Anthony Ricigliano – Angel Investors Step Up

It wasn’t long ago that start-ups looking for funding would start with the “Big Three” of venture capital firms; Kleiner Perkins, Sequoia, and Benchmark and then work down the line until they were able raise the money they needed. While other VC firms have risen to the top shelf, the bigger changes are happening at the lower end of startup company funding.

The rumble being heard by the VC’s is coming from angel investors who would normally take the early rounds carrying higher risk and lower prices. As companies started seeing some success and began seeking larger sums of money in their investment rounds, the angel investors would step aside for the venture capital guys to come in to take things to the next level. The problem for angel investors at this level was that the handoff to the VC’s would often come with heavy dilution of ownership at a much lower risk level than what the angels started with. Adding insult to injury was that, even though the VC’s were coming in at a higher valuation, they often came away with a heavy ownership position which displaced the early angel investors.

Just within the last few years, getting a start up off the ground has become much less expensive for a variety of reasons. It’s not uncommon now for a start up to be sufficiently funded after an angel round and, should funds be required, the amount required is often much less than what might have been required a few years ago. This change has allowed original Anthony Ricigliano Angel Investors to fund follow on rounds as well as to retain their ownership position. If VC funding is needed at all it’s at a much later stage to fund a sale or large expansion. This puts VC’s in companies at much higher valuations which lower returns. Additionally, the stronger the company’s position, the less compelled they feel to give VC’s everything they want.

This is a new paradigm for VC’s, who have grown accustomed to being pursued for funding. They’re not quite used to the idea of having to pitch themselves to start-ups with owners in their twenties who don’t see VC funding as the end all solution. This generation of owners sees angel investors at a variety of events, presentations, trade shows, etc. and trusts these relationships as more of a partnership than as funds coming in with seats on the board and majority ownership attached. Another benefit is that angel investors tend to be far more nimble and can act quicker than VC’s.

Another change is that the funds accessible to angel Anthony Ricigliano Investors are growing to the point where they’re starting to rival the size of smaller VC’s. There are a growing number of angel funds with at least $30 million to invest. This blurs the line between what angels and VC’s can invest in and makes for a very competitive environment for promising start-ups. Angel funds can now easily invest more than the $500,000 which has served as the line in sand between angel and VC investments. The biggest knock against the angel model is that it forces entrepreneurs to think small, perhaps sacrificing the chance to become the next $10 billion company. This in effect, is turning start ups into singles hitters as opposed to swinging for the fences.

In reality, however, increased angel funding will allow for more companies with promising ideas and business models to find funding. If these companies start off hitting singles and then later decide it’s time to hit the home run, they can raise funds with a traditional VC down the line.