If you didn’t know “How to Dance with Angels,” CFO.com is here to tell you. Even though VC investing is back at 2001 levels, the level of angel investing is ramping up at nearly the same rate. Angel investing, or foregoing VC money in lieu of wealthy individual investors, is seen as a way to prevent the pressures of 20%+ above market returns and allow for more corporate flexibility. More traditional angel return expectations hover around 10%-15% above the S&P. A sense of the overall market, from the article:
Last year angels — wealthy individuals who hope to take advantage of ground-floor investment opportunities in new companies — provided $25.6 billion to burgeoning businesses, an increase of nearly 11 percent over 2005, according to the 2006 Angel Market Analysis released by the Center for Venture Research at the University of New Hampshire. Furthermore, the number of ventures to receive angel funding rose 3 percent, to 51,000, last year, and average deal size grew by 7.5 percent. "This continued rise in total investments points to a healthy angel market," concluded the report.
More after the jump...
CFO.com looks at Sara McNeil, CEO of Boston Software Systems (BSS), who wants to take back the funding. Your company is young, foolish, maybe a little reckless, and here comes an older VC fund who will give you plenty of attention and even say it loves your business model. Next thing you know you’re defaulting on supplier payments and your VC is nowhere to be found. Your company has four little sub-divisions to feed! VC funds are only interested in one thing, and they’re not satisfied with under shirt over bra action.
McNeil says taking cash from VCs is risky. BSS has always been focused on moving "to second base...and that's what [has] kept us very, very profitable." But stopping at second isn't good enough for VCs, opines McNeil. They want home runs, and if the return they expect doesn't materialize within a few years, the business either goes belly up or its assets, including proprietary products, are sold for pennies on the dollar.
Despite McNeil’s aversion, the advantage of sticking with VC funding is pure financial muscle. Angel investors often lack the ability to provide a bit of extra padding in capital infusions, unlike VC funds, and VC allows for more liberal usage of additional capital to pursue a more aggressive acquisition strategy, eschewing the pressures of strictly organic growth.
The other way to talk to an angel, courtesy of Aaron Spelling:
Step 1: Wait until your forehead grows 7 inches then spike your hair directly upwards to accentuate it (when my younger sister used to watch 90210, my dad and I would jokingly refer to the show as the “Forehead Club for Men.” Honestly, was having a 32-inch forehead (and 3-inch vertical) part of the casting process?
Step 2: Give Tori Spelling another face-lift, with the back of your hand
Step 3: Bring a set of quintuplet fetal porcupines to term in your larynx
The payoff – your own spin-off series (and having this song in your head all morning):
How to Dance with Angels – [CFO.com]