Entrepreneurs looking for business capital often consider raising funds through angel investors and venture capitalists (VCs). These two types of investors frequently get lumped together, but, in practice, they provide very different services to a founder and are optimal at different stages of the lifecycle of their business. Angel investing typically falls into two categories. The first is a highly personal, hands-on investment approach usually from an experienced entrepreneur that is purposefully designed to give start-ups the best chance for success. The second is what’s known as an angel syndicate, which is a group of investors usually writing much smaller individual checks coordinated and led by a “syndicate lead.” That said, they are both risky. Here’s what all entrepreneurs and angels need to know.
Top 4 Things To Know About Angel Investors
- Angel Investors Invest Their Own Capital
Unlike most VCs, angel investors typically invest their own money in a business – but that’s just a small piece of the story. Angel investors can bring a lot more to the table than a simple financial infusion, such as industry expertise, relationships and a portfolio of startup investments that can help a founder avoid critical mistakes in the early stages of building their business. Personally, the more money I invest in a startup, the more likely I am to want to retain an ownership percentage or a board position to closely advise and guide my founders beyond the initial financial investment they’re seeking to launch their business.
- Angel Investing Is Both Art & Science
Here’s the thing about angel investing: if you focus solely on numbers and logic, you’re missing a critical component, because it’s also about people. Often, angel investors are getting involved in the very early stages of a business, when founders are beginning to reach beyond their own financial resources and those of their family, friends and other stakeholders. This means you have to go with your gut more often than would make some investors comfortable. This is one of the biggest mistakes I see angel investors make: not taking enough chances on the founder and not diversifying. If you play it safe and try to wait for a “sure thing,” you will almost certainly miss out on “the big one.” As an angel investor, I typically like to invest a small amount over many deals. If I’m lucky, I’ll have a couple breakout companies that I’ve now built a relationship with and can step in with more investment and, maybe, some advice.
- Angel Investors Understand Viability is a Moving Target
Lots of startups fail, lots of established businesses fail. That’s just a fact. What I’m looking for is the opportunity to help a fledgling brand launch and grow in the early stages. That means I have to be comfortable taking a chance on an unproven concept or team and not having years of performance data to reassure me. It’s also why, typically, these types of investments only make up around 10% of an angel investor’s portfolio. You have to be willing to lose, but, when you win, the payoff can be huge. This motivates angel investors to give more than just that early stage capital infusion; they’re often the very first professional investor in the business and can provide expertise, networking connections and mentorship in addition to finances.
- Angel Syndicates
An angel syndicate is a highly effective tool for both investors and entrepreneurs. For the investor, investing in startups through angel syndicates is a simple way to diversify your startup portfolio. Typically syndicate leads are, what some may consider, an alternative to investing into a venture capital fund. There are some advantages both for the investor and the entrepreneur
Advantages for Investors:
- A good syndicate lead (one that has had many successful exits) can raise and invest much more money than a typical solo angel.
- The entrepreneur gets the advantage of a single investing entity rather than multiple small investors on the cap table.
- A good syndicate lead brings a strong network and relationships along with the investment.
- Syndicate leads rarely ask for a board position.
Advantages for Entrepreneurs:
- Investors can make much smaller investments even down to $1000 per deal in some syndicates.
- The investor typically reviews each company, and invests as much or as little as they want based on the investors confidence in that deal.
- The syndicate lead has vetted the company and provided the level of due diligence all investors should have before making any investment.
- It’s cheaper. Syndicates typically only charge a standard carry (20% only on gains realized) and unlike VC funds, they don’t charge fees.
- A good syndicate lead (one that has had many successful exits) can raise and invest much
Angel Investing Is Not Traditional Investing.An angel investor provides support to a startup in a variety of ways knowing full well that it won’t pay off every time. Like most things in life, you have to be willing to take enough chances to succeed. If you’re a founder with a world-changing concept and hunger to execute at a high level, get in touch. You can learn more about my approach to angel investing here.