"Angel Investors" are a welcome new breed.

"Angel Investors" are a welcome new breed.

An emerging new group called "angel investors" has exploded in size and numbers recently. "Business angel investing" is at an all time high and rapidly expanding around the Globe. "Not all seed money is equally attractive".

The Equity Gap and why "VC's are often not the answer to folks like us".

The entrepreneurial environment is growing very fast, especially in the US. An emerging new group called "angel investors" has exploded in size and numbers. "Business angel investing" is at an all time high and rapidly expanding ever more around the Globe. Driving this growth are new technologies, a long favorable economic climate in the US and Europe, government deregulation and the inability of many larger companies to innovate. Also, the horrific high valuation given on listed US stocks. All this drives many smart global individual investors away. Angel investment results in start up ventures also have very low correlation to listed equity investments, which fluctuate with sentiment on the stock market.

Yet, there remains an "equity gap". This is because venture capitalist are rarely able to fund small start up firms seeking an amount or less than 1 millions US$, regardless of the quality of the venture. This is primarily so because of their high investment criteria, their insistence on a predetermined exit strategies, the high costs of due diligence, negotiating and monitoring. Clearly there is an absence for smaller amounts of risk capital coming from institutional sources. But this is only part of the problem.

"Business angels" (wealthy private individuals) are the only group of investors whom invest primarily in the very entrepreneurial high growth areas which in the past encountered real gaps in the market for new funding. There are many good ventures which make good sense overall, however the investor group (VC's), are very reluctant to fund these, but this is for very different reasons! And while the "angels" are fragmented and private in nature, (and so difficult to locate) they are clearly the funding of choice for many ventures. For different reasons and not stating this in a critical way, banks and VC's are simply often not appropriate. Also and not much known is the fact that, "Angels" combined, finance many more ventures in size and total capital then their formal VC counterparts.

"Angels" are often more appropriate, as they:

1. Prefer smaller size investments. Say 100,000 to 1,00,000 US$. Hence they take much advantage of this "equity gap", the VC's shy away from.
2. They are more flexible in their financial decisions than VC.s. Meaning they tend to have longer investment horizons, shorter investment appraisal processes. And some studies show they even expect less rates of return. Angels rate the so-called "exit strategies" as an important goal but are not as fanatic on this like the VC's. A recent industry study showed that "exit strategies" are ranked first in importance by VC's , whereas angels ranked, " Investor involvement possible" as their first criterion in importance. (Exit strategies were ranked as 4^th most important to "Angels"). To most start up ventures, "investor involvement" is perhaps desirable as they often provide specific knowledge in one area of interest.
3. Angels are more often "value-added" investors in that they frequently contribute their personal business skills to furthering the new business, if asked to. They more often invest their "know-how" in the venture, rather then invest all their time in managing their investment, in the venture. Unlike the VC's, Angles are often themselves current or past successful entrepreneurs who provide assistance and good advise which can be priceless for younger start up firms. Let's face it and the record shows', VC's are mostly high strung MBA' types whom have seldom deep-rooted past entrepreneur experience.
   

   Clearly, business angels tend to have significantly more small business experience then VC's. A recent study showed that only 38% of VC's are past Entrepreneurs whereas most all Angles are. (see "Angel Investing" by Osnabrugge and Robinson, 2000)

4. Angels are on average more interested in the venture and the management and less concerned about the financial projections. Which in any event are often difficult to formulate. The person, the venture and the niche covered are far more important then any formalized high-strung projections.
5. Combined, Angels represent a much bigger market & capital and so fund far more projects then VC's.
6. VC's often view the venture invested in as "raw material". The real and only client is the group that put up the capital. Hence they are often less sympathetic to the young fast growing firm.
7. Angels tend to be entrepreneurial manager types, whereas VC's tend to be financial investor types.
8. Other studies have shown that "get rich on the niche" is what drives "angels" far more then VC's. Angels so would be more likely to see and value the real "punch" of a niche business.

As we all know, not all seed money is equally attractive. "Venture devils", is always a risk to firms at our stage; yet the VC's to often think -the risk is all theirs.

Further, VC's have a very high rejection rate at close to 96-98% of all proposals evaluated. Clearly, these VC's have a much lower propensity to finance non-established but promising firms. This could possible mean 100 evaluations before a real proposal comes forth. Who has time for that? When the business at hand is so demanding. Readings on this prove that "Angels" take less time in evaluating a project and can move fast if required. Whereas average length of evaluating time for VC's is often double or more their "angel" counterparts. VC's tend to overdo due diligence to cover their backsides and to sanitize their investment decision. Further "restrictive" or "effective controls" are the norm with VC's (even when they own less then 50%), whereas angels are proven far more reasonable.

VC's are just more interested in managing and controlling the investment rather then get involved with the venture. (again see Angel Investing" by Osnabrugge and Robinson, 2000).

Thaistocks.com for one, would welcome a new seasoned "Angel Investor" to help take our winning web site to the next level!

Best Regards

Paul A. Renaud, Managing Director,

www.thaistocks.com