Understanding angel investors

Calling a potential investor in your startup an angel can be misleading. Angels, we imagine, are well-behaved, have our best interests at heart, and only want the best for us.

But this is a business and there is money involved. Angelic behavior is not guaranteed.

How to detect angels with halos still firm?

I grew up around theater people, so I was used to hearing screams of “We desperately need an angel, darling.”.

That's where the phrase came from. Patrons of the arts occasionally invested in a show that otherwise would not have been performed. They were called angels because they intervened and saved the day.

But in the late 1970s, the Center for Venture Research applied the term “angels” to initial investors. There are similarities. Theater angels are people related to the arts; Business angels are people from the business world, often former entrepreneurs.

Both provide funds to make the projects come to life. But theater patrons tended to stay out of it.

The number of business angels has increased enormously. They invest their own money, individually, through angel networks and, increasingly, through crowdfunding.

And, as I discovered during my business career, they vary in every way.

Every relationship is based on understanding the expectations of both parties.

In the case of angels, the first step is to realize that they are thinking about investing their own money.

The second is that they do it to make profits.

The earlier a company is found, the greater the risk to your investment. Profitability remains to be demonstrated.

Knowing that the risks are colossally high, they want to be doubly convinced of the market opportunity. The greater the opportunity, the greater the chance of greater profits to offset the risks.

They rely on their own business experience to make decisions and judge business ideas. This means they will also focus on the person, the offer and the potential.

Working alone, angels can make decisions quickly. A big relief for the startup, which doesn't have to wait forever after launching. But that also makes it more tempting for founders to rush in and accept an offer without examining its details too closely.

The degree of involvement of angels in the day-to-day operations of the companies in which they invest also varies. Some will insist on having a seat on the board of directors, while others will want all decisions to go through their hands. It is important to be clear about this before collecting the money.

Coaching or mentoring can be of great help to a new business owner. The angels will be happy to explain their value to you. Knowledge of the sector can be valuable.

No matter how practical angels are, they will expect detailed and regular reports to know how their investment is doing.

This may seem onerous, but it is also a huge learning opportunity. Once you get over the initial irritation at how long it takes, it will teach you both about your business and how to understand good business practices.

They have the right to want to protect their investment: after all, it is their money.

But some angels can be adamant in every way and believe that they not only hold the money, but all the cards. Early investors set the tone for subsequent trades, so be prepared to turn down the money and walk away.

While they are understandably protective of their money, some angels have a 100% genuine desire to give back and help others on their journeys.

The desire to give back and help doesn't make angels a safer bet. The impulse to want to help makes angels tend to invest in founders they like rather than focusing on pure data.

Founders also instinctively gravitate toward people who will tell them what they want to hear rather than basing their decisions on the value of advice.

A business agreement based on emotions is never solid.

There is another potential danger in the angels' perpetual conviction that they will add colossal amounts of value.

Many will aggressively launch into this topic, while at the same time telling you how picky they are and how only your company is truly worth the time and knowledge they will dedicate to it, rather than any of the other thousands of launches they have gone through. .

But while it's true that complete mentoring of the first-time entrepreneur by the right angel can have value, it's more debatable how valuable it is for someone to sit at your board meetings and argue what they want done. , often drawing on experiences in very different markets.

In reality, the quality of your advice will vary. They will also (surprise, horror) make mistakes.

If you look at Jobs, Gates or Zuckerberg, they didn't hire investors to advise them. They hired investors as they grew in search of financing.

Big investors, whether angels or venture capital, show up as you grow, hungry to get in on the action.

When coming from a successful career, which often includes growing and exiting their own businesses, many understandably develop a dangerous conviction. This is the first Achilles heel.

They are convinced that they can choose the winner.

This means that too often they listen to entertaining stories during launches, pay little attention to data, and rely solely on their own opinions. They make hasty judgments and ignore relevant information, including the vital factor of timing.

They talk a lot about their own genius for driving business. But they rarely take into account its greatest potential value, the ability to introduce new companies to more customers.

The second Achilles heel is that many angels begin to invest convinced that they are going to beat the markets. They discover otherwise and abandon the game within five years. And they want their money back.

Their need for unrealistic levels of full investment conviction has also created a falsehood in the market. Pitchers have to walk carefully between exalting their vision and embellishing the truth.

It's hard not to sympathize with angels.

They are usually very experienced and, in fact, it is their own money that they want to protect. But that can make them a liability.

Here are some ways to protect yourself from an angel with a less than perfect halo:

  • Seek professional investors through social media, angel websites and directories, networking, and pitch events.
  • Consider staying within your industry to gain relevant information and knowledge.
  • Try to do business with people you already know.
  • Investigate. Ask for referrals and chat with other founders they've invested in, present and past.
  • Check the angel's knowledge, connections and abilities.
  • Make sure your goals for your business match, especially when it comes to the exit plan, keeping in mind that your goals may change later.
  • Evaluate how far their pockets go. You don't want someone who is at risk of a financial crisis.
  • Determine to what extent they expect to participate. Put limits in writing.
  • Avoid those who want too much control.
  • Be suspicious. Examine all the details of the agreement.
  • Never let yourself be distracted by the increase in investment. Your priority remains your daily work: sales and survival.
  • Never forget that you are there to make investors money.

In general, a wrong trade can do much more harm than good. It is much better to survive bankruptcy than to assume a liability that you cannot get out of.

When you don't need money, people will shout for it.