angels are in fact meeting their funding needs and that they expect them to be able to meet those funding needs going forward.”
That’s potentially scary news for venture capital firms, who used to be able to depend on the fact that entrepreneurs with relatively low capital needs in the early stage would eventually grow to the point that they’d require larger, multi-million-dollar infusions. These days, apparently, many entrepreneurs are betting that they can get all the way to an exit without taking venture money. “The survey kind of debunked what may be a common myth, which says that everybody is moving up the ladder from angels to super angels to early stage VCs to traditional VCs,” Hollifield says.
But the most revealing section of the Dorsey survey asked respondents to rank 16 characteristics of potential investors on a five-point scale ranging from very important (5 points) to somewhat important (3 points) to not important. It’s tricky to sum up these findings in a few words, as each question resulted in a distribution of answers across the scale. But here’s how the elements stacked up, in order of the percentage of respondents who assigned the elements either 4 or 5 points:
Dilution—percentage ownership required by investor 75.3 percent
Understands funding needs—offers no more or less money than required 70.9 percent
Speed with which the deal gets done 68.4 percent
Pre-money valuation offered by investor 67.5 percent
“I felt like they really wanted the deal” 62.4 percent
Number of board seats required 62.1 percent
Specialist in the space 61.4 percent
Liquidation preferences required 57.6 percent
Operational experience 53.6 percent
Ability to bring in customers 50.2 percent
Has resources to invest in future rounds 42.3 percent
Geographical proximity 26.4 percent
“We had an existing relationship” 24.5 percent
Brand name 24.5 percent
Understands global markets 19.9 percent
“I’ve raised funds with them before” 11.9 percent
If nothing else, these rankings show that startup entrepreneurs are thinking very carefully about who they want to take money from—and that they’re likely to walk away if they think that a potential investor is trying to take advantage of them in term sheet negotiations, or if the money is all the investor has to offer.
“Both Matt and I were kind of impressed,” Hollifield says. Respondents were “very focused on the operational expertise of the investor, and whether the investor was a specialist in the space. They especially told us that they are not impressed with brand names, which is relevant to both super angels and VCs….It’s indicative of a pretty high degree of sophistication among the entrepreneurs.”
A big law firm like Dorsey & Whitney is far more likely to be representing venture firms in deal negotiations than entrepreneurs. So why would they go to the trouble of surveying hundreds of startup CEOs?
Bartus and Hollifield say they wanted to get past the surface of the debates between venture firms and super angels and find out what entrepreneurs themselves think about the different classes of investors. Just as important, they wanted data that would help them advise their own clients.
“One of the biggest questions we are asked by investors is to provide them with feedback when they don’t get a deal they were interested in and thought was a good fit for their fund,” says Hollifield. “They ask us what they should have done differently—what was it about the entrepreneurs’ decision-making process such that they didn’t get the deal? This data reaches beyond our anecdotal experiences to help guide those investors to be more effective in getting to the top.”
It’s an exercise that large venture firms must undertake, or risk losing out on being part of the next Google or Facebook, Bartus says. “One of the better debates that’s heating up is how to differentiate between companies that have low capital needs but have the potential to be another Facebook, and companies with low capital needs and low exit opportunity,” he says. “Angels are willing to invest in both categories, but VCs are really only interested in that Facebook category. I believe VCs are recognizing that they do need to compete at this investment level to pick up those promising companies.”
