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Wednesday, February 10, 2010

Money comes smart or dumb. Find smart.

from Dave Berkus





Dave Berkus manages angel funds Berkus Technology Ventures, LLC and Kodiak Ventures, L.P. and is a partner in Trenchant Ventures, LLC. You can get more insights from Dave at his blog at Berkonomics.com. This piece was originally posted on his blog. (Photo courtesy of Frank Peters)

This statement could be considered controversial. We have previously made the case that professional investors demand more in the form of restrictive covenants and lower valuations. Now we explore the other side of that coin. Professional investors usually bring "smart money" to the table, defined as money that comes along with good advice and great relationships for corporate growth. Often, that money is worth more than the cash invested, because the investors who often become members of the board, bring a wealth of experience, insight, relationships and deeper pockets to the table.

I serve on the boards of several companies with just such VC talent at the table, partners in firms that made subsequent investments in companies where I either made early investments or led a group of fellow investors in early rounds of finance. Each of these companies needed more cash than professional angel investors were willing or able to provide, and we turned to the venture community for larger investments.

Attracting a VC investment means finding a partner in a VC firm who is willing to champion your opportunity before his partnership and then represent his firm with a seat on the board once the investment is made. In a number of cases, these VC partners have made the difference between success and failure or at least growth vs. stagnation. These VC partners have relationships with later stage investors further up the food chain, with service providers, with potential “C” level senior managers, and with other CEO’s with great timely advice or partnering opportunities. In one such recent case, the angels were tapped out at $6 million invested, an amount far above their usual taste, but for a company with a billion dollar potential. The VC’s that subsequently invested $18 million to date are looking for the billion dollar valuation someday, well beyond what angel investors usually are able to project from their own resources. Whether this business and entrepreneur make it to the rare billion dollar club or not, without the VC guidance there would have been little opportunity to even dream of such a goal. There is no question that the company took smart money and leveraged it for maximum growth, using the money, guidance, contacts and more from these large VC investors.

Dave Berkus is a noted speaker, author and early stage private equity investor. He is acknowledged as one of the most active angel investors in the country, having made and actively participated in over 70 technology investments during the past decade. He currently manages two angel VC funds (Berkus Technology Ventures, LLC and Kodiak Ventures, L.P.), is a partner in Trenchant Ventures, LLC. Dave is past Chairman of the Tech Coast Angels, one of the largest angel networks in the United States. You can read more of his blog posts at Berkonomics.com.


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