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September 04, 2004

What VCs require from angels

"Writing a check is the first, and perhaps easiest, part. Yet angels-most of whom are themselves seasoned business executives, entrepreneurs, technologists and finance people-can do the venture community the greatest good by not just writing that check, but by stepping in and prepping the company for sustainable company growth," says Ravi Chiruvolu, a general partner with Charter Venture Capital, in an open letter to angel investors. Chiruvolu seeks to "cross (the) chasm of misalignment between what VCs really want and what angels often fail to provide" through his letter which appears in his column for Venture Capital Journal.

In April, VCJ had carried a Cover Story titled "Angels or Devils?" in which it has outlined the problems faced by VCs when it comes to funding companies which had received investments from angels.

An extract:

"VCs still have a bad taste in their mouths from five years ago, when everyone and his grandmother wanted to invest in private, pre-IPO technology companies - and almost everyone did....

... After all, these novice angels were driving valuations to ridiculously high levels. They were giving amateurish advice that often steered companies in the wrong direction. Term sheets, meanwhile, were littered with errors and egregious anti-dilution clauses that were at best laughable, and at worst a major headache to undo. Perhaps most galling to the VCs was that many of these nouveau angels didn't even economically qualify to invest in private companies. According to the U.S. Securities and Exchange Commission's standards, only people with a net worth of at least $1 million or an annual income of at least $200,000 can participate in private equity rounds. When the market turned south, the vast majority of the angels bolted, leaving the professional VCs to clean up the mess and pick up the pieces of a thousand broken companies."