Extracting More Than Cash From Your Angel Investors

 

A version of this article previously appeared on Forbes.

In order to extract value beyond your Angel investors’ cash, you must first assess three important parameters: (i) the relative strength of their personal brand, (ii) their ability to add operational value, and (iii) the amount of care and feeding they will demand from you.

Angel investors are often the sole source of funding for startups at the critical pre-launch stage. Ideally, such early-stage investors should have the experiences and motivation to help their ventures establish a sustainable business model, rather than simply writing a check before moving on to their next investment.

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Four Common Angel Archetypes

There are a variety of factors entrepreneurs should consider when evaluating a potential early-stage investor. Three criteria that impact an investor’s ability to add non-monetary value to your venture are: Brand, Tactical Impact and Overhead. Four distinct types of Angels emerge when they are evaluated per these parameters, as shown below.

Brand – Value on this axis is delivered by mere association with the Angel, in the form of social proof. Angels with a strong brand offer credibility and validation that influences other constituents of the startup ecosystem. Even if an Angel with a highly-visible, well respected brand never lifts a finger on your behalf after their cash hits your balance sheet, their association with your venture will continue to generate value, through (and potentially beyond), your first institutional funding round.

Warning: the more high profile and prolific an investor, the greater the demands on her time and thus the lower likelihood she will consistently be available to add value when you call upon her. Thus, even well-intentioned High-Profile Investors can inadvertently become disengaged over time.

Overhead – The second measure of an Angel’s relative worth assesses the amount of energy the investor extracts from your venture. Energy can be drained by gratuitous updates, lengthy and unhelpful “strategy” conversations and time spent tracking down the investor for routine tasks, such as coordinating schedules or obtaining signatures.

Startup Founders always have more things to do than time to do them, so the last thing they need is an Angel who draws upon their time and energy and offers little in return beyond cash. Steer clear of High-Overhead Angels, whether they be interfering obstructionists or perpetually unavailable phantoms.

Impact – In this context, value-added is defined as worthwhile actions performed by an Angel on behalf of your venture, such as: introductions, executive recruiting, product feedback and strategic advice.

The Elusive Engaged, High-Profile Investor

An Angel who judiciously adds value, provides reputational validation and is a pleasure to interact with is ideal. In contrast, Hands-on Clueless Investors should be avoided, unless your company will imminently fail without their money and you have no other viable sources of cash. In such instances, take their money and work diligently to convert them into a disengaged investor.

Prioritize the remaining boxes as you see fit, depending on the particular needs of your venture. For example, if your team lacks solid UI/UX talent, a Hands-on Former Operator who shores up this weakness will be a great fit. Alternatively, if you have plenty of Engaged Angels, a Disengaged High-Profile Angel might be optimum.

Painfully Diligent Investors

Even though it can be painful and frustrating, Engaged and Hands-on investors may require to you expend significant energy helping them assess the veracity of your venture’s prospects. This process is additive for all concerned when an informed investor appropriately challenges the entrepreneur’s point of view regarding substantive issues, such as: positioning visa-vi competitors, the size and accessibility of proposed target markets, pricing mechanics, market trends and emerging technologies.

If an Angel’s diligence focuses on a checklist of legal and administrative issues, you are likely dealing with a Clueless Investor. In such cases, the process will require little of your time or attention. Correspondingly, minimal value will result, as the investor will lack the necessary grounding of your business to offer meaningful input.

Yep, Sounds Good

Implicitly represented in the above matrix is a fifth Angel type that abides by the “Sounds Good” school of investing. If the pitch sounds good, they are “in.” This approach allows such investors to rapidly deploy and diversity their capital.

The obvious downside of this strategy is that most pitches from experienced entrepreneurs “sound good.” It is not until time and attention are applied to the entrepreneur’s underlying assumptions that potential pitfalls become evident.

Similar to Clueless Investors who perform perfunctory diligence, the lack of thoughtful contemplation from “Sounds Good” investors often leaves them with an incomplete and inaccurate understanding of your business. Thus, absent a strong personal brand, a Sounds Good investor usually offers little value beyond their checkbook.

The Beauty Of Low Expectations

Without question, the more value you can derive from your Angel investors, the better. However, entrepreneurs frequently over-estimate the impact an investor will have on their venture. With this in mind, if you expect little value beyond your investors’ cash, you will seldom be disappointed.

Note: This entry was based on this Quora answer posted by my brilliant Partner at Rincon, Jim Andelman.

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet about the Clueless Angel Investors or tell you about that killer burrito I just ate. 

John Greathouse

John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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  • CliffElam

    I am not normally a big fan of quad charts (yes, I was a consultant, why do you ask? ;0) but that is very useful. My first startup had people scattered all over the landscape and it took me a long time to sort them out – probably it would have been useful to have been doing that as I was recruiting.

    I did have to get over my Dr. Who “Weeping Angel” phobia to read the article though….

    -XC

    PS- Disqus threw the first ever error I’ve seen when I tried to login. Strange.

  • Cliff – I am not a Dr. Who fan, so I didn’t realize I was alarming readers with my friend’s photo. My apologies.

    I am with you re 2×2 matrices. I never was a consultant, but I saw enough of them in B-school to satisfy a couple of lifetimes. Like you, I try to use them sparingly.

  • CliffElam

    2007, episode 7 – “Don’t Blink!” – but everyone calls it the Weeping Angels episode. It is on Netflix, and it is the penultimate creepy episode. My 11 year old was in my lap and my 17 year old was leaning up against me. And we’ve seen it several times. No gore, just old fashioned suspense. They could have made that episode in 1969. (Inside joke, you’ll get it if you watch it.)

    I sound like a nutter, I know, but there is such a dearth of family friendly entertainment that satisfies from 11 to 49….

    -XC

  • Cliff – I am with you regarding finding suitable entertainment. My son is now 13. I’ll check out “Don’t Blink” – my son likes suspense and it will be good to show him that talented directors can hold an audience spellbound without using gushing blood as a visual exclamation point.

  • CliffElam

    My kids also enjoy Castle and Bones – ages 11 to 17. Castle has mild sexual content and Bones has a trademark “gross” shot at the beginning that is really more comical than movie-gross. My youngest also loves to watch Hawaii-Five-0 with me – it’s a terrible series but it has caught his attention, who knows why. Very mild show.

    -XC

  • This matrix is extremely helpful. There are a few more vectors I would add. One of them is domain expertise and experience in angel investing.

    The more domain expertise the investor has in your sector, the higher the value of their brand because they understand your business. This is why a good portion of investors with a brand focus on specific sectors like high-tech. High-tech angel investor investing into film business or energy could end up being a disaster unless they know those sectors well.

    The more deals the angel investor has done, the better your startup because you can tap into their deep knowledge of funding lots of startups. The problem in this scenario is exactly what you said: their bandwidth becomes limited in terms of time.

    In terms of operational, I would expand on that with the level of micromanagement an angel might bring into the startup. If the angel investor has a “micro-management” mentality, it drains the resources of the startup.

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