As an angel, one of the reasons you invest in a startup is because you share the founder’s passion. You can see that he has a vision which can improve the world and because you want to help him bring his dream to fruition, you are willing to put your money where your mouth is. The problem is that while it’s all very well to talk about how the startup will create a positive impact in the long run, the fact is that most startups will run out of cash before they reach that point.
As an angel, you’re acutely aware of the fact that you have limited funds, and you will not be able to provide the entrepreneur with enough money until he reaches his end goal. Therefore, along with thinking long-term, you also need to make sure that the founder is frugal and conserves cash.
While this is not as sexy as dreaming about the big picture, it’s equally important. If he doesn’t remain grounded and takes care of these basics, his dreams will turn into nightmares – not just for the investor who loses his hard-earned money, but for the entrepreneur as well who will end up wasting a significant amount of his life.
Why Angel Investors Hand Hold Entrepreneurs
This is why we try to make sure that we hand hold the entrepreneur until he reaches the next stage of his evolution and is mature enough to be able to raise a series A from VCs. This is why we also need to think about what will make the startup attractive to VCs in the short-term.
We’re quite happy to participate in the next round as well, especially when we’ve been impressed with the way the entrepreneur has been able to execute. By interacting with him frequently we can judge his ability to build a team, create a quality product, and sell it. We are checking to see if he is responsive and responsible if he is willing to be open and ask for help when he runs into problem and if he respects our advice and feedback.
This is why we keep dry powder so that we can provide a bridge round and participate in a Series A. We are happy to double up on the companies which we feel are on the right track. This is a very useful signalling mechanism for the next round of investors as well, and our willingness to invest makes it much easier for him to raise money. When VCs can see that the original angels are continuing to invest in the founder, it gives them a lot of confidence that this is a sound founder, and the startup has a good chance of doing well.
We treat our initial seed investment as an experiment, and when the founder shows us that he’s been deserving of our trust, we are happy to invest more money in him. This increases his probability of continuing to grow because he can attract additional external funds. We also think this helps to keep the entrepreneur honest because he understands that his angels have a key role to play in his success.
While it’s easy to be a hands-off angel investor who only writes a cheque, an active angel who engages with the founder adds a lot of value and improves the chances of the startup reaching escape velocity considerably.
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]