What to Look for in an Angel Investor
There are important differences between an angel investor and a venture capitalist. For starters, the typical investment size for angels is smaller than that of a venture capitalist. In general, an angel will invest between $20,000 and $250,000 (of their own money) in exchange for a private equity position. VC’s pool together resources and invest on behalf of a “fund” in most cases. Venture capitalist (VC’s) don’t usually have a cap on the amount they’ll invest but they have a range they prefer.
Angel investors are more common for early-stage startups because these companies (usually) have less of a track record and are still validating their business idea. Angels like investing in early-stage startups because they get in “on the ground floor” and receive a higher equity position.
While the term “angel” might conjure up images of a business savior and someone who whisk companies on to success, the reality is most angel investments fail. Startup founders need to take certain things into consideration before bringing on an angel investor. Remember, this person will be with the company for the foreseeable future.
In this post we’ll look at the most important things you need to consider before taking on an angel:
Perhaps the most important thing startup founders need to consider when looking at angel investors is their level of risk tolerance. Startups are inherently risky because it’s almost impossible to know whether or not a company will succeed. There can be indicators of success but only time will tell. Angel investors that don’t have high-risk tolerance can cause all sorts of problems for startup founders. In general, you need to make sure your potential angel is in a position to lose their entire investment. While your goal is to make the company a huge success, you can’t risk having an angel investor breathing down your neck, asking when they’re going to get their money back.
If an angel investor expects to get their money back in 6 months or less, you need to take that as an indicator they’re not the right investor for you. Professional angel investors know that it can take multiple years before a startup provides a return on investment. Having a long-time perspective means that an angel investor’s willingness to wait years before even anticipating a return. Be upfront with any potential angels and let them know that you’re in this for the long-haul. It can even scare off potential angels if you tell them that you’re going to pay them back in an unrealistically short time frame.
One common theme seen in successful entrepreneurs is that they almost always have regrets about equity and control. While you have to be willing to give up some amount of control to raise capital, you also don’t want to give up too much control before you know where your company is heading. If an angel investor is overbearing on the amount of control they want, sometimes it’s best to simply pass on that angel. Before ever going into any investment negotiations, make sure that your startup co-founders are clear on the amount of control you’re willing to give up.
A less quantifiable benefit to bringing on an angel investor is the professional connections they’re able to provide to an early-stage startup. Startup founders should reach out to angels who have specific industry connections in the field that their company operates in. An angel who has 10 years of experience in your field is far more valuable than an angel who has 30 years of experience in a completely unrelated field. Do background research on any angels you’re speaking with and figure out who they know and how long they’ve known them. Tools like LinkedIn, Google, and good old-fashioned telephone calls are your best bet here.
If you’re a startup founder looking to find potential angel investors for your company, Tandon Group might be able to help. Tandon Group has invested in many startups over the last 30+ years and is always interested in meeting new startup founders (even if we don’t invest ourselves). We have one of the strongest networks of Indian and American entrepreneurs in the world. If you want to find out how we can help, reach out to us and let us know what you’re working on!