Are Angel Investors Cheap Money?
Have you been thinking about getting a few angels?
No…Not the kind with wings but the kind that dips into their big pockets and help entrepreneurs start and build their businesses.
The first two companies I started began with Angel Investments — for the first start-up, where I had designed an award winning fire escape ladder, the angel’s cash allowed me to quit being a minimum waged Consultant (minimum wage when you divided my hefty salary by the 100 + hour working weeks…) and gave me the chance to pursue my passion to start and build my first business.
If you google ‘Angel Investors‘ , most of the results focus on what Angels are (broadly) and many of the articles keep it so general as to be close to useless if you are actually in the process or are about to start the search to find and close your first angel investor round…many articles include some good points but I found most of them too ‘money-centric’.
Huh? You are probably thinking…isn’t that what Angels are all about?
Well I’d like to offer you a different way of thinking about it.
It’s true that Angels tend to get involved in very early stage companies and often look for a high rate of return on their cash…let me explore that for a second…
“Angels tend to get involved in very early stage companies…” – in my case, the first $XXXK of funds were raised while I was still an employee elsewhere – at that time I had…a business plan and a prototype. THAT WAS IT~!
No customers, no employees, and no office – literally just a stack of pages I’d sweated blood and tears over and a prototype of a product that would go on to look very different.
What these angels were really investing in was ME! And I would guess that most Angels who go ahead and invest in a business ultimately make the decision not because of the business plan, the prototype or even the first few customer endorsements but because of the person with their hand out…
So – back to the money. Angel investors get involved at the RISKIEST stage of a start-up – most start-ups don’t go anywhere and their money goes POP! Gone! Now even if Angels are people with a high net worth – they still (probably) worked hard to make it…so as, in the investor community, the angels tend to take the most risk – they also look for the highest multiplier on their money.
Multiplier? Whassat? So – for example, they give $10K – if they get $100K back when there is some form of liquidity event then they have made 10X on their initial investment of $10K (i.e. $100K divided by their initial $10k).
As a for instance – I have heard of angels looking for 20 times or even 30 times of their money back. So, for that $10K, they would hope to get $200-$300K back from some form of liquidity event.
Liquidity event? Whassat? …that’s basically even that allows the investors to get some or all of their cash out. (Example – IPO, acquisition etc)
Bringing this full circle – So why Andrew – do you think that the Google results were too ‘money-centric’? Isn’t that what angels are all about?
Yes and No! In my view, the money you get from Angels tends to fall into one of three categories.
Either CHEAP MONEY, EXPENSIVE MONEY or just, plain old, MONEY!
Am I talking about the multiplier again? Absolutely not! The amount of multiplier you, as the entrepreneur, can guarantee to the angel investors is zero! You can guarantee absolutely nothing. You business might go gangbusters and someone could come along and buy you for a fortune. Likewise, your business could go gangbusters and you could IPO or it could cease to get off the ground and their investment could be worth 5 cents – the multiplier the angels get could be very different with each scenario…you have no way of predicting what it will ultimately be…
So let me explain what I mean by cheap and expensive Angel money…it’s quite simple…
When I took angel money for my first start-up, it became obvious, very early on, that I had three types of investors:
1) The Value Add Investor:
This is the investors that calls you up occasionally and is looking to help…they are opening up their contacts database and connecting you with other angels, advisors, entrepreneurs, suppliers or whomever…to help you and your business grow. Better yet, you talk on a weekly basis and they help you think through the challenges and the strategic questions you have for your business, they help open doors for you and even drive great recruits to your business and help close them so you increase your employee firepower!
Money from this kind of Angel – I call “Cheap Money’ – because you get much more value than just the cash – it makes their money really worthwhile so whatever multiplier you ultimately pay, it was partially because these value add angels helped you every step of the way – their payout is cheap money. You get me?
That leads us to the other kind of Angel…
2) The ‘Pain in the Ass’ Investor:
There are some investors who, as soon as they give you the check, become an absolute pain in the rear. From that moment forward, they believe they own you…no, not just a piece of your business (which they have)…but YOU! They will call you 24/7…they will ask you to jump through hoops that may have very little to do with the businesses immediate needs and, they will tell you, loudly and often how bad a job you are doing and how you should be doing it some other way.
Their way ideally.
And do they open their contact database to help out? Rarely if ever. Their function is to become a complete time sink and a constant annoyance.
I consider money from this kind of Angel…”Expensive Money”. Wouldn’t you?
3) The Simple No Thrills Angel Investor:
The third type of angel is just plain, old money – they give you the cash, you put it into the business and they are happy to get the monthly or weekly updates about how the business is going – their value is limited to the initial cash they may put in.
Now – before I finish this post – I want to leave you with the challenge the above creates…
Here’s the challenge – “You can’t tell which angels are going to be in category 1 or 2 or 3 until AFTER you have taken their cash and they’ve signed on the dotted line.”
Its true – you can interview and screen angels (if you have choices…and you ALWAYS have choices…even if it’s to bootstrap and use your credit card while working at a day job) and it’s tough to tell if they will add value or be the bane of your existence.
I hope the above has given you a few things to think about. And come back so I can take you through how I managed to have a higher chance of picking the value added Angels and getting ‘Cheap Money’.
Have you gone out and locked in Angel Investors? Any good stories about the experience or horror stories you’ve ‘heard’ from others?
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Here’s to your startup success…