Most entrepreneurs make the wrong decision when seeking angel money for the first time. Instead of being selective about their investors, they focus on finding someone, anyone, with a bulging wallet.
That approach is shortsighted and will lead to trouble. Having the wrong investors creates a myriad of problems in a start-up.
Who Should Be Your First Seed Stage Angel?
1. People you like and respect and who like and respect you. Having compatible personalities and having an understanding of the difficulties of what your counterpart is doing are key to a successful entrepreneur-investor relationship.
2. Backers who know what it means to be an angel investor. You don’t want investors who will ask for their money back when the company gets into trouble or who ask you naïve questions. You need investors who realize that they are making high risk, illiquid, investments. And they are okay with it.
3. People who know how to help an entrepreneur. Be wary of angels who seek “coachable” entrepreneurs. While good investors use that term in the way it was intended — to mean that the entrepreneur is not too stubborn to hear advice — others think of the word as a synonym for “malleable.” These angels want to tell entrepreneurs what to do. But the investor’s not the one in charge. They don’t get to make the decisions. Good investors advise; they do not bark orders.
4. Investors who know when and how to give advice. Advising is a very hard skill to learn and most people don’t know how to do it. Good advisors sense when and how an entrepreneur will be receptive to a message, particularly one that is hard to hear. For instance, when valuations drop and the entrepreneur is spinning her wheels trying to raise money at an unrealistic valuation, the good investor says, “Maybe we should talk through your options.”
5. People who know how to teach and mentor. Many successful entrepreneurs make lousy angels because they want to jump in and do things for their portfolio companies rather than help their entrepreneurs think through their problems. Jumping in and doing isn’t helpful because most successful entrepreneurs are ten-plus years past running day-to-day operations. When investors who are operationally a decade out of date tell entrepreneurs that they will redesign a product or rework an ad campaign the outcome isn’t likely to be stellar.
6. Investors who will work their connections to get you potential customers, suppliers, employees and additional money. Connections to investors may be the most important of the package. When entrepreneurs are raising money it distracts them from building their companies. So good investors help their startups raise money from other investors. That doesn’t just mean linking entrepreneurs to the VCs who will do their Series A round. It also means helping them complete their current investment round. Not every start-up’s funding round is immediately oversubscribed. Helpful investors suggest people to contact and get potential investors to look at your pitch deck and take your call today, not next year.
Seedling Photo via Shutterstock
I was going to point out one area that I felt was more important than the others, but these are all absolutely critical to a successful relationship. And that should tell you how hard it is to find the right angel investor.
Any type of investor will want to have a say so in the business. Selecting an Angel investor is no different than having a partner. Even when one makes a charitable donation (most of the time) they want to make sure their money goes as intended.