Today’s Friends & Family are Tomorrows Angels

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I just read Mark McQueens interview with Rick Segal over on the Wellington Financial Blog. (If you don’t subscribe I recommend you do.)Rick Segal is a partner over at JLA Ventures in Toronto and has done a number of interesting investments recently. He’s also got a good blog.However, a comment Rick made I’m not really sure I agree with.

Question #2. Would you call the “friends and family round” actual bona fide investing, or merely charity?Answer: Friends and family is usually -and should be- helping out. Period. The expectation should be zero or a tax loss receipt. I say that, not to be harsh, but to remind those start up folks, to set expectations low enough that down the road, problems are not created with value/liquidity expectations.

I understand what Rick means in setting expectations, it can be a problem with entrepreneurs.But I’ve got a bit of the opposite view on the rest of his view – friends and family rounds – in most startups I know of are the original angels. They’re usually the ones who get the first $300-600K done, not by themselves but by opening up their contact list to the entrepreneurs and introducing their usually wealthier friends or contacts. They wouldn’t flog the deal to their contacts if they didn’t consider it an investment. Never mind what Rick (or I) might believe, to them its an investment.Ricks comments also leads into the usual complaint I hear about VC’s, in that they (we) have no respect for the angel/friends/family investors. I hear this all the time. Its a concerning trend that all Canadian angels seems to share this view, especially after years of limited liquidity events. These views by the angel community, have made it much more difficult for local entrepreneurs. It also leads into the problems (that I agree with) cited by Rick in the very next question:

Question #3. Is the Angel investor network in Canada robust enough?Answer: No. Another 10 million dollars in angel money flowing into new ideas, projects, etc, would be great. I got the 10 million number from the number of $100k – $1MM chunks of money being asked for in the last 12 months. A more active/deeper angel network would grow the deal flow for sure.

Absolutely. But, if we are going to lament the lack of a deep pool of angels we should probably not start by telling friends and family investors in the pre-carpet round to expect a write-off in the deals. While setting expectations is all fine and good – this is an investment to them – its not charity (or very rarely is.) VC’s should definitely not be implying this – in that it breeds the already held conviction that we’re out to screw the early investors – Who generally are the guys whose coat tails bring the bigger investments in.

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Hi. My name is Matt Roberts, you can find me at www.mattroberts.com.

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