When do Angel investors turn into Demons that destroy startups and value they create ?
Angel investors are a necessary part of a start up ecosystem. They often step in when no one else is willing to take the risk of investing in an entrepreneur and an idea. However, angel investors are also ‘investors’ and neither they nor entrepreneurs should forget that. In my more than 18 years as an entrepreneur, I have come across all sorts of ‘angels’ — from corporate professionals to high net worth families to successful first generation entrepreneurs. This is across the two countries I have worked — India and the United Kingdom. However, this post is more a summary of my thoughts from my India experience where angel investing is a fairly new phenomenon. However, since human nature is similar all across, I won’t be surprised if some or all of this applies to other countries.
First of all, what kind of angels are out there ? I have observed three kinds — the one who seeks to be noticed : this is the sort who will spray $20k–50k on every opportunity they like and then pray. $20–50k does not make any difference to any idea or startup and these angels are simply ones who want to check out the scene. Their return on investment is really getting invited to startup conferences as speakers and getting listed as ‘prolific investors’ in startups. Most angels belong to this category. They have no clue.
— the sophisticated ones : these are people who can not only invest enough ($300k and more) to turn an idea into a real product that can be market tested but also have connections to help with follow on investments and customer connects. They have experienced and achieved enough that they can stay relevant on a startup’s journey and can create enough leverage with follow on investors to ensure an exit for them when the time comes .
— the ‘strategic’ moneybags : the only strategy for an angel investor should be to do enough to help a startup succeed and make a good return on investment in the process. However, here the term ‘strategic’ is not in a good sense. These are people who invest with an ulterior motive. Their ultimate aim may be to actually own the business or bring in family members to run it or force a merger with an existing business they own.
As an entrepreneur, you know which one to avoid. The strategic one. Their ego can destroy a startup if they do not meet their objectives.
Coming clean, on limits. Angel investors may bring in some money but they have limits on how much they can invest. It is best for entrepreneurs and angels to know those limits. Angel investors, particularly in India, want to be seen as ‘rich people’ who can afford anything. Unfortunately, that is not true. If an angel goes overboard and invests more than they should and realises this afterwards, they may want to exit prematurely and cause problems for the startup. Or, come up and demand a price for the investment that the entrepreneur or the startup can not afford.
Stay away from Angels who do not have an investment plan and do not come clean on their net worth and limits.
Personal involvement and contribution. A young start up needs all the help and good advice it can get. Angels can help instill basic corporate governance, and bring in customer and investor connects. However, when it comes to managing money, no investor, angel or otherwise should be allowed to manage funds they have invested. Micromanaging expenses or writing piecemeal cheques should not be allowed. There is a conflict of interest in this. If anything goes wrong with the startup’s investment plan, the angel may blame the entrepreneur and as investment terms go, the entrepreneur will end up paying the price for the angel investor’s meddling in handling money. Some demonic investors may also intentionally derail a startup by pushing for aggressive growth and ramp up expenditure and then blame the entrepreneur for their failure to rein in expenses when the going becomes tough.
Investors are best kept as investors. Their advice is at best an input to consider. Not a sermon to follow blindly. They may have been purely lucky in the way they have made their own money. They may be utterly mediocre when it comes to doing business. Check how the angel has made money and then decide how far and where to involve them in the business.
Investment instruments. When a startup’s valuation is not clear, an angel may decide to take some equity but then if the amounts increase, there could be convertible debt or just a secured or unsecured loan for working capital. An investment instrument and associated agreements such as a loan agreement or a shareholders agreement is way to protect an investor as well as to balance risks on both sides. Angels who get spiteful in the end because of some unfulfilled wish may use such agreements to simply run down a start up. A shareholder dispute, for example, may simply be used to take the color of a dispute with a financial creditor, in case the angel investor is also a lender. As the law stands, a financial creditor can easily run down a business and a demonic angel can just be so spiteful.
As between co-founders, entrepreneurs and angel investors must have very strong and fool proof agreements on how they handle disputes and what each one of them is allowed or not allowed to do in such situations.
For entrepreneurs, ultimately, the most important thing to achieve is to get to a point where the startup becomes a business and stands up on its own feet. That is the only way to send a message that no one is indispensable and that the startup can take care of its own.
However, angels can turn into demons at any time. Startups do not usually create situations for exit of investors for a good 6-8–10–12 years. Entrepreneurs should be very very careful about getting angel investors on board and getting a few of them on board may be way to de-risk individual evil actors.
Please feel free to share your experiences here in the comments section. I am currently setting up a new venture in the blockchain powered financial services space, which is my fourth startup venture since year 2000 when I started off. You can also connect with me on twitter@BorahKallol