Why VCs should invest in angel-backed deals
Should angels be hailed as "investors of the first resort"? Modwenna Rees-Mogg investigates.
The full version of this article appeared in the Spring 2007 issue of Collaborate
Brave-hearted angels
Across most sophisticated financial services markets of the Western World governments and financiers are hailing the brave-hearted angel investor as the person around whose neck they wish to place the mantle "investor of the first resort".
Surely, they say, these are the best people for the job to bring unwieldy businesses and immature entrepreneurs around and prepare them for us to invest at a later (safer) stage?
Of course, they are absolutely right, the best angels are the ideal people to help get great businesses off the ground. The world is littered with examples - from Amazon to Body Shop - which act as testimonials to angels backing an entrepreneur at the right moment.
Everyone agrees that the best angels not only bring deep pockets, getting skin in the game by investing in the equity of the company, but also strategic advice, practical management support and an address book to die for. Sadly, not all angels are the best angels.
Choosing the "best" angel
Perhaps if Alexander Pope had been an angel investor he would have said not that ".. for fools rush in where angels fear to tread" but ".. for foolish angels rush in where the best angels fear to tread"?
Foolish angels treat their investments like betting at the races without understanding that the bet is not really a "to win", but an accumulator on several races by the same horse. The angel may write-off his bet; the company, remains exposed forever.
So I think VCs should invest in deals backed by "best of breed" angels, but not any old angels. Why? Well, these angels can put the "serial" in front of the word "entrepreneur" in a world when being a mere entrepreneur no longer guarantees you the respect of the business world.
Angels bring emotional intelligence and business principles along with their address book. The former is particularly important.
Think of the great new brands of the late 20th and early 21st century - Virgin and Innocent etc - and you think of their focus on building great relationships with customers and suppliers; marketing morals as much as the profit motive.
Angels tend to know what is commerce and what is sharp practice; who in their world will help a small business and who will trounce it; how to hire and how to sack. They can be a very cheap adviser and/or a non-executive director.
Changing funding entrepreneurship in the UK
VCs can help angels too. As a co-investor, one of their great assets is that they bring the cold blooded approach of a financial investor. However, they have a much bigger opportunity that that.
From where they sit, they can change the dynamic in funding entrepreneurship in the UK. The smartest VCs have already noticed this. To win the opportunity to see the best deals from the angel world, then they must offer ways to reward the angels for risks taken to date.
One day, we must hope it will become the industry standard to offer angels a full or partial exit - either when they invest or as soon as possible thereafter.
Allowing angels to release cash will not just buy goodwill, but will recycle it into the next generation of companies, which will be worthy of investment as the VCs' new fund opens in five year's time.
So perhaps it is not just that VCs should invest in angel-backed deals, but that they should create the concept of the Venture Buy-Out, where they simultaneously give angels the opportunity to exit early, while providing fresh capital for the management to take the company to its next level of growth?
Modwenna Rees-Mogg is Editor-in-Chief at Angel News and a non-executive director of London Business Angels
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