Need Funding? Go Angel and 5 Reasons Why

Many startups and people who follow them are very aware of Venture Capital funding, it always is big news when a company gets a big round of VC funding.  But that is not the only route for raising capital to help make your company grow, and in some cases may not be the best route either.  Another popular form of raising money is through angel investors.  In an interesting post over on Found and Read they take a look at the latest round of finacning raised by Lookery, “an advertising and user-targeting network offering lightweight, economical targeting data for every user on every web page”.  Lookery’s CEO is Scott Rafer, fomerly the creator of MyBlogLog which he sold to Yahoo some time back before starting Lookery.

Lookery recently completed its second round of fincancing and in a bit of a twist went all angel funding to raise over $2.25 million.  As the post states, Lookery is at the stage where traditionally they would be seeking a VC round, they chose to go the other way.

Here is a look at the 5 reasons Scott chose to go the angel route

1) Focus. Angels can concentrate on the individual strategy of your company, rather than the larger portfolio management strategy a VC must bear in mind (e.g. How deep are my fund reserves? How fast must I spend them?), most of which don’t apply to your company. “Founders want their startups managed as sovereign entities, not as portfolio segments, “ Rafer says.

2) Fewer confusing ownership terms. Angels don’t get the level of liquidation preferences VCs demand. Angels like convertible notes and often get what Rafer calls “thin preferreds,” but you’re unlikely to suffer the dreaded participating preferreds. Without a multi-tiered equity structure, every investor, including founders, gets paid in proportion to what they put in.

3) You will control negotiations on future funding rounds. You’re less likely to have a “dissonant chorus of voices between the common shareholders and preferred shareholders, each at the table and wrestling in a different direction” over the terms of the new round, Rafer says.

4) Transaction control. If a good purchase offer comes your way, you’ll get to decide when to sell. You won’t have to seek permission from investors who aren’t on your board or worry about what a VC needs to have happen vis á vis managing his limited partners. Chances are you’re not an LP, so why should you care? Angels have no LPs, so their agendas tend to be far more transparent.

5) Angels aren’t compensated in ratios. Angels get 100 percent of the profit they generate with their investment in your company. A VC only gets a fraction of the “carry” generated on your deal. This is one reason a VC might be motivated to urge you to sell bigger; they need the numerator in the exit math ratio to be bigger, or the denominator to be smaller, to maximize their piece of your deal. With an IRR compensation method, VCs get paid even more if you sell faster. But the thing to remember is that a VC is negotiating for the interests of others, not just himself. With angels, “it’s a merit-based discussion, or at least much more so, because the angel is actually getting the entire return,” Rafer says.

There is a really good book I would suggest all of you read called Founders at Work.  It is small vignettes about many of the companies we know today like Paypal, Blogger, etc and it showed some of the pitfalls of VC funding that really jive with much of what Scott is talking about here.

So remember, don’t think that your only option is VC funding.  Angel investing has become very popular and there are organizations in many areas that organize local angels to help local companies find them and vice versa.