Note: Back from a long hiatus ...

One of my all-time favorite songs is “She Talks to Angels” by the Black Crowes (the acoustic version is best). I know the lyrics are sparse - five lines plus the refrain make for a short song, but the instrumentals rock and carry it out to 5:31.

What does this have to do with Venture Capital? Well I was just listening to the song and it reminded me that “She” from the song isn’t the only one talking to angels - an increasing number of entrepreneurs are as well.

It’s a little of back to the future - 1999 all over again - except I believe the crowd of angels these days are more sophisticated than their predecessors and in it for the long run. At IDG Ventures we focus on very early stage startups and as such, see angels as both collaborators and competitors more and more often.

Some of my brethren in the venture business are quick to dismiss angels, depositioning them as “amateurs” or “tourists” who won’t actively engage, won’t really add a lot of value, won’t be there for the long run, etc. Sure there are angels who fit that bill. But there are many VCs who do as well.

So what’s the real difference between angels and VCs? Increasingly the lines are getting blurred, and I am of the mind that it may not matter any longer. The real issue at hand is where can entrepreneurs find risk capital at its earliest stages, where, as one of my portfolio company CEO’s puts in, there may be little more than “two guys and a trick duck?”

I would loosely define a “true” seed deal as one where:

1. (a)on a modest amount of capital (less than or equal to $1m)
   

2. (b)over a defined, short period of time (less than or equal to one year)
   

3. (c)a small team executes to achieve a set of mutually agreed to milestones, upon the satisfactory completion of,
   

4. (d)a full financing round is performed.
   

IMO, seed investments are the most difficult of all startups investments. By their very nature, a true seed stage product or service is raw (sometimes rawer than raw), the team incomplete, the market size incalculable and the empirical evidence non-existent. Basically, very little we learned in VC correspondence school about evaluating a new investment is useful in assessing a seed deal. It really comes down to a bet on a key person a key insight and the promise of market potential.

The scope of help a seed stage company needs is inversely proportional to the completeness of the founding team. Most venture capital firms are ill-equipped to aptly prosecute seed-stage deals; they have too many other commitments and a set of internal processes that are not built for such amorphous constructs. For instance, with a small bankroll, a seedling startup is really not the right place to hire highly paid recruiters to help locate that great VP of Engineering. The fact is that during the seed period the company just may not be able to hire very many “big guns” at all. Therefore the right help is more likely to be the ability to quickly surround the company with a blanket of friends and advisors who can provide the insight and augmentation the founding team needs to achieve its milestones.

And this is where Angels in general may have a leg up on VCs; more often than not they have fewer company commitments and are able to roll up their sleeves and pitch in. And if they are willing to do this and have very relevant domain experience (i.e. rolodex and playbook in the startup’s sector) their assistance can be invaluable and will be an accelerant.

Venture firms that want to do seed investments “right” need to make an overt commitment to them; they need to acknowledge that the rules for their other investments that are more mature, just may not apply. And they need to dedicate resources to get actively involved in the projects to help them achieve the milestones on as short a schedule as possible.

As an entrepreneur evaluates a potential choice between an angel and a VC for their seed round, they need to look beyond the curb appeal of a VC’s palatial address and portfolio; or the notion that an angel will move faster and pay a higher price. Without a track record of successful engagement at the seed stage, both will likely be poor choices.