Angels vs. VCs

The best angel investing in my world (Silicon Valley early-stage startups) is based primarily on relationships, not on formalities. This does not mean that formalities are dispensed with. On the contrary, everything is done by the book. But it is done on friendly terms, with the wealthy individuals who open their pocketbooks knowing and believing in the founders and coming beside them to offer not only money but also strategic advice and long-term guidance. These are basically former founders themselves, and successful entrepreneurs, who consciously seek to guide the new ventures toward the path to success without using VC resources in the early stages.

And this is the wave of the future. VC investing is basically still largely frozen today, but the early-stage efforts of such angels are active and thriving. They might raise $500K or $1M or $1.5M, depending on the need, but the terms of the investment will always be preferred stock on balanced terms. Often, the round will be styled as a Series AA to distinguish it from the typical VC-type round.

This piece has one of the best conceptual discussions of the differences between angel and VC funding that I have ever read. Nonetheless, the model documents still derive from a VC mindset (a good tip-off is the term sheet provision that the startup will pay $10K of the investors' legal fees for making the investment). Thus, while I believe the Andreessen Horowitz fund is trying to distinguish itself by taking a simpler approach than is traditional, I believe it remains VC-style. One will not get the equivalent here of the benefits of what one would get from an angel investment made by a few wealthy individuals with whom one has existing relationships. The latter, and not the former, is the optimal angel investment.

The approach being pioneered here is a very good step in the right direction, but it represents more a VC firm trying to expand its range than it does an optimal form of angel investing.

First, Great to see new content on pmarca again.

Second, saying "it takes a lot less money to build a company nowadays" has become a cliche. Unfortunately few people really explain why this is. I thought this was an excellent explanation.

> I emphasize product to distinguish it from building the company. Building modern companies is not low risk or low cost: Facebook, for example, faced plenty of competitive and market risks and has raised hundreds of millions of dollars to build their business

Important point. People use the term "startup" nowadays to refer to products more often than companies. Building a company is a totally different endeavor. It's surprisingly easy to build a profitable, popular product on the Internet. But turning that into a global, thriving company is a totally different ball game that few people have managed to do. I think it starts by picking an important problem to solve. Most of the startups I've seen (some of mine included), have gone after small, niche problems that won't lead to large companies.

> When we invest in angel rounds, we behave like an angel. As angel investors, we can invest as little as $50,000, we do not take board seats, and we do not require control.

That's an awesome pledge. Anyone know other VC's that also do this?

Very insightful comment: If the VC wants to be in the angel round, but refuses to behave like an angel, then entrepreneur beware"