We occasionally hear individual investors suggest something like “I invest in later stage companies.” or something similar. Here is the problem with that statement or approach. Individual investors are not going to get access to quality late state deals except in rare circumstances.
Here is why. When a startup is just getting under way, they don’t have any metrics or criteria that will match up with the thesis of most institutional investors. There are “Seed” and early stage VC funds, but they are essentially acting as super angels and not true institutional money (except that they aggregate pools of capital). True institutional grade capital is invested in more than “good ideas” and “quality management.” So, before actual traction and metrics exist, angels have an opportunity to participate. (by the way, we are defining angel in this case as someone investing less than $250K. This isn’t the technical definition, but if you are investing $250K and above, you can occasionally squeak into a later stage deal alongside institutional players.)
If a startup generates momentum that warrants interest from institutional investors, they are not going to be interested in having smaller investors participate in their rounds. There are numerous reasons for this. The more investors in a round, the more work it is to get approvals going forward for certain corporate action, such as M&A activity. These activities absorb a lot of attention from institutional investors, so they want to make their life easy in this arena. Additionally, individual investors are typically investing personal money and have more emotion involved. This can complicate matters. Institutional investors are less emotionally vested and it makes for a different decision making process. This isn’t to necessarily say that emotional investment is always bad, but it’s certainly different; and someone who is managing money for a living doesn’t generally want to deal with that element.
So, angel investors that think they are able to get into later stage deals need to ask themselves if those are truly “later stage” and if they are quality. If they were quality and later stage, why isn’t the round absorbed by institutional players? There may be legit reasons, but it’s an important question. The purpose of this post isn’t to pour water on angel investor objectives, but rather to ensure investors are self aware. If you understand that you are generally going to have the best access to earlier stage deals, then you can develop criteria and support expectations that are appropriate for that stage.
Here is why. When a startup is just getting under way, they don’t have any metrics or criteria that will match up with the thesis of most institutional investors. There are “Seed” and early stage VC funds, but they are essentially acting as super angels and not true institutional money (except that they aggregate pools of capital). True institutional grade capital is invested in more than “good ideas” and “quality management.” So, before actual traction and metrics exist, angels have an opportunity to participate. (by the way, we are defining angel in this case as someone investing less than $250K. This isn’t the technical definition, but if you are investing $250K and above, you can occasionally squeak into a later stage deal alongside institutional players.)
If a startup generates momentum that warrants interest from institutional investors, they are not going to be interested in having smaller investors participate in their rounds. There are numerous reasons for this. The more investors in a round, the more work it is to get approvals going forward for certain corporate action, such as M&A activity. These activities absorb a lot of attention from institutional investors, so they want to make their life easy in this arena. Additionally, individual investors are typically investing personal money and have more emotion involved. This can complicate matters. Institutional investors are less emotionally vested and it makes for a different decision making process. This isn’t to necessarily say that emotional investment is always bad, but it’s certainly different; and someone who is managing money for a living doesn’t generally want to deal with that element.
So, angel investors that think they are able to get into later stage deals need to ask themselves if those are truly “later stage” and if they are quality. If they were quality and later stage, why isn’t the round absorbed by institutional players? There may be legit reasons, but it’s an important question. The purpose of this post isn’t to pour water on angel investor objectives, but rather to ensure investors are self aware. If you understand that you are generally going to have the best access to earlier stage deals, then you can develop criteria and support expectations that are appropriate for that stage.
