23 Jul Angels or Devils: The Perils of Angel Financing
Much like everyone else, institutional investors are chasing returns, looking for spread and trying to arbitrage the market like crazy. Consequently, we’ve seen a massive rise in Angel investing over the last decade, but the rules, type and strategy of angels has changed drastically. So has dealing with the majority of them.
For the typical angel of years past, the investor tended to be a bit more sophisticated than some of today’s angels, had a bit more money and was looking for ideas that lead to the “next big thing” with massive eventual payouts.
Conversely, today’s angel investors are a bit less sophisticated (as a whole) have smaller amounts of money to invest and in many instances are fine with investing in steady-state, local enterprises with good potential. They’re not after the next tech explosion as their wealthy counterparts were five and ten years ago. The profile is matching more of the baby-boomers who’re looking for something to keep them occupied with their money in retirement and who want to find a hobby business–one run by someone else with more time, but whose profits are shared with the angel.
Personally, I expect this type of angel investing will only increase over the next decade as we see larger swaths of the boomer generation finally put up their workers caps and start to retire. Whilst many of them have little saved for retirement, a large number have a great deal to invest and who want steady-state businesses, will be looking expanding and looking locally for a “good deal.” This mentality may also be further fueled by the capital expansion and relaxed rules put forth in the JOBS act.
Whilst opportunities abound for capital procurement, the investor expansion will create more headaches for entrepreneurs than heretofore seen. Here are some reasons why.
Angels vs. Devils
The typical angel investor of yesteryear was deemed so because he or she would invest when no one else would. They were the saving grace for many busineses. As always, external and demographic factors have caused a shift in how people invest. Here are some reasons I would personally tread with care when I was seeking funding from angel investors.
- Setting expectations. Angels turn to devils when expectations are not met. Because many of today’s angels are simply seeking “good enough” returns, it’s can be easier to set expectations, but it’s important to keep them in check. Unless you’re attempting to create the next monstrosity of a company, most of the time expectations are best kept in check by making sure the investors know the size and scope in both the best, worst and most likely scenarios.
- Choose a mentor first, money second. Angels investors are often a bit like herding cats. The ones you want can be the best mentors, but unfortunately even accredited investors with experience can be a thorn in the side. The best investors are those that are mentor investors and not the other way around. I prefer someone who can offer cool-headed expertise to someone looking for a quick and fast return. Entrepreneur beware. In angel investing the latter is more common than the former.
- The devil in the details. Although most founders will be dealing with angels, the devil is still in the details. Understand your own business first and that’s when you’ll best be able to communicate it to others. You can’t count on angel investors for understanding your financial statements. That’s for you to know. We consult with companies who need assistance in this regard, but ultimately the founders should have a good idea of the tail that wags the business dog.
Gathering funding for your next business venture can be one of the most time-consuming processes in the entire value chain of starting, managing and exiting your business. It’s one of those necessary evils. Don’t let the relationship with your angel funding partner prove another necessary evil. Flesh out your own details first and then dive in and court angels where you can find them.
It’s tough to turn down money when many start-ups have a “take what I can get” mentality. If you have the luxury and can afford to be picky, be picky. It’ll be appropriate, especially if and when things get a little dicey.