Transitioning from Angel Investment to Venture Capital

Picture of Tipping Point BookVenture capitalists are generally not interested in business “start-ups”.  With business start-ups there are too many unanswered questions regarding the product or service, and the market.   That is why “angel” investors are needed to bridge the gap and assist the entrepreneur, both financially and with business advice, until a track record is developed.  If things go well, there will likely come a stage when the business needs a major injection of funds to take the business to the next level.  Rapid growth can be a curse.  Without adequate financial backing, rapid expansion of a successful business can involve an immediate increase in costs with a delayed increase in revenue, and may result in bankruptcy.  The venture capitalist is looking for a business with rapid growth potential and is prepared to provide the funds to fuel that growth.  I compare angel investment to a small stakes poker game played among friends and compare venture capital investment to a high stakes poker game played with people whose only interest is the game.  In the small stakes game, it is real money; but the small stakes moderate the tone. Within limits, the angel investor will try to accommodate the entrepreneur when problems are encountered.   In the high stakes game, the amount of money at stake increases the intensity of the players.  To make matters even more intense, expectations are sky high.  There are also time limits, as the venture has a monthly “burn rate” and must reach set milestones before the allocated funds are exhausted.  The venture capitalist is gambling.  He or she knows that out of ten businesses that receive investment capital, only one or two will realize their potential.  The potential return must, therefore, be multiples on the investment to cover the losses on businesses that do not succeed.   Those multiples can be between ten and thirty times investment funds.  It is not acceptable for the business to merely create a living for the entrepreneur and jobs for a handful of employees.  The investment must result in the business “scaling up” to provide significant returns.  If the entrepreneur does not have the skill set to guide the business to the next level, he or she may be demoted and replaced by someone who does.  If the business is unable to meet expected milestones, the business will be cut off from further funding.   Those are the rules of the game.  Sorry, it is just business.