Points on Angel Investing

From press coverage to cocktail conversation, there is little consistency in what constitutes "seed stage vs early stage, venture investments vs angel investments and venture capital vs private equity investing".  To anyone familiar with start up investing there are many overlaps between Cradle Investing and other forms of start up investing. These inconsistencies complicate negotiations as various parties start discussions with generally help "rules of thumb" that may have been developed in very different environments. 

The most pressing example of the problems caused by poor definitions arises when a company is first valued. Because there is no precise process for determining the value of a company both investors and entrepreneurs begin by making various assumptions often with little to know supporting information. A value that is too low will not incentivize the entrepreneur while a value that is too high will led to excess dilution of the investors in subsequent financing rounds. 

A significant amount of work needs to be put into the relationship between entrepreneur and investor to avoid ugly discussions down the road when they are more costly. 

Down rounds can be driven by many issues. Cradle investments are particularly susceptible to financial pressures as there is little to no operating history, few material assets and relatively new employee cohesion. Any trip up or slow down can leave a new company short of funds before it is able to raise subsequent rounds of financing leaving two options, go back to original investors for more money at a reduced valuation or seek out new investors at a reduced valuation. 

Early on in the investment process entrepreneurs and investors need to understand and take precautions against future round looking to exploit market pressures.