Most early stage investments include a right of first refusal (or pre-emptive right) for future financings. This means that if there is a future financing round the early stage investor has the right to participate in the funding round and not to be diluted. This option has inherent value and is particularly valuable with successful early stage companies.
This is also a valuable option for VC funds that are looking for later stage investments. By being prepared to spend some ”premiums” the VC funds have the pre-emptive right on a diversified portfolio of angel investments. The VC funds will have the inside running for deals in investee companies whose performance they have monitored since start-up.
Collaboration with VC’s
The sophistication of mature angel groups hasn’t gone unnoticed by venture capitalists, especially those that still consider investments in early-stage companies. Over time angels and networks of angels have become willing to syndicate deals among themselves and also in collaboration with venture capitalists.
Venture capitalists appreciate the robust process adopted by angel organizations and recognize that angels serve as critical mentors and board members for start-up companies. Tech Coast Angels, a network of angel investors in Southern California, for example, has more than 20 venture associates routinely scrub deals and invest alongside the group’s members. By investing alongside angels, the venture capitalists set the stage for leading subsequent larger investment rounds.
Source: “Angel Financing: Trends for Today’s Entrepreneurs” by William H. (Bill) Payne
Benefits of VC Participation
The benefits of a VC participating in an Angel Group or co-investment fund for the investee company and Angel investors include:
- Leveraging the VC’s industry knowledge, networks and institutional due diligence and operational processes.
- Potential in-built exit strategy either solo or with other VC funds.
- Deeper pockets for later round capital raising.
- Greater speed to complete later round raisings
A new study, by W. Kerr and J. Lerner of Harvard Business School, shows that angel-backed companies are more likely to succeed and show more growth than those backed by VC firms alone.
The report found that companies with angel funding see 30-50% higher growth figures for website traffic, are more likely to survive for four years, and are better placed to receive further rounds of funding.