Understanding Angel Investors

🌈 Abstract

The article discusses the realities of working with "angel" investors, who are individuals that provide funding to startups and businesses. It highlights the potential pitfalls and challenges that entrepreneurs may face when dealing with angel investors, and provides guidance on how to navigate these relationships effectively.

🙋 Q&A

[01] Calling an Investor an "Angel"

1. What are the potential misconceptions around calling an investor an "angel"?

• The term "angel" can be misleading, as it implies the investor will behave well and have the entrepreneur's best interests in mind, when in reality it is a business relationship where money is involved.
• Angels are not guaranteed to exhibit "angelic" behavior, as they are primarily focused on making a profit from their investment.

2. Where did the term "angel" originate in the business context?

• The term "angel" originated in the theater world, where patrons would invest in shows that otherwise would not have been produced, effectively "saving the day."
• In the late 1970s, the Center for Venture Research applied the term "angel" to seed investors in the business world, as there are similarities between theatrical angels and business angels.

[02] Understanding Angel Investors

1. What are the key things to understand about angel investors?

• Angel investors are investing their own money, either individually, through angel networks, or through equity crowdfunding.
• They are doing it to make a profit, and the earlier the stage of the business, the higher the risk to their investment.
• Angels draw on their own business experiences to make investment decisions, focusing on the market opportunity, the individual, and the business idea.

2. How do angel investors' involvement and expectations vary?

• Angel investors can make decisions quickly, which can be a relief for startups, but also tempts founders to rush into deals without fully understanding the details.
• The level of involvement angels want in the day-to-day operations of the business they invest in can vary greatly, from requiring a board seat to simply wanting regular reporting.
• Angels will expect detailed and regular reporting on the progress of their investment, which can be an important learning opportunity for the entrepreneur.

[03] Potential Pitfalls with Angel Investors

1. What are some potential dangers or pitfalls to be aware of with angel investors?

• Angels may invest based on emotions and personal connections rather than pure data, which can lead to unsound business arrangements.
• Angels may overestimate their ability to add value through hands-on mentoring and advice, especially if their experiences are in very different markets.
• Angels can develop a dangerous conviction that they can "pick winners," leading them to make snap judgments and ignore relevant information.
• Some angels may want to get their money back quickly, within 5 years, which can create a false dynamic in the marketplace.

2. How can entrepreneurs protect themselves from problematic angel investors?

• Ensure that the deal and terms are sound, as the wrong deal can do more harm than good.
• Be prepared to turn down money and walk away if the angel investor is being uncompromising or demanding too much control.
• Recognize that when you don't need money, people will be more eager to invest, so be cautious about accepting deals just because they are available.