Tuesday, December 13, 2011

Venture Capital and Angel Investing

The Book: Venture Capital and Angel Investing, edited by Andrew M. Lane and Nicole P. Mifflin (Nova Science Publishers, Inc., 2011).
Why You Should Care: A relatively short and highly readable study of the structure of venture capital and the characteristics and behavior of angel investors.
My colleague Frank Vargas recently wrote about his experiences working with entrepreneurs in Silicon Valley during the early boom years. Some years before that, while Frank was a mere undergraduate at Harvard as yet untested by the rigors of Boalt Hall, I was already at Stanford Law School, smack dab in the middle of the Valley.
From time to time, my jogging route would take me down Page Mill Road in Palo Alto past Hewlett-Packard. All I knew about the company was that it made calculators, the kind that I had happily abandoned in my freshman year of college after fulfilling my calculus requirement (never to look back). I was blissfully unaware of any revolution taking place at the time. With interest rates in the high teens in the early 1980s, I have heard that some of my more entrepreneurial classmates would borrow for tuition at low subsidized rates, and invest in T-bills, earning themselves a nice spread from which to purchase the odd pitcher of beer at Zott’s (now known as the Alpine Inn in Portola Valley).
It only goes to show you that timing is key (something I’ve alluded to before). By the time things really were churning in Palo Alto, Sunnyvale, Mountain View, and San Jose (around the time that Frank was just starting to work in the Valley), I was sitting some 5,000 or so miles away in the decidedly not high tech United Kingdom. Sad to say, but things were not very rosy there in the early 1980s, what with the Iron Lady presiding over privatization of industry during the depths of recession. But, hey, my dollars sure went a long way, with the dollar and pound approaching parity shortly before I arrived on the shores of that scepter'd isle.
I returned to a United States in the early stages of a high tech revolution. Apple was just beginning to market the McIntosh, and Silicon Valley was now the place to be, not just for innovators, but for venture capitalists. It was around that time that I first became familiar with the concept of “angel investors”—those who provided the money to keep a dream alive until it made the radar monitored by venture capitalists.
Venture capitalists are fairly easy to identify, but hooking up with an angel investor has always seemed to be a fortuitous—if not providential—experience. The question for entrepreneurs was, and remains, who are these people, and how do we get in front of them?
Venture Capital and Angel Investing is a slim volume that provides some help on the first question, and perhaps indirectly on the second as well. The section dealing with angel investors provides all sorts of interesting nuggets of information, all drawn from studies conducted between 2001 and 2006 (and thus likely out of date for today’s economy—but  maybe the best information we have at this time).
For example, it surprised me to learn that “most angel investors are unaccredited investors, but accredited investors provide the majority of dollars invested.” Frankly, I would have thought almost all angel investors would be accredited. Between 2001 and 2003, up to 629,000 people provided an estimated $23 billion per year. (Remember, that’s not venture capital—that’s money from angels.) It is a very high risk game, and those looking for a quick return should not play. “Between 0.17 and 0.2 percent of the companies financed by angels go public, and between 0.8 and 1.3 percent are acquired.”
My assessment? This is a very good read for those interested in “more accurate estimates than were previously available of the market and demand for angel capital, the companies that receive angel capital, and angel deals.”

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