The One Simple Way To Tell An Angel From A VC

Angels vs. VCs

I’ve been an angel investor. I’ve been a venture capitalist. And in my book, at least in the US, there is one simple way to tell an angel investor from a VC.

OPM.

That stands for Other People’s Money. It’s a good idea not to become addicted to OPM. (but I digress).

Before the second World War, angel investors and venture capitalists were the same. There were no “venture capital firms,” just wealthy families who sometimes had family offices to manage their investments.

Then in 1947, American Research and Development became the very first venture capital firm. They raised Other People’s Money, and invested that OPM into high growth potential companies.

In 1978 the investment rules changed for pensions and endowments (like university endowments), enabling them to invest a portion of their money in venture capital funds. That opened the OPM flood gates and VCs have flourished ever since.

Now, VCs also invest their own money alongside OPM. Angel investors only invest their own money. No OPM.

This clear distinction (at least to me!) means that when I started hearing about “super angels” who raised money from other angels and got a piece of the profits from the OPM, I shook my head.

Dudes, you are not angels when you use OPM.

The same holds true in my book when it comes to Angellist syndicates. A swarm of angels do in essence a deal-specific venture capital fund, and the syndicate lead gets a share of the OPM profits if the deal is successful.

Syndicate dudes, you are not angels when you use OPM. You are venture capitalists constructing ad hoc funds with angel investors as your LPs (limited partners).

To be sure, the line isn’t as clear as it was 20 years ago, but to paraphrase the song, “You must remember this / OPM is still OPM.”

Don Gooding

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