fundraising

Not All Angel Investors Are From Heaven

angel investor

On Angel Investors

As entrepreneurs, in the initial stages of the startup, we often think that the answers to our problems will come in the form of an angel investor. By definition, angels are high-net-worth individuals who get involved early in the company’s life, bringing capital, sector knowledge and network, and relevant expertise.

Angel investors usually invest anywhere between $20k-$300k and take on 10-30% ownership. They spend some of their time coaching entrepreneurs, opening doors, helping the company build the team and product, participating in strategic decisions.

Not all angel investors are the same

However, not all angel investors are the same. Reality has “expanded” the definition of an angel and many times what we see is well-off folks with no particular value-add (beyond the dough) playing the angel role almost as hobby. This is particularly true in less developed markets, such as Brazil (which I know from experience) and the rest of LatAm. Being rich and successful doesn’t necessarily make someone a good angel.

As an example, a retired C-level executive from a large pharmaceutical company may easily have a couple of hundred thousand dollars to spare and decide to invest in a startup. Why not help a couple of smart kids with a brilliant idea for a new technology or web business? What better way to stay busy and motivated!

The problem is that often these investors often have no idea what they are getting into. They just don’t know the real challenges and risks of starting a company. As time goes by, the product doesn’t launch as planned, the bank account gets thinner, and the investor gets nervous.

Entrepreneurs also get frustrated because they had expected miracles from this angel. After all, he is the older, successful mentor, who’s been there, done it all.

But it turns out the guy you looked up to actually doesn’t know much more than you when it comes to building a tech company from the ground. His rolodex only has contacts of retired people from irrelevant sectors. And as he sees his investment going down the drain, he doesn’t think you’re that cute and inspiring anymore.

Of course, I’m painting a pretty extreme scenario here. But the point is that you shouldn’t necessarily accept the first person who’s willing to invest in you. If the angel investor is not a good fit, it’s better to hold your horses, bootstrap the business a bit further, until you find someone who can actually add value to the company.

Originally posted on the Entrepreneur Academy (NEN). Image: nenonline.tv. See also Time To Start a Company – or Not.

What’s your experience with angel investors? Leave us a comment!

In Seed Capital Fundraising, You Gotta Choose Your Pizza

early stage funding seed capital

Seed capital and ownership

A common mistake entrepreneurs make, especially in the startup’s early stage, is to worry too much about valuation and dilution. The business, after all, is their “baby” and they can’t give away too much too soon – every share is worth fighting for! Well, guess what, the business is almost as much of a baby to those who are willing to back you up so early. Overvaluing the company from the get-go generates problems on several fronts.

Seed capital must be priced with care

First, very often the early investors are “3Fs” (friends, family and fools) or an angel who is only within one or two degrees of separation. Selling an overpriced product, even if you didn’t do it with bad intentions, may leave everyone with a bad taste in their mouths; especially if an institutional investor comes in a year later and values the company at half the first round. It’s hard to explain that to your uncle.

Also, overpricing makes it more difficult to raise new rounds. It sends the wrong message to more sophisticated investors. The impression is that you either don’t know how to value a company, purposely overpriced it, or the company simply lost some of its value. Neither is a good story to tell when you are sitting across the table from a VC.

Obviously, at the same time it isn’t good for anyone that the first couple of investors grab more than say 30-40% of the company. The entrepreneur needs to remain motivated, ideally also vesting some of the equity (more about that in a future post). But getting obsessed with dilution is bad for your startup. The more deep-pockets have their skin in the game the better and greater the chances the business will grow for everyone. After all, which would you prefer: 90% of a pizza or 10% of Pizza Hut?

See also Not All Angel Investors Are From HeavenImage: generalstorecafenj.com

Have you raised seed capital with 3Fs or angel investors? Leave us a comment!