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Nikkei Business Daily April 4, 2018

Evolving Role of Angel Investors in Silicon Valley Ecosystem

Silicon Valley has a long tradition of executives who became wealthy when their start-ups succeeded and decided to invest their capital, advice and introductions in emerging entrepreneurs in the earliest stages of start-up company formation and building. This “pay it forward” movement to create the next generation of tech entrepreneurs defines the original Angel investor profile. More than the potential for outsized investment returns possible when market-moving tech start-ups IPO, angel investors are inspired to help grow the next generation of tech innovators.

During the dot.com era in the mid-90s, as Silicon Valley tech start-ups were going “mainstream” and the allure of becoming an entrepreneur spread far beyond California borders, angel investing also began to attract not just tech entrepreneurs but individuals who had no experience with tech start-ups or investing. At the same time, many of the prolific and connected angel investors began to band together around a special focus, geographic or alumni affiliation to create even more visibility for angels as a serious class of investors.

In the last decade, crowdsourcing start-ups like Kickstarter and Angellist have expanded the pool of individual investors even further by offering founders fundraising marketing and matchmaking platforms. A kind of “democratization” of start-up investing has been the result. Despite the proliferation of angel investors and available marketing and legal tools to support them, we at Core Ventures Group encourage our founders to work with angels who bring more than just capital to the table and to limit angel participation in the startup seed stage fundraising, for two primary reasons.

First, the high-quality entrepreneurs we work with should be able to raise institutional capital out of the gate if they have a strong track record and have a viable company idea and expertise. In fact, as we’ve written before, there is an overabundance of professional investment capital. By raising an appropriately sized seed raise from experienced, reputable seed stage funds, we know that the entrepreneurs will increase their odds of completing the milestones to getting to a successful Series A financing. More important than their checks, these seed fund partners will provide invaluable operational and governance counsel, and they will provide extension financing when the company is in need of unplanned capital.

In contrast, many angel investors end up being a head-ache for entrepreneurs. Most can only afford to invest at the earliest, lowest priced financing as they do not have the risk profile or capital to participate in increasingly more expensive equity rounds. And yet, when founders engage individual angels they have to do a lot more work to collect smaller checks at the time of financing, and then throughout the life of the start-up to manage communication. Many angels who don’t have tech or start-up experience require extra education and can more easily get upset by the inevitable ups and downs of a start-up. We estimate that one should have the capacity to be writing $50-$100K checks into at least 25-30 start-ups.

Oftentimes a small investment from friends and family is crucial for founders starting their first company. However, we do see across our small portfolio a negative correlation between success and having a lot of angel investors, especially if company does not have strong institutional investors. Despite my discouraging tone, not all angels are created equally and there are two types of angel investors that can be very helpful. One is the professional venture investor or serial entrepreneur whose “brand name” in the start-up ecosystem can legitimize the start-up by association and be a lure for talent and professional investors. The other is an individual whose market expertise and contacts can be vital for the success of the company in the market they are selling into. In CVG “Music-as- a-Service” B2B start-up Feed.fm, the first angel investor, Mika Salmi, was an entrepreneur and former President at Viacom overseeing 30 brands including MTV. Mika’s market insights and potential for customer introductions were one of the big lures that inspired a CVG investment.

For the mainstream population, we are also wary of the “democratization” of angel investing since it may amount to a “democratization” of sharing in the losses of approximately 70% of startups that do not even return invested capital.

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We place a high priority on meeting with start-ups that are referred by someone we know. If you aren’t already connected to our network, feel free to send us an email. Forgive us in advance for only responding to cold introductions that are absolutely fascinating.