Angels and VC’s only invest in high risk, high gain opportunities – right?

There are a number of differences between Angels and institutional VCs, but one fundamental difference is that Angels invest their own money – VCs are typically investing the money of others.

This difference in fiduciary responsibility translates to quite different investment criteria.

Since an Angel is not accountable to others, she can invest in anything she likes. This could be a high risk, high gain start-up or a relatively conservative retail or services business.

In fact, most successful angel investments are a result of Angels reinvesting in industry sectors that they know well. This experience provides their investees with essential insight and networks that help them leapfrog many of the hard lessons that their competitors have to fight through.

The other luxury that an Angel has is that they set their own agenda with respect to timelines and required return on investment. An Angel can therefore choose to become a long-term partner in a business without feeling the pressure (and therefore applying the pressure) to exit within the medium term.

VCs are obliged to deliver their investors a return within a predefined timeline. This constraint means that VCs must look for portfolio companies with properties consistent with that objective. Such businesses must have the potential to scale quickly and into large markets to maximise the probability that, within a constrained timeline, they can deliver a healthy return on investment commensurate with the underlying risk.

So while high risk, high gain is an oversimplification, it is true that VCs will typically not be interested in local services businesses or simple trading (distribution) operations as their potential to scale is limited by their local addressable market and/or their lack of defensible intellectual property.

There are a number of other relevant factors, but the key point is that Angels and VCs should not be equated. They service very different segments of the investment market (albeit they sometimes overlap).

Angels are active across a much broader spectrum of business activity and do not limit their activities to high risk, high gain propositions.

VCs have tighter (arguably more demanding) investment criteria due to their fiduciary obligations and fund lifecycles.

In either case, it is very important that entrepreneurs understand the mandate and objectives of any investor.

Many people like to stereotype investors as not having any interest in good solid businesses, but such stories tend to emanate from entrepreneurs that have either failed to achieve that required understanding or have investment propositions that are not adequately prepared.

Doron Ben-Meir has been an active venture capital manager for the last eight years. He founded Prescient Venture Capital and prior to that was a consulting investment director of Momentum Funds Management. He was a serial entrepreneur over a 12 year period, co-founding five new technology based businesses.

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