In Part 1 of this series we were introduced to Mike Zimmerman, General Partner of TVP and got a brief understanding of the local Venture Capital industry.

We also established that VCs are probably not the right answer for most tech/web startups and that Angels are, which is where we pick things up here…

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“Angels” come in a couple of species – High Net Worth individuals who like to make their own investments and Angel Networks, which are groups of individual Angels that either co-invest or advise each other on investments.

The problem, from a VC perspective, is that Australia doesn’t have the right kind of angel community just yet.

Mike explains:

In the US there are lots of angels who got rich from tech companies and hundreds who have been executives at tech companies. That combination of domain expertise and cash isn’t really available here. For instance, there’s no local equivalent of a Marc Andreesen (Netscape, Opsware and  Ning founder), an Angel who is held up as a technical expert as well as one who has created several massively successful companies.

Instead, he went on to explain, what we generally get in Australia are people who have created wealth in other fields and who are interested, sometimes, in tech. It’s the classic dilemma of what value does an Angel add i.e. do you just need Angels with money or are Angels with less money but expertise, networks and relationships, more important?

In most cases, it’s the latter.

An example of this dilemma in action are some ex-Investment Bank Angels with a lot of money who, when they advise, do so from an investment bankers perspective. This is not always friendly to VC capital structure and can result in a limited  potential for future funding rounds and the associated ability to leverage the VCs networks and relationships.

The lesson? As a startup entrepreneur, if you’re keen to eventually get VC funded, you need to be careful when sourcing an Angel – you may get funded but at what cost?

So, are there any good local tech Angels?

Mike did cite a few local tech Angels that do have the knowledge and experience tech startups need. These include Mike Cannon-Brookes, Roger Allen  and Ramin Marzbani.  In addition there are the HitWise guys and also people like Rand Leeb-du Toit. On a smaller scale you have people like Clay and Rebecca Cook from Vibe Capital. I’m sure there are more out there (feel free to add more people you know of in the comments) but as a percentage of the Angels out there they are a small minority.

Because of that TVP, and many other tech VCs, really like to be the first outside investor simply because there can be added complexity and not much value add from Angels who don’t truly understand the industry and funding process.

So, looking back over the first part of this interview with Mike, and today’s installment, the problem for tech startups seeking funding becomes quite clear. Not enough relevant angels and too big a gap between where most startups are and where they need to be to be interesting to VCs. The result is limited early-stage web/tech startup funding.

To summarise..

The issue? We need more successful tech entrepreneurs to become tech Angels.

The solution? Unfortunately, time.

It’s a problem, no doubt, but one we, as tech entrepreneurs, and VCs, in Australia must work around.

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Stay tuned for Part 3 where we discusss the current state of the VC industry and Government Policy that could help it