Angel investors can certainly be qualified from a “net worth” perspective, but they’re rarely as sophisticated as they may need to be for doing deals. Being prepared from a securities law perspective is not the only consideration founders should consider when seeking funding. In short, the mantra “beg, borrow & steel” is not the only method to follow for financing your business.
Angel investing is one area where entrepreneurs need to exercise great care when preparing to offer company securities. Selling securities to wealthy individual investors (i.e. Angel Networks at the like) is sometimes a less resistant and less difficult way to obtain funding, but there is always a cost to borrowing money. And if the money seems easy at the outset, the cost might be buried in the deadly fine print.
Expertise & Time Limitations
Face it. While money from individual investors may be tempting and usually a bit more easy to obtain, it will not come with as many connections, expertise and consulting services. Venture capitalists and PE funds will utilize immense connections for tapping knowledge and human capital. Remember, when you pick your investor, you are investing your greatest resource: your time. Your time is best connected with an expert in the field in which you work. Choosing angel investors over a more institutional alternative means you could be risking your time with non-sophisticated investors. When you tap investors, you are also asking them for valuable time and more-than-valuable expertise. Angels are more limited.
Infrequent Follow-on Investment
Don’t forget, angels are simply limited by time and expertise. Angels rarely have as much money as classic VC and PE funds. And while angels will always be bent on the success of any private investment they’ll often be the first to “tap out” when the company may be backed into a corner. To put it bluntly, follow-on investments by angels will either be limited or non-existent.
Unsophisticated angels may get irreconcilably diluted if follow-on investment rounds occur without them. More sophisticated round 2 and 3 investors will most certainly rewrite terms to be more in-line with typical fund goals, which generally has very negative effects on initial angels. This can be especially problematic if initial angels included friends and family.
Frustration with Squeaky Wheels
Entrepreneurs almost always have the best of intentions, but angel investors can prove some of the squeakiest wheels, even if things don’t go south. Working with angels is less like working with a 400 pound gorilla and more like working with 100, 4 pound monkeys. They are difficult to corral and require much more attention. With a greater number of individual investors large blocks of time can be wasted in communicating directly with individual investors through email and phone, answering questions and following-up on milestones. Valuable time is wasted when angels become distracting squeaky wheels.
Without knowing it, angels take on much more risk with early investment deals than their institutional counterparts. If needed funding is not understood, they’ll feel jaded when returns don’t meet potentially bloated expectations. And, which is more, they’ll rarely be willing or able to pony-up more cash when additional rounds of funding come calling. But without customers, cash and connections the earliest stage companies will often need to pander to get funding. That can include speaking with smaller funding options in earlier rounds. Just be careful. Angels are a different beast. Take care of how you let them into the corporate tent.