How the changing relationship between Angels and VCs can work for your business
In partnership with UKBAA and BVCA
Understanding the working relationships between investors can be key to helping your business secure funding rounds.
That’s particularly the case when it comes to Angels and Venture Capitalists (VCs). Little more than a decade ago, Angels and VCs were seen as very different parts of the finance chain. They had different interests in terms of their investment requirements and would expect businesses to be in very different positions if they were to get involved.
But the lines have since blurred, and Angels and VCs are actively working together and forming strong and productive working relationships.
“The distinction between an Angel Syndicate and a Venture Capital fund has become less sharp,” Tim Hames, Director General of the BVCA explains. “The ultimate difference is that Angels invest with their own money and VCs invest with other peoples’.”
If your business can bring together investment from both Angels and VCs who know how to work together, and if you can successfully nurture those relationships, then there are some very lucrative benefits.
1. Working holistically
Historically, Angels invested early in the process as individuals, whilst VCs invested later in groups. But as Angels begin to form ‘Syndicates’ – larger groups who join forces to offer larger funding rounds and minimise risk – and VCs begin to get involved earlier in a business’ lifecycle, the two have begun to work in harmony.
Rod Beer, Strategic Relations Director at the UKBAA explains, “we are seeing many deals where VCs are identifying the opportunity to get involved earlier, alongside an Angel Syndicate and they work together as a team. They invest on the same terms and both have a place on the board. It can work really well.”
This closer working relationship between Angels and VCs can help businesses receive a more valuable pre-Series A deal. Businesses get the value of working alongside Angels and VCs at the same time, as well as taking home a larger funding pot.
2. Cultivating connection
Even if they don’t work together at the start of a business journey, Angels and VCs often cross-refer companies with potential.
VCs will refer businesses to Angels if they have approached a fund too early in their journey. Similarly, Angels can introduce their businesses to VCs when the time is right to take the next funding step. For both sides, keeping in touch is crucial. And for businesses looking for funding, speaking to investors with strong industry connections can help cross-referral occur naturally.
“From an Angel’s perspective, helping an existing investment reach its next funding milestone can be hugely fulfilling. The Angel can take an exit or partial exit if they want to reinvest their money elsewhere, or work with the VC to stay invested in the business and with the opportunity to bring added value.”
|Jenny Tooth CEO at UKBAA and Angel Investor|
3. Planning early
As for businesses seeking their first Angel investment, it’s important to make your funding strategy clear up front, being transparent that you intend to go for VC funding to support your growth. In this case, you should always look for an Angel Syndicate or lead Angel with good VC contacts and who are used to working alongside VC funding.
Jenny Tooth, CEO of the UKBAA and Angel Investor herself, explains, “Angels are part of an ecosystem of other players. Angel money is very often the first source of equity finance you have as a business. But you should use this to access other relevant sources of finance and investment to support your growth journey."
You should take advantage of the range of finance sources relevant to your businesses and what they can bring in terms of finance and access to additional expertise in their business to help them achieve growth.
Of course, some friction is unavoidable. VCs often create preferential shares when they invest in a business. These shares often take precedence over existing Angel shares. Similarly, Angels may or may not want an exit when a new VC enters the picture – which may or may not work to the VCs advantage.
“When VCs invest, they often want the money to go into the business – not into buying out Angels,” Beer explains. “There can be real advantages for the VCs of Angels staying in the business – it’s a bit of a touching point where VCs don’t want to let Angels go. If Angels bring expertise and value, they don’t want them out. They want them to stay and keep adding value to the business.”
The bottom line
Identifying a VC partner that both the business and any existing Angel investors think are a good fit can be one way of keeping everyone on the same page.
“It’s brilliant when the Angel and the investor are aligned in saying ‘let’s go out and find VCs who we can all work with’,” explains Tooth. “Planning your business’ journey together and being clear about what you need and when – and signalling those needs early – is crucial.”