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and “taking strike outs” in the process.
By ICR™s definition of preseed, seed, and start-up, early-stage represents
the riskiest investment; often it means investing in no more than an idea.
Some may insist that we overrepresent the activity of angels in this market,
but a look at the above numbers should settle the matter. Seed and start-up
investments in the angel market amount to tens of thousands of transac-
tions. By comparison, the entire venture capital industry invested in 166
early-stage transactions in 2003. Entrepreneurs will tally more for their
time, trouble, and money from an angel investor than from the professional
venture capitalist, who better serves as a near-distant, instead of initial,
funding source.
Having addressed some of the quantitative differences between angels
and venture capitalists, Exhibit 4.4 presents an overview of some of the
main qualitative differences between business angels and venture capitalists.
When we cross-compare business angels with venture capitalists, business
angels seem to be concerned more with a firm™s success and creation of a
sustainable company, while venture capitalists seem to be more concerned
with an exit strategy and concomitant internal rate of return. Business
angels are using their own money; venture capitalists are using other
people™s money. If we consider private investors, the mean number of
investments they make a year totals four. The number of investments made
by the most active venture capital firm in 2003 was 73, with second and
third most active venture investors coming in at 52 deals and 50 deals per
year, respectively.
Alternative Sources of Capital

EXHIBIT 4.4 Main Differences Between Business Angels and Venture Capitalists

Business Angels Venture Capitalists
• Concern with firm success • Concern with exit strategy
• Own money • Other people™s money
• Smaller equity share • Larger equity share
• Mean # investments = 4 • Mean # investments = 23
• Small business experience • Academic credentials
• 80% started a company • 38% started a company
• Part-time investor • Full-time investor
• Entrepreneurial manager • Financial manager
• Value-adding, active investor • Strategic investor, not hands-on
• Focus on entrepreneur • Focus on concept and rapid growth
• Location important (80%) • Location important (60%)
• No experience in venture™s • No experience in venture™s 29%
industry 59%
• ROI objective minimum 30% • ROI objective minimum 40%
• Generalist • Specialist
• Short due diligence and negotiation • Long due diligence and negotiation
cycle cycle

Source: International Capital Resources

Thus, angel investors are part-time”although active and value-added”
investors, whereas institutional people”almost strictly hands off”are
full-time. Angels, 80 percent of whom have started a business, value small
business experience; venture capitalists, only 20 percent of whom have
started a business, value academic credentials. The business angel focuses
on the entrepreneur, while the venture capitalist focuses on revolutionary
concepts with rapid growth potential. In huge markets, management can
be replaced!
Other differences abound. To 80 percent of the angels, location is im-
portant, especially given the cost, time, and frustration associated with air
travel in the current geopolitical environment, while location matters to 60
percent of the venture capitalists reimbursed for their travel. Business angels
will invest in a company when the angel has no business experience in that
company™s industry 59 percent of the time, whereas venture capitalists will
invest only about 29 percent of the time in industries where they have no di-
rect experience. Thus, you have a better chance in the angel market because
about twice as many business angels invest in industries they do not have di-
rect experience in. So you can have a larger number of people to go to be-

cause they may not be familiar with your technology, but they do appreciate
the market potential.
The angel investor, a generalist who anticipates a minimum ROI of 30
percent, contrasts sharply with the venture capitalist, a specialist, who pre-
sumes a minimum ROI of 40 percent. Finally, the business angel requires a
short due diligence and negotiation cycle; the venture capitalist favors a long
due diligence and negotiation cycle.


In their 1990 article in the California Management Review, “Does
Venture Capital Foster the Most Promising Entrepreneurial Firms?” Raphael
Amit, Lawrence Glosten, and Eitar Muller suggest that start-ups backed by
venture capital have a much higher failure rate than those financed by indi-
vidual investors. Venture capital is spread thin, say the authors, and venture
capitalists negotiate tough deals that drive away the ablest entrepreneurs,
those who know the value of their projects. Hence, they conclude, we can ex-
pect higher failure rates among firms seeking venture capital than among the
total population of new firms.
One reason for the double digit of investment failures among venture
capital investments may be that some more inferior deals gravitate toward
venture capitalists because of their more aggressive valuation stance. In other
words, entrepreneurs with less confidence in their venture may be willing to
take less money for equity in their current round of financing. Compare the
entrepreneur or inventor who, encouraged by the venture, would rarely sac-
rifice so much.
For example, suppose a venture capitalist offers an entrepreneur an in-
vestment of $1,000,000 but wants 50 percent of the company. The venture
capitalist is thus declaring that the venture is worth $2,000,000. The entre-
preneur with less confidence in the venture, with less belief in the venture™s
viability in three to five years, will accept the valuation. If, however, the en-
trepreneur does have confidence in the sustainability of the venture, why
would he or she surrender what may be worth millions within a comparable
time frame? As the article™s authors surmise, “The most able entrepreneurs
will not find the prices offered by the venture capitalists sufficiently attrac-
tive.” Since, as we have presented, angel capital is accessible for promising
deals, the confident entrepreneur need not compromise.
Confident entrepreneurs should confer less on the venture capitalist be-
cause they believe in their venture™s future value. Venture capitalists are ag-
gressive in their valuation because it serves them to manage the downside
Alternative Sources of Capital

risk and increases the possibility of achieving their targeted internal rate of
return, especially after having been burned in the dot-com bust of the late
1990s. If the venture capitalist can persuade the entrepreneur to relinquish
50 percent of the venture, for example, the venture capitalist can afford a less
successful transaction than either would like, but still provide a reasonable
return for the venture capital fund™s investors. The venture capitalist will suf-
fer far less than the entrepreneur. At this rate of valuation, chances are the
venture capitalist will get back the original investment, particularly if the
company is sold or merged.
Amit, Glosten, and Muller put it bluntly: “The most promising entre-
preneurs will not seek venture capital financing.” That the entrepreneur is
better off in the early-stage deal with the direct, private investor than with
the venture capitalist seems axiomatic.
In sum, a wide range of financing possibilities awaits; each has its
strengths and weaknesses. Some options apply to certain companies, while
others would not be suitable. The difference lies in stage of development.
Once you are clear about your stage of development, you can evaluate what
will work for you. Still, for people lost in the capital gap, only one resource
seems workable: the direct, private placement made with the angel investor.

