Digital Ventures

Entrepreneurs and investors, both venture capitalists and angel (private) investors sometimes have very different perspectives. Are you looking for the same things in the right places?

This is an interesting survey by Dee Power in the US and it highlights how Entrepreneurs can make assumptions that can slow them down in finding financing and waste a lot of their time – check out the results and make a note of the best places to look for funding.

Over 100 entrepreneurs that were actively trying to find capital were surveyed and their results compared to the results of a series of surveys of 250 venture capital firms and a survey of 40 angel investors also known as private investors.

Entrepreneurs were asked two questions and their results compared to the summarized answers of angel investors and venture capitalists.

1. What do you think is the most common way angel investors find the companies they actually invest in?

2. What do you think is the most common way venture capitalists find the companies they actually invest in?

The venture capital information is the result of three years of surveying a total of over 250 venture capital firms. The last survey was completed in June 2000. Complete results of those surveys are available in my book, “Inside Secrets to Venture Capital” published by John Wiley & Sons May 2001. The entrepreneur and angel surveys were conducted in April, May and June 2001.

How entrepreneurs think angels find deals – Referrals by:

• Another angel 24%
• Direct contact entrepreneur 20%
• Finder/intermediary 19%
• Angel network 17%
• Attorney 8%
• Accountant 5%
• Venture capital conference 3%
• Venture capital firm 2%
• Matching making service 2%

It is clear that the entrepreneurs who responded to the survey understood that angels rely on a number of different sources for deals. The first four sources were ranked fairly closely with only a variance of seven percentage points between them. They correctly saw that angels give a lot of credence to deals referred to them by their angel colleagues.

The second choice, direct contact by the entrepreneur was ranked higher by the entrepreneurs than by many angels we interviewed, some of whom stated that they much prefer to have a deal referred to them by someone they know and trust. It was interesting that entrepreneurs ranked intermediaries as more important sources of deals than attorneys or accountants. Again, if the attorney or accountant knows the angel well it tends to cause the angel investor to give the deal more attention.

Angel networks were the next most popular choice. Many angels do not yet belong to formal networks, and in some metro areas angel networks are non-existent or not very active. Angels who do participate in networks, however, tend to use them as preferred sources of deals rather than deals sent directly to them as individual investors. Many angels will invest both as an individual or as part of a group.

In the opinion of these entrepreneurs, match making services have not caught on as important tools for angels to use to find deals. This agrees with what many of the angels interviewed as well.

How entrepreneurs think venture capitalists actually find deals (Second percentage from survey of VCs):

• Direct contact by the entrepreneur 20% – 30%
• Referrals by Finder/intermediary 64% – 17%
• Attorney 13% – 7%
• Accountant 9% – 7%
• Venture capital conferences 10% – 7%
• Referral by Venture capital firm 18% – 34%

(Percentages don’t add to 100% since some entrepreneurs and VCs designated more than one way)

How entrepreneurs think venture capitalists find the deals:

Referral by a paid intermediary is the overwhelmingly first choice by entrepreneurs, which is curious when compared to the fourth place ranking they give intermediaries for angels. Since angels are much more difficult to locate than venture capitalists, one would think it would be the opposite.

Only 17% of the VCs said that referrals by intermediaries was the most common way they found the deals they actually invested in. Many VCs told us informally that they considered the use of an intermediary an indication that the company wasn’t attractive as an investment opportunity.

Direct contact by the entrepreneur is very underrated by the entrepreneurs themselves and yet it is cited by the VCs as the second most common way they find the deals, in fact, it is only one percentage point less than the next three categories combined.

Referral by another venture capital firm was ranked in third place by entrepreneurs at 18%, which is actually the most common way VCs find the deals.

So where does the entrepreneur look for investors?

Look where the investors are, not where the light is shining. Use every method. Expand your network. Find someone that can introduce you to an investor. Don’t rely just on an intermediary or finder. It’s difficult to cope with rejection, but remember you only need one yes.

Look on the sidebar for links to Angel Groups and info about VCs. Much has been written about getting your plan into a VC or even getting to a meeting so I won’t repeat it all here. Suffice it to say, as the research shows, you need a referral – people like people who their friends and colleagues like…get networking and leverage your connections!

Dee Power is Co-author with Brian E. Hill of “Inside Secrets To Venture Capital” published by John Wiley & Sons May 2001 and Attracting Capital From Angels, January 2002 by John Wiley & Sons.