounds. Finally, entrepreneurs could change what is expected of early stage investors. While the promise of fast cash is hard to turn down, the benefits of cash with certain strings attached, where entrepreneurs play the puppet masters, will add more discipline to the early stage investing world.