As an angel investor, and a startup founder, it is important to understand the role that you can play in a startup’s success. Over the years, we have seen several examples of angel investors who have provided invaluable guidance and resources that were instrumental in taking startups from ideas to profitable businesses. Some examples of highly successful and famous angel investors include individuals such as Mark Cuban, Ron Conway and business magnates such as Jeff Bezos. Founders and investors from the UK will also be familiar with the show Dragons Den, which has seen a panel of angel investors actively engage with startups for many years. Investors such as Peter Jones, Deborah Meaden and Piers Linney, who is a member of the Connectd ecosystem, have since become household names. But what happens beyond writing the cheque is often a mystery.
In this post, we will explore what exactly makes an angel investor successful and what implications their involvement can have for both parties. We will also discuss some of the most important financial considerations for angels when investing in a company’s growth. From highlighting types of returns expected by angel investors, the active role that successful investors play and discussing common risks associated with such investments, keep reading for a comprehensive overview of the role played by angels in today’s tech world.
Writing the Cheque
Angel investors play a critical role in funding promising entrepreneurial ventures. However, whilst motivated by the potential for high returns, you also bear a higher level of risk when compared to traditional forms of investing. This is where due diligence becomes essential. Before writing the cheque, angel investors must scrutinise the business plan, cash flow projections, and management team for potential red flags. Additionally, you need to assess the risks comprehensively, considering the industry and competition, scalability potential, and potential exit strategies. Serial investors will often have lawyers and accountants to help analyse investment opportunities. When negotiating terms, this should be a process which is fair and beneficial for all parties, and aligns with the long-term vision of the company. After all, your role is to support the founder’s vision for the long-haul.
Alongside due-diligence and negotiation, forming a relationship with the founder throughout this process is one of the most important roles that angels can play in the early stages.
Active vs Passive
Aspiring entrepreneurs know that securing startup capital is one of the most significant hurdles to overcome in building a successful business. Active and passive angel investors are two of the most common sources of funding, but they differ significantly in their approach and level of involvement. Active investors are typically experienced entrepreneurs who take a more hands-on approach, providing mentorship and strategic guidance in addition to financial investment. Passive investors, on the other hand, may provide funding but take a more hands-off approach to the company’s operations. While both types of investors can provide valuable support, startups must carefully consider which approach will best serve their long-term goals. For some entrepreneurs, hands-on guidance and mentorship may be essential, while others may prefer a less involved, more flexible approach.
It is often the case that inexperienced/first-time founders will view angel investors not only as providers of capital, but also as mentors to their business. It is crucially important that both founders and investors research each other thoroughly before committing to any deal, and have a mutual understanding of the level of support and relationship that is expected of one another. It is well known in the startup world that in some cases, no investor is better than the wrong investor. Ultimately, the role of the angel investor will vary between individuals, but the most important consideration is that this role is established early-on to avoid future confusion and conflict which could impact the business’s growth trajectory.
Active Angel Investors
As an active angel investor, your roles and responsibilities extend well beyond simply providing capital. You serve as a mentor, advisor, connector, and sometimes even a cheerleader. Your expertise and network are invaluable resources that can help founders navigate the many challenges that come with building a successful business. As an active angel investor, you must be willing to dedicate time and effort to help your portfolio companies thrive. This may involve providing strategic guidance, making introductions to potential customers or partners, and even rolling up your sleeves to help with day-to-day operational tasks.
Here are a few specific ways that angel investors can help their portfolio companies succeed:
- Provide Expertise and Advice: With your years of experience and business acumen, you can offer valuable advice and insights to the startup founders. This can help them avoid costly mistakes and guide them through major decisions.
- Make Introductions: Networking is crucial for any startup, and as an investor, you can make introductions to potential partners, customers, and even other investors. This can open doors that may have otherwise been closed to the startup.
- Offer Access to Resources: Startups often face resource constraints and may need additional support. As an angel investor, you can provide access to your network of service providers, such as law firms, accountants, and marketing agencies.
- Help Develop Key Relationships: Business success is often dependent on key relationships. As an angel investor, you can help startups build relationships with potential partners, suppliers, and vendors.
- Provide Mentorship: Mentoring can be incredibly beneficial for both novice and experienced entrepreneurs. Angel investors can provide support and guidance as they navigate the challenges of growing a business.
By offering these additional forms of support, angel investors can help their portfolio companies succeed beyond just providing financial backing. This can ultimately lead to stronger returns for investors and the success of the startup.
Passive Angel Investors
For some (often more experienced) startup founders looking to raise funds, angel investors who take a more passive approach can be a great source of capital without the added pressure of needing regular input and consultation. These investors are willing to invest in a business with minimal involvement in day-to-day operations, allowing the founders to continue focusing on their vision for the company. However, passive angel investors should still carefully consider the business they are investing in and the management team behind it. No matter how you approach your investment style, it is always vital to form a good relationship and understanding before coming to any agreement, even if you don’t heavily involve yourself in business operations. Additionally, passive investors should be prepared to take a hands-off approach and trust the founders to make strategic decisions for the business. In the end, the benefits of a passive angel investor can be significant for both parties, but it’s essential to ensure the partnership is a good fit for everyone involved.
Considerations for Startups
Entrepreneurs are always on the hunt for the perfect angel investor – one who not only brings funding to the table but also provides valuable expertise, useful connections, and the right level of involvement. First and foremost, startups should consider whether the angel investor’s expertise, experience, and network align with the company’s goals, vision, and industry.
Next, startups should assess the angel investor’s reputation, track record, and portfolio to ensure they share similar values and priorities. Additionally, startups should evaluate the angel investor’s communication style, availability, and expectations to ensure they have a positive and fruitful working relationship.
Lastly, startups should consider the angel investor’s terms, structure, and expected return on investment to ensure they align with the startup’s financial needs and plans for growth. Tools such as Exporaise (www.exporaise.com) can help with understanding a business’s investment readiness. By carefully considering these factors, startups can choose an angel investor who not only provides funding but also adds value to their business.
However, before taking the leap, it’s essential to do your research and consider what type of support and involvement each potential investor can offer. Should you opt for a hands-on investor who desires to be actively involved in the decision-making process, or a hands-off investor who will provide financial support and advice from a distance? Ultimately, the answer depends on your personal preferences and the unique needs of your business. A hands-on investor can bring valuable industry experience and connections to the table but may also come with added pressure and expectations. At the same time, a hands-off investor can provide more freedom but may not be as invested in the long-term success of your business. Overall, it’s crucial to remember that every angel investor is different, and you should be clear about your expectations and communication needs from the start.
In Conclusion
An angel investor can be a game changer for a budding business. They can offer more than just financial support to a new venture, whether that comes in the form of advice or opening up networks that are otherwise hard to access. However, it’s important to remember that everybody’s goals are different when entering into an investor relationship and having solid processes in place before anyone puts their money on the table is key. Don’t let fear stop you from taking a chance but don’t be naive, due diligence is essential all around. We could have gone deeper into layers of issues with angel investing but this post should have given you plenty of food for thought about the various forms angels take and how it all works. We wish you luck as you embark on your journey as either an investor or a founder. If you’re keen on exploring more topics related to entrepreneurship and angel investing, check out our blog section where our team continuously dives deep into the world of startups.