Reflection Six
In Chapters 9 and 10, Rao touches on two more strategies that finance-smart entrepreneurs use: grow with angels you can control and seek non-VC VCs first.
To grow with angels you can control, you may need to take less funding initially and keep long-term gains in mind. Rao lists several types of angels:
*industry angels – experts in the entrepreneur’s industry that invest noteworthy amounts of money because of their position and/or past successes. Industry angels can be advantageous in their connections, credibility, and advice. This type of angel, Rao states, is usually the best.
*area angels – invest to build local businesses
*rich investors – mostly known to local money managers or investment bankers
*crowdfunding –one of the latest funding sources
Factors affecting angel financing, Rao says, are the following:
*get a lawyer before contacting angels (and even friends and family) that knows securities law and knows about rules and regulations (number of angels that can be used, the amount of money that can be raised). Rao recommends getting a “bell cow”—a well-known angel that has a good reputation and has made money.
*angel capital is limited capital—most invest smaller amount of money in earlier, high-risk stages; many angels join angel groups and pool their resources to offer larger amounts; most angels do not make money, but want to make a difference. Rao points out that many angels were successful entrepreneurs and/or team members in growth ventures so they have experience in building successful companies and offer solid advice.
*crowdfunding (VC for entrepreneurs that cannot get institutional VC) – money in small amounts from many different investors who find you through online crowdfunding sites; they like your product and are willing to take a small risk on you. If based on pre-sales, could attract investors to help get the venture started, but the entrepreneur must have the capacity to develop the product and follow through.
As far as seeking non-VC VCs first, there are options out there such as seeking alliances. Corporate alliances have money, influence, and power. Rao also points out that they have connections and can lead to additional opportunities, such as helping to develop a new product and for larger companies, alliances can help them enter emerging trends.
Besides corporate VCs (CVC), other alt-VC VCs examples are late-stage VCs, small business investment companies (SBIC), and area and community venture capital funds.
Rao reports about 18% of billion-dollar entrepreneurs (including Bill Gates and Jeff Bezos) built their companies with late-stage equity.
SBICs were one of the first organized institutional VC funds with a goal of offering more equity funding to US ventures. They use their investors’ funds, along with debt from the federal government to invest in small businesses.
Area and community venture capital funds may be found by contacting local economic development organizations. These are called community-development VC funds or community-development financial institutions (CDFI). Rao reports that Sam Walton of Walmart benefited from CDFI funding.
As an adventure seeker that is new to the world of entrepreneurship, I lean toward looking into Rao’s take on industry angels as real possibilities for funding opportunities. Not only has Rao convinced me, but Croce et al (2016) have, too. In one study (Croce et al. 2016), a dataset from Crunchbase made up of 1933 high-tech startups who had received funding from a business angel in at least one round of funding was reviewed. The results concluded that business angels in early-stage investments lead to an increased chance of “receiving subsequent rounds of funding and additional capital infusions from venture capitalists.”
Would you go with angel investors? If so, which type of angel and why?
Stay tuned to find out more in the next reflection on Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital.
References:
Croce, Annalisa, Massimiliano Guerini, and Elisa Ughetto. 2016. Angel Financing and the Performance of High-Tech Startups. Journal of Small Business Management 56: 208–28.
Rao, D. (2020). Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital. FIU Business Press, Mango Publishing Group.