Unlike institutional lenders and venture capitalists,
angel investors have diverse backgrounds and perspectives. In fact, their
beliefs of a companyâs business practices and how a startup should be managed and
operated may differ significantly to what entrepreneurs may have in mind. Therefore,
some angel investors can be viewed as either beneficial or detrimental to a new
companyâs success.
Since angel investors tend to invest a large amount of personal capital in a small
number of companies, their perspectives on startups can also be dramatically different
than investors who have experience in tens and hundreds of enterprises. While it
may be advantageous for a new entrepreneur to raise capital from an angel investor,
the business owner should fully understand their term sheet and the ramifications
associated with obtaining startup capital
from an angel investor. Entrepreneurs can develop a better understanding of the
agreement from an attorney in their industry and are encouraged to look at angel
investors from the following six perspectives before signing the term sheet.
1. An angel investorâs value to the startup
Most angel investors take an active role in their invested company; therefore, entrepreneurs
should expect to enthusiastically engage with them on a regular basis. An experienced
angel investor will regularly mentor and consult new entrepreneurs on how to move
the company forward and will often request a board seat to make sure their invested
company is on the right track to success.
On the other hand, there are angel investors who do not have industry experience
and/or may only be concerned with the
return on investment. These types of angel investors often choose not to
play an active role in running the company, which can be harmful since the new entrepreneur
may require guidance during his/her companyâs early stages.
2. Background and perspectives
Since every angel investorâs business perspective is highly influenced according
to his/her personal experiences, they may perceive things differently from other
angel investors. In addition, they may have more knowledge than others depending
on their industry of expertise. Regardless of the situation, it is important for
entrepreneurs to fully understand their angel investorâs background, industry experience,
personality, and ROI before signing the term sheet. At times, angel investors can
either make or break a company.
3. Differences in expectations
Entrepreneurs have certain expectations on how their startups should be managed
and operated. However, many angel investors may view an entrepreneurâs standards
as ânaiveâ and disagree with how the new business owner should take the company
forward. These differences of expectations between both parties will often lead
to poor communication, avoidance, and resentment. Both the angel investor and entrepreneur
must understand the expectations of one another in order to amicably run the new
company.
4. Risk of investment and patience
Most angel investors will choose to invest in only a few startups. Given this situation,
each investment they are involved in is considered âhigh riskâ since they do not
have many investments that can protect them if one of their startups fails.
Angel investors can also react differently under pressure, which can be very influential
in a companyâs success. For example, if an angel investor fails in one investment,
they may accept their failure and move on. Others may lose their patience, react
illogically, and may choose to meticulously micromanage the affairs of the failed
startup. As a result of the latter situation, the entrepreneurs may be advised to
make the wrong strategic moves. Due to the fact that every angel investorâs personality
and reaction is different, entrepreneurs should therefore understand how risk averse
the angel investors are before obtaining startup capital from them.
5. Professional management of the company
Unlike the conservative method of investing that banks and venture capitalists have,
angel investors tend to communicate with entrepreneurs on a more informal and personal
level. At times, this relaxed approach can lead to miscommunication and misunderstandings
between the angel investor and entrepreneur. Some angel investors may have the tendency
to micromanage their invested companyâs affairs and undermine the entrepreneurâs
efforts in operating the company, which can be very damaging in the long run. To
avoid such differences in opinions and possible falling out, it is important that
the entrepreneurs understand the managerial background of their angel investors
from their previous investments before signing the term sheet.
6. Ethics
Ethics are very important in any business endeavor. The
angel investor should have ethical behavior in all of their business pursuits
since the process of raising capital
is similar to having a business partner. Entrepreneurs should scrutinize the angel
investor thoroughly, especially when it comes to the ethics of how they conduct
business practices before any investment agreement is made.
In the end, entrepreneurs and their angel investors should be compatible with each
other.