Angel Capital in America:
A Study


We conducted a study that examined angel and venture capital available
through one investor network. The study profiled early-stage, higher-risk
private and institutional investors actively involved in direct, private invest-
ment into entrepreneurial ventures, and we sought to clarify investment cri-
teria and describe aspects unique to these investors. Our purpose is to help
entrepreneurs seeking capital to better understand angel and venture capital
expectations in the private placement, fund-raising process.
The study was sponsored by ICR, a San Francisco“based angel network.
One of the authors is the Senior Managing Partner of the firm. ICR is recog-
nized by government agencies, entrepreneurial organizations, academic in-
stitutions, entrepreneurs, and institutional and angel investors as having
built one of the largest databases of qualified investors interested in early-
stage investing in the United States.
The challenge for any angel study is, of course, to identify and locate in-
vestors to participate because of their preference for privacy, as we have dis-
cussed. We will explain how these investors were attracted to the database
and network later. In this chapter, we present an analysis and summary of re-
sults of the survey.

The first objective was to identify qualified investors, and then to administer
a questionnaire designed to define investment criteria and preferences, as
well as characteristics of the investors themselves. Confidentiality was as-
sured to all who participated, and the questionnaire was designed to be non-
intrusive in order to facilitate the response rate while providing as much
useful and quantifiable data as possible.


The major source of names was developed from ICR™s proprietary data-
base of investors built over the previous 15 years. We used a range of tech-
niques to attract investors to the database and, consequently, got them
involved in the network. The techniques used included investors who had
invested into client ventures, direct mailings to high-net-worth investor
lists; radio interview shows followed up with audio tape sales on angel in-
vesting, newspaper advertising, and investment seminars; referrals from in-
vestors in the network solicited with incentive programs, business periodical
advertising, publishing and distributing an angel investment newsletter, in-
vestment conference promotion and speaking engagements, publishing and
promoting a book on angel investing, and creating a high-traffic web site
(www.icrnet.com). Obviously, this is not a statistically valid sample. But
these techniques provided a cross-sampling of investors from across the
United States.
Data were collected by randomly selecting 100 investors from ICR™s
database of 1,359 investors. Each was sent a letter introducing the study, as-
suring confidentiality, explaining that results would be published and avail-
able publicly. The questionnaire was designed to be easy to complete and
return, and was enclosed with the letter. Because an existing relationship was
in place between one of the authors of the study and the investors, data col-
lection was made significantly easier than having to build a list of investors
to mail to, and to persuade them to participate.
In all, 100 packages were distributed. Sixty completed survey question-
naires were returned.


Profiles of the investors who responded conform to expectations consistent
with a national network. Fifty percent were from California, 13 percent from
Massachusetts, and a sprinkling from across the country, including New York,
Illinois, New Jersey, Maryland, Connecticut, Pennsylvania, Ohio, New
Hampshire, Minnesota, Florida, Georgia, Colorado, Texas, Utah, and Wash-
ington. Given the higher levels of entrepreneurial activity in California and
Massachusetts, higher rates of response from those regions were predicted.
Fifty-seven of the respondents were male; three female. In addition, the
respondents were well educated. Fifty-seven percent held post-graduate de-
grees, many from Ivy League universities. Eighteen percent had been presi-
dent, CEO, or other senior executives in established corporations. Thirteen
percent held medical, law, accounting, or engineering degrees and were still
We asked about their start-up management experience by inquiring if
Angel Capital in America: A Study

they had founded their own companies. Forty-eight percent had been in-
volved in starting up their own ventures.
We assessed the respondents™ investment history and experience. Eighty-
three percent reported prior experience investing capital in various busi-
nesses for their own account. One hundred percent confirmed that they met
accredited investor status. Eighty percent answered that they relied on legal,
accounting, or tax advisers when they considered particular investments, and
would continue to rely on such advice in the future.
Three quarters of respondents (77 percent) stated that they were indi-
vidual investors acting for their own account and investment purposes”and
not with a view to distribute or resell. One third responded that they were ei-
ther a professional venture capitalist or employed by a venture capital firm.
Twenty-five percent represented a corporate investor. The overlap may be
explained by the fact that some venture capitalists, when there is no conflict
of interest, can invest privately for their own account. Also, some angels in-
vest through the corporations that they own or run.
To understand the frequency of past investments, we asked respondents
to indicate how many entrepreneurial ventures they invested into during the
previous five years. Their responses are summarized below:
During the past five years, in how many entrepreneurial ventures have
you invested?

Number of
Responses Category
0 None
10 One
10 Two
4 Three
5 Four
2 Five
20 Six or more

Thirty-three percent made only two investments or fewer in five years!
Eighteen percent invested three to five times in five years. However, one-third
reported six or more investments in this time period.
We also asked respondents to report the size of their past venture

Number of
Responses Category
1 Under $10,000
4 $10,000 to $25,000


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