Startup founders know that after family, friends, and other fools, if they need to raise more funds in order to grow, they will need to go to angel investors. A big problem is that there are a lot of misunderstandings about angel investors. Part of this is because their impressions are based on what happens in the US simply because most of the books and online articles discuss the practices of US angel investors. However, the Indian ecosystem is very immature, as a result of which the Indian angel is a completely different animal from the US angel investor.
The first thing you need to realise is that every angel is different. It’s impossible to put all of them in one bucket because each of them behaves differently. Since the only qualification you need, to call yourself an angel, is the ability to write a check, we need to understand that angels come in all shapes and sizes, each of whom becomes an angel for completely different reasons.
Thus, there are some angels who will write only one single cheque in their lifetime, and never ever fund another startup again. While many will sign up based on their gut feeling and intuition, some will take a very systematic and disciplined approach.
The leaders in this space who lead a lot of deals, have a lot of clout because of the respect they command in the startup ecosystem. They have had successful exits in the past and other angels look up to them and are happy to follow their lead.
Thus, you could find a wealthy family friend who’s willing to be an angel and fund your company. This can be very exciting, and it’s hard to refuse someone who wants to give you money because he wants to help your dream become a reality!
For many startups, this is a great way to get hit the ground running. However, this is usually an informal agreement, and it’s not done in a systematic fashion. Because there is no formal paperwork, it can be done very quickly, but this could also cause problems in the future. The funder is usually not a sophisticated investor and when you need to raise your next round of funding, there may be issues about what his role in the company should continue to be.
Sophisticated angel investors, on the other hand, are experienced and have done many angel investing deals before. A good angel investor can significantly improve your chances of thriving. He is well-networked and can open lots of doors. Because he has helped entrepreneurs in the past, he can be a great coach as well and help you navigate the treacherous path to success.
However, some angels behave more like devils, and they can be a real pain in the neck. They start believing that just because they have written you a cheque, they own you. They want to give you advice all the time and insist that you listen to their pearls of wisdom because they think of themselves as being the experts. They want you to be at their beck and call and expect that you meet up with them whenever that want.
They often have crazy ideas, which you are forced to listen to politely, because you have taken money from them. However, they don’t add any value, and even worse, they actually drain a lot of your energy.
Since you are a first-time entrepreneur, you are naive and don’t know how to deal with him and since he is a first-time angel, he expects you to toe the line and do what he says. This often becomes a case of the blind leading the lame and is one of the commonest reasons why startups go belly-up.
Some angels are ex-angels – they will not invest any money, but only give you advice. To add insult to injury, they will often charge you a fee for this, in the form of equity.
Angels, Angel Networks Or VCs? You Decide
This is why dealing with angel networks can be much better. While they are slower and more bureaucratic, they are also better organised, because they have a formal structure, and follow a systematic process.
You will need to learn to negotiate with the angel, but if you do your homework well, this should not be difficult – after all, your interests are aligned. Please have realistic expectations, and learn to be flexible and respectful. Every angel has their own “sweet spot” – you need to find this to determine if the fit is right, and he is the right angel for your startup.
Many founders believe that once he’s written the cheque, the angel’s job is done. He should now leave you alone and allow you to run the company as you see fit. However, from an angel’s perspective, signing the check is just the beginning of the relationship – it’s after the funding has been done, that the work of a good angel really starts.
He can guide you when you are stuck, and because he has a lot of experience, he can help you with the hundred and one things you need to do when you are running a company – such as hiring, firing, raising the next round of funding, marketing, accounting, and ensuring good corporate governance.
Yes, you could skip going to angels completely, and go to VCs directly, but this has its own advantages and disadvantages as well. While it’s true that VCs have much deeper pockets and can give you a lot more money, you also need to remember that they are investment professionals. They need to return the money that they have raised in their fund from their limited partners back to them, after multiplying it.
They have their own agenda, and where they are in their own funding lifecycle will determine how much money they can give you; and how quickly they need to see you make a return on it for them. Finally, if they give you money for your seed round and then don’t fund your Series A, you’re in deep trouble, because then no one else will want to touch you.
An angel, on the other hand, is investing his personal money. He has a lot more flexibility and freedom, and can pretty much make his own calls because he is not bound down by a rule book. Liking you is enough reason for him to fund you. However, he has limited funds, and may not be able to continue giving you more money in the future, even though you may need it desperately.
As an angel, it can be heartbreaking to have to say No to a passionate founder, and entrepreneurs need to learn not to take this personally. Angels have their own limitations and have to allocate their funds sensibly. While we would love to say yes to every founder, this is clearly not possible.
The rule is simple – do your due diligence on an angel investor before you accept money from him – don’t get carried away and say yes to the first person who offers to fund you!
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]