Supporting Angel Investments - 08/16/2008

After angels make an investment, hopefully using the process outlined in prior posts, they become highly vested in the development and progress of the business. What role should the angel investor take in supporting the business at it develops and matures? This question brings us to the 6th stage of angel investing, as categorized in the book in Winning Angels: The 7 Fundamentals of Early Stage Investing, by David Amis and Howard Stevenson.

The 7 Fundamentals of Early Stage Investing

Before we look at the roles angels can play supporting companies they invest in, I do want to make a brief comment, as a follow-up to the low print quality of this book which I mentioned in the initial introduction to this series. In my copy, a whole page seems to be missing (blank) in Chapter 42, which is the introduction to Supporting. This repeats again at the beginning of the final section, Harvesting. How a book can be put to print with such low quality, and then stay this way for almost 10 years, baffles me.

Despite these physical shortcomings, the message does get across. Different angels will have different styles, desires, and capabilities to support and contribute to a business. Likewise, different companies have different needs, depending on the background and experience of the management team, the market they are serving, the stage of the company, and the particular knowledge and skills of the angel investor. The activity of supporting the business clearly occurs after the investment is made; however it seems critical that companies and angels carefully consider the type of relationship they both desire prior to the investment. In that sense, discussing, understanding, and defining what role the angel will take should happen during the evaluation and negotiation stages, rather than after the fact.

The authors classify the role angels may choose to play (or need to play) into 5 categories:

  • Silent Investor - the investor puts in the money, then does nothing and hopes for the best
  • Reserve Force - the investor is ready to help at a future time, if needed
  • Team Member - the investor joins the team in some capacity and becomes very engaged in the business, but does not control it
  • Coach - the investor serves to mentor the management team and provide guidance and help through regular engagement and meetings
  • Controlling Investor - the investor takes control of the business.

A healthy discussion of these possible roles, what the entrepreneur wants and needs and what the investor is willing or capable of doing should happen before the investment is made. It may also be useful to understand what type of investor is likely to be closest to the business post-investment, either because they are the lead investor or because they are putting in the most money. Amis and Stevenson do not directly address the different types of angels; however an excellent report from MIT identifies four main types of angels:

Angel Investor Types as identified in MIT Report

The types are somewhat self-explanatory but I refer you to the report for a more detailed explanation (page 18). As a side note, this report is worth reading and provides complementary information to Winning Angels, including some very interesting data and analysis from an extensive survey of angel investors that was conducted in 2000. This data includes the primary motivations of angel investors and data on how much of their net worth angels commit to startup ventures, among other things.

In defining the appropriate role the angel investor or investors will play, it is important to assess the alignment between the type of angel, and the role that is needed. If the angel is a “financial return” angel, and the company needs a controlling angel, clearly the relationship will not succeed. Likewise, if the angel is a “guardian angel”, who is prepared and expects to spend considerable time with the company, but the entrepreneur is really seeking a silent or reserve force relationship, there is a good chance conflict will emerge. Combining the data from Winning Angels with the MIT report can provide a valuable framework to have this discussion.

Angels that do take more active roles in the business can contribute in many ways, both strategic and operationally. One interesting perspective presented in the book is the concept of supporting companies in achieving value events. A value event is a key milestone that results in the creation of additional value for the business. Examples would be completion of a prototype, obtaining a first paying customer, securing a follow-on round of funding, filling a key management position. By understanding beforehand they key value events that are required to meet the investment requirements of a VC firm, for example, the angel can help guide the business on a path to achieve that milestone. The angel may be in the best position to understand what those value events are, in the context of their prior business experience and by accessing the people in their network.

The role of the angel may also change over time. Initially, the angel may be taking a reserve force or coaching role, but if the business gets into trouble, the angel may need to quickly take more significant role. If new capital is put into the business, the angel may even find himself or herself taking the role of controlling angel - potentially reluctantly!

It is clear from the industry data, including the best practices presented in Winnings Angels, that active angel investors represent a critical success factor for many businesses. It is very important that the company and the angel investors achieve a match in expectations, role, and relationship, to give the company the best chance of success and to best leverage the contribution each individual can make to the business. These discussions should happen before the money changes hands. Angels are “more than just money” - and research shows that problematic angel investors or those with the wrong background or skills can actually negatively impact the future success of the business.

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