Do you believe in angel investing?

At a recent Boulder New Tech Meetup, my friend Kimbal Musk said something to me in passing that, well, I just couldn’t let pass. He said he didn’t believe in angel investing anymore, and that any company worth getting involved with was worth taking right to a VC. This piqued my interest and I started trying to think of companies that had truly made it and become something really remarkable after raising only a small angel round. Not many came to mind. Something rang suspiciously true here – If I had a nickel for every time I heard an entrepreneur say that they’d be raising $500k and then nothing more I could give them all to one of them and find out.

I asked Kimbal if I could follow up on his comment with a podcast (full audio here) and I invited Brad Feld to attend as well figuring he’d have plenty of insight (he did).

The discussion meandered a bit before Brad argued that there are really three types of companies who seek angel funding. They are;

  • Those that will ultimately need significant institutional money and won’t get much impact from angel dollars
  • Companies that don’t need to raise much money ($250k-$1m) before they can grow and accelerate, but are likely to later need an institutional round.
  • Those that don’t really deserve to exist in the first place.

Kimbal goes on to say that his experience is that putting $500k into a company never really changes the first or last page of the business plan, and that anything related to adoption takes marketing and a great team, and therefore money.

At one point in the discussion, Kimbal realized that the disconnect was simply that his philosophy of angel investing is to get very involved and that what he really disagrees with is very passive angel investing. Brad agreed that passive angel investing is really often just “for profit philanthropy.”

So after the discussion, I think Kimbal would now agree that for the second type of company that Brad listed, angels can and do have a large impact especially when they get heavily involved and use their resources, energy, talent, and connections to help the company get to the next level and that such companies would not likely survive to see a venture round without such angels.

So? Are there companies who really make it to a worldwide audience on only a small angel round? Brad points out that while it can and does happen once in a while, that when you hear such a plan it is essentially just “bullshit.”

Give it a listen – I hope you’ll find the discussion as interesting as I did. I learned a great deal from the conversation – but then again I don’t think I’ve ever spent ten minutes with either one of these guys that I haven’t learned something valuable. We did this at Kimbal’s restaurant in Boulder, The Kitchen, so I apologize in advance for the couple of rough edits while coffee was being ordered.

file under: Blog, Startups