Fund the Runway: Angels and Snakes

March 10th, 2009 by Sharon Larsen

We’re now ready to discuss the last of our highlighted small business funding options, angels and snakes. 

 

 

#5 Angels and Snakes

 

Angel investors typically are wealthy individuals who provide capital for startups. They might contract for convertible debt or equity in the business as a return on their money. Some angel investors have begun to organize angel networks in an effort to share their pool of investment dollars.

 

Venture capitalists (called VCs, though we unaffectionately refer to them as “snakes”) are institutions that manage a pool of wealthy, qualified investors’ money. It is not uncommon for them to be the face of a trust, business, investment fund, or other entity. They have a responsibility to the members of that group to ensure the success of the businesses their money is invested in, which results in a very active involvement.

 

My experience has been that dealing with angel investors is far better for your blood pressure than dealing with VCs. That can be good or it can be bad. If you have the discipline to execute on all aspects of your entrepreneurial climb, you may benefit from the more hands-off approach the angels take. However, if you need structure, leadership, and occasional bullying, the snakes may be the right solution for you.

 

Many businesses simply require VC funding to start. If you are after the grand slam, you will want to consider it. If you do, then this book will give you some great guidance, but you will want to browse around for an additional entrepreneurial bible. In fact, it might be best to have an entrepreneurial clergyman. When you work with snakes, a critical resource to have among your senior staff or advisors is an individual who has had a successful VC exit. Having this experienced person will help you navigate the maze of VC demands. The attitude that a VC brings to the table is all or nothing. If a VC invests a million, they want ten million out of it.

 

Some have done well with VCs, but I have never had a good experience with venture capital funding in my entire career. Traditional venture capitalists can be very difficult. Management gets restructured and goals get realigned. With VCs, you will do it their way, not yours. So why the bad taste in my mouth? Hmm—let me count the ways.

 

I worked as the CEO of a small company, making repeated attempts to get funding. I cannot count the number of times that venture capitalists led us down the rosy path, wasted our time and resources, jerked us around, and then proclaimed, “We’re out.” The truth of the matter is that many VCs don’t want to be first in. Because they have money to protect, they often hold off on commitment. But once you get one in on the deal, others clamor to climb aboard.

 

Angel’s Pros:

§  They are less threatening than a snake.

§  They tend to leave you alone.

§  They are friendlier on the ownership terms.

 

Angel’s Cons:

§  Legal costs can get high.

§  No pressure from them can cause laziness in your team.

§  Typically, you’ll need more than one angel.

§  Usually, an angel is someone you know.  You don’t want to risk the friendship.

 

Snake’s Pros:

§  A massive infusion of funds allows you to quickly get to market.

§  The financial oversight keeps pressure on and momentum high.

§  Potential board contacts and cross-relationships with other funded ventures can open more doors.

§  You get visibility with funding from a notable VC.

 

Snake’s Cons:

§  You lose some control.

§  You build product for the capital rather than the market.

§  It seems like a VC’s job is to make your life difficult.

§  If you don’t like audits, you had better cultivate that taste!

 

 

We’ve now learned about the five main funding options for entrepreneurs: debt financing, credit cards, bootstrapping, family and friends, and angels and snakes.  Be thinking about which fits best with your needs and situation.  Tomorrow we’ll finish up Rich’s thoughts on the various options.

 

 

 

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