5 reasons why VC funds make more sense than trying to go it alone
When billionaires from Shark Tank can’t make it work, is it time to reconsider angel investing?
Lately, it seems everyone is talking about angel investing. With venture capital funds previously inaccessible to most, unless you had £1 million+ to invest, investors have sought out direct investment opportunities into start-ups. However, even seasoned investors like Mark Cuban have struggled to make it work, which raises the question – should you really be angel investing?
Here are five reasons why investing in VC funds makes more sense than trying to go it alone:
- Quality of deal flow:
- When it comes to start-ups, those with the highest potential have their pick of investors. So how do you find quality start-ups to invest in? Well, it’s not going to be easy. The best start-ups probably won’t be going on Shark Tank and often aren’t even looking for investors – they’re already being courted by top venture capital funds. And if you do manage to find a promising start-up, there’s no guarantee that they’ll take your money. After all, why would they choose you over a VC firm with a proven track record? In the end, it’s often about who you know. If you want to get in on the ground floor of the next big thing, you need to have access to the right networks.
- Volume of deal flow:
- The best VCs screen thousands of opportunities a year, and pick only a handful of businesses to invest in. Even the best-connected individuals are lucky to see 50-100 opportunities, most may see 5-10 a year. Are you likely to find a star this way? The volume of deal flow needed is just too high for any individual to evaluate all of the opportunities out there, even if you find them.
- Investors of choice:
- Founders have a strong preference for value-add investors, and for good reason. Not only do they provide the necessary capital to grow, but they also offer a wealth of industry knowledge and insight. In addition, these investors typically have an extensive network of contacts that can prove invaluable to a young company. For all these reasons, founders are more likely to find success with value-add investors such as funds, than with most angels or other types of investors.
- Portfolio effect:
- Start-ups fail far more often than not (see our blog on that). Even if you make 10 investments, it’s likely that at least 9 will fail. If you invest in 3-5 businesses, is that enough to correct for the impact of luck? The likelihood is, in order to make money from investing in start ups, you need to build a portfolio of at least 15-20 investments – not only is this reliant on you finding good opportunities, but also having significant capital to deploy. VC funds build failure into their model, building portfolios with expected returns that have already assumed a large percentage of investments fail. By investing in tens of businesses across a portfolio, VC funds mitigate the inevitable risk that comes with each individual investment.
- B2C bias:
- TV shows like Shark Tank, and individuals, are more likely to favour tangible businesses that sell consumer goods and leisure businesses directly to the consumer. Some of the biggest start-up success stories, however, are B2B (business-to-business). But these aren’t ‘sexy’ or tangible to angel investors. Professional, thematic investors like VC funds are much more likely to identify, understand, and target these businesses.
Angel investing can be a great way to get your foot in the door with start-ups and growth investing, but success is not as foolproof as it seems. If you’re looking for a professional and established way to enter the world of venture capital, Sprout is here to help. Co-founded by venture capital and private equity professionals, our team has the knowledge and resources you need to make smart decisions with your money.
Sign up today to learn more about venture capital, and browse our selection of top-tier VC funds.