How to Get Venture Funding, page 9

Different Stages of VC Funding, continued

In either case, the final round before the liquidity event is often called the mezzanine funding round. It’s considered less risky—after all, the company already has a track record, products, customers and a likely exit strategy—but also less rewarding. You can’t expect the kinds of returns on a mezzanine investment that you can on a successful seed investment, which can pay off thirty or forty times over.

Occasionally, investment rounds are also named by the series of preferred stock granted to the investors of that class. Using this terminology, angel or seed investors receive Series A preferred stock, called Round A. Investors in the first venture round receive Series B preferred stock and are part of Round B, and so on.

Angel Funding as an Alternative

Angel investors are wealthy individuals who provide seed funding to start-ups. Often, angels are friends of the entrepreneur who founded the business. Other times, the founder has spent a great deal of time and energy tracking down angels who, as a group, may provide a start-up with significant capital and other resources, such as expert advice and good connections. It’s not unusual for an angel investor to later provide an introduction to the venture fund that does the first professional round of funding.

If you don’t know any angels, you may be glad to learn that angel organizations have formed over the last five years. These groups are designed to bring worthy start-ups together with angel investors. Normally they have processes that resemble the VC selection process but are somewhat less formal. Business plans must be screened, and not all start-ups are selected to present to the group of angels.

Some angel groups, for example, OffRoad Capital, function entirely on the Web. Angels qualify for membership, download offering memorandums and place expressions of interest using the OffRoad Web site.

Other angel groups, for example, BayAngels, hold periodic dinners at which screened start-ups do their pitch to the angel members. (In the case of the BayAngels group, the dinner is held at a luxurious seafood restaurant overlooking the water in Sausalito. That gives entrepreneurs a chance to pitch to a mellow group of people who have enjoyed their salmon and California wines.)

You can locate other angel groups by using the resources outlined in “Web Resources” later in this briefing.

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