An Open Letter To Angel Investors
In the past few years, there has been a lot of positive press about the increase in angel investing here in the United States. The passage of the JOBS Act and the potential for increased crowdfunding activities has created a surge in the number of angel groups around the country, web-based portals promoting deals that appeal to the angel community, and investment opportunities – deals – that are visible and available to investors who want to risk smaller amounts of money than are typically required to participate in venture capital funds.
As both an “angel” who invests in early stage companies and as an entrepreneur who occasionally seeks angel investors for my own activities or for client companies, I have a perspective that may be unusual but which I think is more “360” than most. With that in mind, I want to offer you, Mr. or Mrs. Angel Investor, some advice and suggestions that will make things better for both of us!
1. Look in the mirror. Are you really an angel investor or do you just like how that sounds at cocktail parties? The key word is “investor”. I have met hundreds of individuals at various angel forums, clubs, organizations, and meetings who have never invested a dime. They are looking for opportunities for themselves – to provide legal, accounting, sales, or other services to the start up, but not invest their own capital. There’s nothing wrong with that so long as you don’t tell me you’re an angel investor and have me spending time pitching you when there is no hope of you investing in my company.
2. Know Your Limit. If your personal circumstances are such that you have a comfort level that you don’t want to exceed, and that pretty much applies to everyone at some point, figure it out before we get serious. I need to know if you are able to participate at a meaningful enough level that it’s worth my time to educate you about the company and its prospects or negotiate the term sheet with you assuming that you’re going to be my lead or my sole investor. If I’m looking to raise $250,000 and your limit is $10,000 per investment, then find an angel investing club that you can participate in at that level but which aggregates other angels like you in order to provide start-up companies with a meaningful slug of what they are after. There are lots of those around.
3. A Quick “No” is Preferable to a Lingering “Maybe”. Don’t keep me hanging. If you aren’t excited about the investment from the get-go, you probably aren’t going to invest. Do us both a big favor and say no right away if that’s your reaction. Don’t keep me thinking that there is hope only to be disappointed after wasting time and energy following up innumerable times with calls and emails checking in on the status of your analysis. You aren’t going to miss the opportunity. If you say no and then something changes your mind, I’ll probably be happy to hear from you that you’d like to participate. Fund raising for small companies is pretty much a never-ending process so the door probably won’t be closed and locked!
4. Death By Due Diligence. I need capital to move my business forward. And I probably needed it yesterday. Waiting for you to complete four months of due diligence before making a decision or starting the negotiation on a term sheet is something I am willing to do if you’re going to invest $5 million, but since this is an angel round and the figure is probably two orders of magnitude less than that, please don’t kill me with your due diligence process. If the investment capital is that precious to you, then you probably shouldn’t be investing it anyway. If you don’t have faith in what I’ve told you about the business or in my integrity, then you definitely should not be investing in my company or in me. This is a partnership so ask the critical questions that you need to understand and which I can quickly answer but don’t drag this out or create a committee of four people to see what issues you can find. All early stage companies have challenges. Mine is no different. Either you believe I can manage through them with your capital and your help, or you don’t.
5. Just Do It. Yes, that is Nike’s slogan but it should be yours as well. If you like the opportunity, you like the leadership, you have the capital and aren’t going to starve if you lose it, then just do it. Make the leap and get things going. Don’t ask your lawyers and accountants to generate a term sheet or investment document that is going to take us weeks to agree on. Don’t tell me you’ve got the cash and then make me wait while you figure out how you’re actually going to do the investment. Let’s get things started and see if we can’t make some exciting stuff happen and, if we’re lucky, makes some money in the process.