In the past two or three years, a great change has taken place in the balance of forces between investors in early-stage companies.
In the past, angels would come in at the garage stage, and put up the first money, and then venture capital funds would spot that the company was at the growth stage, and come in with their investment. The angels were left to look on longingly as the funds made the money.
The situation has changed, however. The crisis of 2008 hit the VC firms and their ability to raise follow-up funds. At that time, many entrepreneurs made piles of money from companies they sold or floated, and became professional angels. Even super-angels.
The status of angels has very much risen in the US, and today, they fill the large vacuum that the VC firms, fighting for their lives, left behind them. The angels set up clubs and investment companies, organized themselves into associations, and turned what had been considered a millionaires' hobby into a profession.
However, the main problem of the finance track for early-stage companies has not changed. The angels invest their own money, whereas the VC funds invest their investors' money. Wealthy as he or she might be, there is a limit to the amount of capital an angel will want to put at risk.
When a company that an angel has helped to found needs to raise $10 million, the angel will very likely find him or herself unable to take part, or able only to a limited extent, which dilutes his or her stake.
Angel syndications
This week, it was reported that angel groups from North and South California, and from New York, were forming an alliance with the aim of investing higher sums in companies, and thereby to extend the companies' time for growth before they need to raise money from venture capital funds.
Tech Coast Angels and Band of Angels from California have teamed up with Golden Seeds of New York, and the three groups will henceforth cooperate in joint investments.
The partnership will be called Angel Syndication Network, with more groups expected to join. The syndicate seeks to bring together at least ten US groups.
The syndicate will work according to a new format: a company that has received investment from one of the regional groups will be able to go on to raise money from the syndicate, saving the need for new due diligence examinations.
Richard Sudek of Tech Coast Angels said that part of the motivation for setting up the syndicate was make the angels more competitive vis-à-vis the venture capital funds. “As we have made investments over the last five to eight years, we have found a few things that are not in our favor as VCs have come in,” he told Xconomy.
The angel phenomenon is gathering momentum in Israel too, perhaps even more than in the US, but for other reasons. In Israel, venture capital funds are in a tight spot financially, and have almost completely abandoned early-stage investment. This is where the angels come in. In the US, by contrast, Facebook has convinced everyone that they have to find the star entrepreneur when he or she is still a student, and the funds try hard to reach the promising companies when they are still at the presentation stage.
Either way, it looks as though angels in both Israel and the US are becoming more powerful in relation to the venture capital funds.
Published by Globes [online], Israel business news - www.globes-online.com - on September 21, 2011
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