Flying With an Angel Investor

The landscape for financing early-stage companies continues to evolve as does the rest of our economic system. As venture capital funds have grown in size over the past decade from the significant influx of money from institutional investors, so has their appetite and need to deploy greater amounts of capital. This sounds like a good thing at first for those of us wanting to raise money for startups.

Unfortunately, seed and early stage funding from VCs has increased very little over the past 10 to 15 years in absolute dollars, so there is a lot more competition in today's market for a limited pool of capital. In general VCs have moved upstream seeking less risky later-stage deals where they can deploy larger amounts of money. And with the delay in IPOs and exits because of the recession, many VCs are forced to allocate capital for existing portfolio companies vs. making new investments.

So, what does this have to do with angel investors? A lot! Angel investors and angel groups have become more formal and greater in number, stepping in to significantly fill the funding gap for seed stage deals.

While there is no substitution for friends and family money to get an idea or concept off the ground, angel investors finance startups and early stage companies needing a few hundred thousand to a few million dollars. The challenge in today's market for many angel groups is access to capital; they are funded by high net worth individuals, many of whom are sitting on the investing sidelines. Nonetheless, angel investors and groups are active and a viable alternative for startup capital.

This leads us to discuss the types of angels. As with many other funding sources, there are different types of angels and angel groups, each having an investment approach and idea of how they can help, or not help, in building your company.

It is important to note the grey area between those who we title angel investors and those that are higher income individuals that don't have experience with early stage investing; we think of angels as individuals that routinely invest in early stage companies.

Angel groups tend to take on the personality of the lead angel investors within their team. Understanding the idiosyncrasies of the investors is relatively important in finding the right fit, whether one investor or a group.

On the surface, it may appear that it is just about the money not so. Professors Michael Horvath and Fred Wainwright of Tuck School of Business at Dartmouth College characterize angels as follows:

Guardian Angel-has relevant industry expertise and contacts, and will be active in helping the startup grow and achieve success. We would expect this investor be a value-added board member.

Operational Angel-has significant experience as a senior executive in a major corporation, and can provide significant value-add in scaling operations. However, be careful because this angel may have no idea of how to operate a small business without the significant management depth found in larger companies.

Entrepreneurial Angel-this investor has "been there, done that" and may be very valuable to a novice entrepreneur. He will be able to provide perspective to the founders on what to expect from investors and how to effectively negotiate financing terms. An entrepreneurial angel with operating experience is ideal.

Hands-off Angel-these are wealthy individuals, i.e., doctors, attorneys, or similar professionals. This type of investor is willing to invest but usually does not have the time or specific expertise to be of much help to the startup.

Control Freak Angel-these investors believe they have all the answers because they have achieved certain wealth, or they have the personality to convince themselves they know everything. Caveat emptor.

Lemming Angel-think of these as "tag along" investors. They will not likely make a decision unless following the lead of an angel group. Generally, these investors are not active in the operating decisions of the company.

Once you have garnered adequate interest by an angel or angel group, ask questions that will allow you to gain an understanding of their mode of operation as an investor.

Ask about the frequency and method of interface with portfolio companies, and how they view their role. In addition to determining their track record and background talk with existing portfolio company CEOs and founders to get their perspective. Lastly, have them describe a deal that has gone bad and how they responded.

Combining these inputs should allow you to get a sense of the type of angel they are and how they may fit with your needs.

When accepting money from an angel investor, you are taking on a new partner. Think about them in that vein and make sure their vision and values align with those of your team.

If you can, seek out investors that really share your mission, understand your industry, have entrepreneurial experience and can provide more than just money. Choose wisely.

Kenneth H. Marks is managing partner of High Rock Partners and a certified merger and acquisition advisor. He can be reached at khmarks@HighRockPartners.com.