Angel Investors: More Than Just Money

Leaving a lucrative position as a partner in a large law firm in 1999 to create a real company and product in the educational arena was not an easy decision. How would the venture be funded; how would I find capable, hard-working people; what is the best marketing approach – the questions were endless and the challenge daunting.

by Susan Preston http://www.entreworld.org/Content/AuthorsBio.cfm?BioID=269

Davis Wright Tremaine LLP http://www.dwt.com/

Full Article:
http://www.entreworld.org/Content/EntreByline.cfm?ColumnID=622

One thing I understood going in was the potential value angel investors can bring to a company. About nine months earlier, I had the pleasure of starting the first all-women angel investment group. I had done some angel investing prior to this time and learned the excitement of investing in young companies along with the value I could bring to the entrepreneur through my former positions in senior management of public and private companies.

My experience with my own business, