This post is the sixth of seven posts about angel investment in entrepreneurial ventures.
There is no substitute for experience in start-ups and small businesses. Successful entrepreneurs often make the best angel investors for a new venture because they have hands-on experience with the challenges of start-ups and likely have experienced a few failures from which they have learned. Each angel will have a different approach, and each entrepreneur may have needs that extend beyond a purely financial investment. The angel investor’s role will be different in each investment based on the needs of each party in the relationship. This said, let’s look at five typical ways an angel may participate in an entrepreneurial venture:
Silent investors typically take no active interest in a company. Instead, they make an investment and hope to see a return on that investment over time (Amis & Stevenson, 2001). Entrepreneurs who secure silent investors gain access to financing, but they lose the opportunity to leverage the knowledge and experience of the angel.
Those angels willing to act as part of a reserve force may make an investment, but they will also help the entrepreneur when called upon with particular problems (Amis & Stevenson). Entrepreneurs who have a reserve force gain not only financing but also access to the wisdom of the angel on an as-needed basis. Such access can be valuable for entrepreneurs who have solid business experience, but may occasionally encounter challenges for which they may require outside insights.
For some companies, an angel may provide some financial investment and take a full- or part-time role within an entrepreneurial venture depending on the stake (Amis & Stevenson). Another option may be for an angel not to provide investment, but take a full- or part-time role in exchange for equity and another form of compensation (Amis & Stevenson). In either case, an entrepreneur may gain value from this arrangement; however, the risk for the entrepreneur may be micro-management at best, or at worst the possible loss of control.
Coach or Mentor
An angel who serves as a coach may have the greatest impact on the venture, yet may not have a controlling interest (Amis & Stevenson). This angel may or may not make a financial investment, but will be someone on whom the entrepreneur relies for regular advice and input. Such an arrangement may be ideal for an entrepreneur, especially if the angel has broad experience.
A controlling investor is one who takes control of a company through investment or convention and then manages the company, actually becoming the entrepreneur because he or she is driving the direction of the business (Amis & Stevenson). An angel stepping into this role, if highly experienced, may be able to have a significant positive impact on the venture.
Angels with a depth and breadth of experience can be invaluable to a startup, especially if they have the desire and availability to be involved in the venture. Each angel will bring something different to the table. The challenge for entrepreneurs is to be open enough to listen and gain from the wisdom and insights the angel has to offer. It is important to remember that those investors who are willing to invest time and energy to help the entrepreneur be successful may choose to do so from an egocentric position—they want the additional visibility from the venture’s success in addition to the financial returns (Balachandra, Sapienza, & Kim, 2014). This egocentricity is not necessarily a bad thing, but entrepreneurs need to be aware of this possibility when entering into a deal with an investor. Entrepreneurs must seriously consider the tradeoffs with regard to what the investor can bring to the table beyond a purely financial investment. The willingness to allow an investor to have influence over the venture is a difficult thing for any entrepreneur, but in the long run, it may be best for the success of the business.
Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamentals of Early-Stage Investing. London: Pearson Education Limited.
Balachandra, L., Sapienza, H., & Kim, D. (2014). How Critical Cues Influence Angels’ Investment Preferences. Frontiers of Entrepreneurship Research, 1-16. Retrieved from http://digitalknowledge.babson.edu/fer/vol34/iss1/1