Five top tips for working with Angel Investors
Typically, Angels are themselves experienced entrepreneurs who still have that strange, irrational urge of the entrepreneur to do what the rest of the world says is impossible. In this article Jordan Green—Deputy Chairman of the Australian Association of Angel Investors Ltd and President of Melbourne Angels Inc—shares his top tips for working with angel investors.
One of the most common questions I get is from entrepreneurs who want to know what to expect when working with Angel Investors. My standard answer is to describe who the Angels are and what they are trying to achieve. Before that though, the short answer is “work collaboratively with trust and honesty”.
Angel investors are private people investing their own money, usually in modest amounts ($10K-$100K) and their own time for high order returns (10x their investment or better). Typically, Angels are themselves experienced entrepreneurs who still have that strange, irrational urge of the entrepreneur to do what the rest of the world says is impossible.
Five rules for entrepreneurs working with Angels
- Communicate openly, fully, often and effectively. Surprises are your worst enemy.
- Be ethical, honest, courteous and respectful of the investors, their time and their money.
- Expect and value the advice and guidance of the investors but, remember you are accountable for performance.
- Treat the investors as your partners, not your enemies. Collaboration will foster success, confrontation will ensure failure.
- Keep the interests of investors aligned with your own interests for the common goal of a successful and ethical exit.
Remember, Angel Investors are investors because they want to be. They are using their free time to pursue entrepreneurs, to consider the investment opportunities and to support their portfolio companies. To work successfully with Angels embrace their contributions, not just their money, work on the relationship and don’t treat them like a one night stand.
Whether operating alone, a Solo Angel, or in a team, an Angel Group, Angel Investors all follow the same basic process:
- Deal Flow
- Generation, Screening, Evaluation, Exit Potential
- Due Diligence
- People, Market, Intellectual Property, Company Records, Legal documents
- Terms Sheet, Negotiation, Special Rights, Board Seat(s)
- Governance, Strategy, Mentoring, Exit Focus/Design
- Target Acquisition, Terms Sheet, Negotiation
Each investor or group will manifest this process a little differently and emphasise different elements for each deal at different stages of the process. Good investors are as eager to receive constructive feedback on their process as are good entrepreneurs to receive constructive feedback on their business.
So when working with Angel Investors you should expect to give and receive courtesy, honesty and constructive comment. Angels are trying to build a portfolio and they will likely see over a hundred prospective investments a year just to make one. Yes, those are long odds on both sides of the table so, while we all know only too well the frustration of the entrepreneur seeking investment, spare a thought for the persistence and patience required of the Angel hunting for the right deal. An all too common mistake made by passionate entrepreneurs is blaming all the investors who haven’t invested for their short-sighted opinions and obvious risk aversion.
Stop! Think! Listen! These men and women are looking at hundreds of possible investments, probably many that are very similar to your very own precious enterprise and they are doing that after having already enjoyed some success as entrepreneurs themselves. Might they just possibly know something you don’t and be offering valuable constructive feedback?
The quickest way to turn off investor interest is to be a know-it-all who rubbishes the investors (or other investors). Yes, we all know that the VC community in Australia is still struggling to get its head above water but, that doesn’t mean that all the venture capital folk are ‘bad’. Yes, Angels will ask many of the same questions as a VC but, that doesn’t mean that Angels are the same type of investors as VC. Yes, you have a great idea to answer an unmet need in the market place but, that doesn’t mean you are the first, the only, or the best. As an entrepreneur seeking investment you are a sales person and the first rule of sales is to understand your customer. The second rule is to sell what the customer wants/needs, not what you think is good about your idea/product/service/company.
Principles that Angel Investors Follow:
- People are the most important element of an investment. Have confidence in the capability of the management and in the value of the intellectual capital contributed by the Angels.
- Be proactive, not reactive. Anticipate the market, recognise the direction of change and understand the value chain. Seek out your preferred investment opportunities.
- Get the fundamentals right and focus on rapid growth. How well a company performs is the key driver of value growth. Look for the exit as a prerequisite to investing.
- Prudent due diligence is essential but, excessive due diligence on a paucity of information is pointless.
- Admit errors and mistakes, we’re not perfect. Be honest with yourself and make decisions on what you know, not what you thought you knew.
- Problems travel in packs and take time to correct. There is almost never a quick fix to a real problem in an investment.