"Crappy Angel Behavior"
The Second of Two Posts on Early Stage Investors
The Importance of Choosing the Right Angel
Collaborating with the right angel investors establishes a strong foundation for startups by securing essential financing, achieving critical milestones, and fostering early-stage successes that lead to long-term growth. Experienced angel investors provide a robust business, operational, and investment foundation, directly supporting emerging ventures and working closely with founders to facilitate progression toward institutional investment. Selecting the appropriate angel investor or syndicate can significantly shape a startup’s trajectory.
Finding the Right Angel(s)
Selecting the right individual angel, group of independent angels or angel group is essential, yet many entrepreneurs—both first-time and seasoned founders—struggle to secure their first or subsequent investments with the right angels.
The ideal angel investor combines many of the strengths of a traditional VC with these additional qualities:
Proven Track Record: Angels often rely on personal experience and industry networks. VCs typically have a stronger track record of successful investments.
Domain Expertise: Both VCs and Angels can offer domain expertise, but Angels often have more firsthand experience and industry connections.
Robust Networks: Both VCs and Angels have networks, but VCs may have more extensive connections due to their larger firms and institutional relationships.
Genuine Commitment: Both VCs and Angels can be committed to startups, but Angels may be more personally involved and emotionally invested due to their smaller scale.
Alignment of Vision: Both VCs and Angels prefer startups that align with their vision and values, but Angels may be more likely to invest in startups that align with their personal interests.
Angels should practice a time-honored approach to interacting with startups: Do no harm. This means that angels should prioritize the well-being of entrepreneurs over their own personal interests. This involves acting ethically, honestly, and with a genuine commitment to helping startups thrive without taking advantage of their vulnerable position.
By understanding the unique strengths of angel investors, entrepreneurs can set realistic expectations and build a clear path toward Series A funding.
Characteristics of Exceptional Angels
Exceptional angels combine personal experience, especially executive management, with industry insights, mentorship, network access, and ethical practices. Their dedication and passion make them invaluable partners for startups.
While I've encountered more negative experiences with angels than VCs, I'll withhold specific names for now. Feel free to reach out if you're curious.
Proactive Steps to Avoid Problematic Angels
Founders can mitigate risks associated with angel investors by conducting at least three in-depth meetings, including a meal to thoroughly evaluate their compatibility. (For instance, if they eat the food served to you, you could come to the conclusion they are very aggressive. <joke> )
For angels taking a major ownership position, additional due diligence is recommended.
Establishing a three-member board early-on provides essential governance, advice, fiduciary oversight and finance counsel. Founders should always conduct thorough due diligence on all investors and secure top-notch legal counsel (two or more law firms from the inception is recommended). Building a strong network of advisors can help balance the influence of angel investors.
To successfully navigate the complexities of angel investor relationships, founders must effectively manage expectations, demands, differing priorities, and maintain healthy relationships.
Understanding "Crappy Angel Behavior"
This type of behavior refers to negative or unprofessional actions and practices exhibited by some angels that can harm entrepreneurs or negatively impact startups. While not all angels engage in such behavior, understanding these red flags helps founders more effectively navigate the angel and early stage financing landscape.
Examples of undesirable angel behavior include:
Lack of Transparency: Angels may have hidden agendas, such as seeking consulting fees, board positions, or additional equity, which could conflict with the startup's interests. Unclear expectations can lead to misunderstandings and disputes, damaging the relationship.
Overpromising and Underdelivering: Angels may make commitments they cannot fulfill, leading to disappointment and frustration. They may also fail to provide promised expertise, connections, resources, or mentorship. Worst of all, startups may waste time and effort based on false promises, only to be disappointed.
Unethical Behavior: Angels may use their influence to pressure founders into unfavorable finance terms or in other agreements. Some angels may provide false or misleading information or have personal interests that conflict with the startup's best interests, potentially harming the company's prospects.
Micromanagement can stifle innovation by hindering a startup's ability to adapt. Excessive control can disrupt team dynamics and morale, leaving founders feeling disempowered and demotivated. This loss of autonomy can undermine the entrepreneurial spirit and hinder the startup's growth.
Poor Communication can hinder progress and create frustration. Delayed responses, inconsistent feedback, and unproductive communication styles, such as being aggressive, dismissive, or condescending, can damage relationships and undermine trust.
A Lack of Support after the initial investment can be a significant drawback of angel funding. Angels may become less involved or fail to provide promised introductions, customers, partnerships, mentorship, leading to delays in growth.
Misaligned Incentives can create unwanted drama. Angels may prioritize short-term gains, invest in competing businesses, or manifest a lack the commitment needed to support the startup's ongoing success.
Overly Aggressive Terms in seed financing can be detrimental to startups. Demanding unreasonable ownership stakes and imposing unfair terms, such as vesting schedules or board composition, can limit founders' control and autonomy. Avoid side letters and special terms that can create an unhealthy power dynamic or disadvantage for the company when seeking future institutional funding.
Reputation Damage: Negative public comments by angel investors about a startup or its founders can damage its reputation, making it difficult to attract future funding or talent. While this behavior may inflate an angel's ego, it ultimately harms the founders or startup rather than providing tangible benefits.
Angels who engage in problematic behaviors can harm startups by demoralizing founders and teams, creating financial strain, hindering operations, and misaligning strategic priorities. This challenging environment can significantly impede a startup's ability to thrive.
Conclusion
Selecting the right angel investor is crucial for a startup’s success, providing essential funding, expertise, and supportive networks that drive long-term growth. Exceptional angels offer more than capital—they bring valuable experience, domain knowledge, and a genuine commitment to founders. However, it's important to watch out for "crappy angel behavior" such as lack of transparency, unethical practices, and micromanagement, which can hinder a startup’s progress. By conducting thorough due diligence, engaging in multiple meetings, and securing strong legal and advisory support, entrepreneurs can build healthy, productive relationships with their investors. Ultimately, the right angel partner can significantly shape a startup’s trajectory and pave the way for future success.