Don't Make Raising Angel Funding Your Plan B

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Don't Make Raising Angel Funding Your Plan B

 

The following is a guest post by Chris Sheehan. Chris is a seed stage VC and angel investor at CommonAngels. You can follow him on Twitter at @c_sheehan and his blog Early Stage Adventures.

plan b

I wear two hats one as a general partner of a couple of seed stage VC funds, the other as an occasional angel investor. Wearing my angel-investing hat, I wanted to highlight an issue that I encourage founders to be careful about when pitching. There are variations on the theme, but essentially it's a line that goes something like:

“…we've talked to some VCs who are really interested, but they tell us we are too early for them to finance our round. So we are raising a small seed round now to hit the milestones they want and then will raise our A round. Its often followed by, we just need $[insert here, but typically $100k - $500k] for [6] months to hit our milestones…”

So what's the problem with this pitch to an experienced angel investor? When I hear this, I'm thinking:

1. The way you have pitched it to me says you struck out with VCs so now are turning to angels as a backup strategy.

2. From your voice, tone, body language, it feels like you really want the VC money and angels are just a stepping-stone to get the VC round.

3. You are probably new to the process of raising money from VCs. You miss reading the buying signals, and are possibly confusing interest with a genuine desire to finance your startup. It's the job of a VC not to miss out on a potentially good deal, so the process can be full of we're interested signals rather than an outright no.

4. The likelihood of raising money from any of the VCs you are talking to is probably very low. Not impossible, just unlikely.

5. So not only is there high seed stage risk (product, market, team), there is very high financing risk on the deal. It's unlikely you will hit the milestones in the time frame you're thinking and the most likely outcome is that you need to approach your angel investors around the table for more money, which will set up a potentially challenging discussion and negotiation.

6. Even if the scenario plays out that short money leads to solid metrics, which then leads to a VC funding the next round, the way this has been pitched, it doesn't feel like there is the basis for a strong partnership.

Ok, so what can you do? Its perfectly fine to test your concept with VCs with large funds to get a range of feedback on various elements of the business like “is it fundable?”, “where are the key risks?” “what other analogs have they seen?” And if you're not getting them to bite on the seed round now, recalibrate your funding strategy for angel investors. But when you do that I'd suggest:

1. Pitch to angels as partners not just a means to get the VC round. This will comes across in your slides, voice, body language and how you frame your overall financing and de-risking strategy.

2. Consider if there a better financing approach. Is it possible to operate on a small amount of money for say 12 18 months, which will give you enough time to experiment, learn, adjust, and de-risk the opportunity? This seems like a more attractive proposition to an angel investor and if it works out, there is a good probability that a larger VC raise will be done at a decent up round valuation.

3. If angel financing is not available for 12–18 months, is it possible to work with the angel investors to do a small seed with agreed testing/learning/milestones that will lead to them funding another round?

Approaching experienced angel investors in this way will hopefully result in them leaning forward instead of backward, and being much more enthusiastic about finding a way to work together. What do you think?  Any lessons learend from navigating the angel and VC funding?

Posted by Dharmesh Shah on Mon, Apr 16, 2012

COMMENTS

Amen, Chris. Having been on both sides of the fence on this one (both raising money and writing checks), this is one of the hardest decisions to make, but I don't think there has to be an angel vs VC decision. The ideal resolution--provided the investors are all on the same page--often is-having both some VC and some strategic angel participation. The mix, however, is a bitch. If entrepreneurs have the stomach and the means to hold out, I think the best advice is to talk to everyone and bide your time until you can get your dream team together. Then make damn sure that the chemistry seems OK before taking the money.

posted on Monday, April 16, 2012 at 10:38 AM by Ty Danco


As we head back out now to seek our seed round, this was an interesting topic because: Our deck says (and has always said) "$K" as a seed round with the plan to seek "$M" as a Series "A" round to accelerate growth. We didn't specify "Angel" vs. "VC" because it's about the amount of capital needed and what we're going to do with it that mattered to us, not where it came from.  
 
(Is that an oversight on our part??) 

posted on Monday, April 16, 2012 at 11:05 AM by Peter Alberti


The best advice that I can offer is that, if you strike out with VC's, you should know exactly why and address it.  
 
The reason to go to angels is that you don't want or need the quantum of funding that a VC wants to put in play.  
 
Nobody wants to be a Plan B investor.  

posted on Monday, April 16, 2012 at 12:28 PM by Andrew Ellis


I really like this post! It validates my approach to finance. I have been thinking about an Angel as a partner and I'm not considering VC financing. Having an angel investor as a partner in the test/learn/milestone phase is very important, not just for receiving the necessary financing, but to provide long term support. 
 
Only after our model is proven to work and we need to grow would I think about other means of obtaining other financing. 
 

posted on Monday, April 16, 2012 at 1:36 PM by Terry Leach


The stories are like reflections of what I am going through in my life…and these did make me realize my mistakes and what steps do I need to take…. 
pizza by the slice houston

posted on Wednesday, April 18, 2012 at 11:54 PM by Felix Roddy


Thanks for wonderful advice, Chris. I do not see any good reason for presenting myself like that to Angels. I have a question for you - What if a startup is funded by its founders and they have enough money (say $500k) to sustain the growth at early stage. Now, would it be good idea to have some angel investment before you approach to VCs, just to gain VCs' trust? 
 
I am trying to understand whether a startup has to go through angel investment before approaching VCs or not? How would VCs decide on a startup that directly approached them? I hope this is not too off the discussion :)

posted on Thursday, April 19, 2012 at 7:50 PM by Rakesh Soni


I think that maybe this is becoming more the norm than the outlier. Many of the early-stage companies I'm talking to are deliberately avoiding VCs, recognizing the mismatch in funding & risk at that level. They approach the whole business more organically, looking at how to test markets and grow in a measured way, and viewing angel investors as, like you said Chris, partners. 
 
Great post Chris.

posted on Tuesday, April 24, 2012 at 11:27 AM by Brian Gladstein


Hello, 
 
 
 
I am a bit confused. I have been trying to get an investment for my ecommerce and later mortar store with high end fashion women apparel, handbags, but it seems that no one really wants to invest. Maybe I should just seduce someone rich, like the "real" housewives and have them buy me everything I need in order to run my business. Seems like the easiest way..They might be dumb but they're not stupid.

posted on Wednesday, April 25, 2012 at 11:23 AM by Ak


It's a very daunting and confusing process. The worst part is navigating how many investor groups, VC and Angel alike, insist upon an aspiring entrepreneur "network" in! For many who aren't in the in-crowd you take what you can get...

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posted on Monday, May 28, 2012 at 1:40 AM by I NEED AN INVESTOR


This is a very informational and helpful article. If you can post information on how to approach investors and angels and ask them to invest, that will help many of us. 
 
Thank you for the wonderful article.

posted on Saturday, June 02, 2012 at 2:37 AM by David D Souza


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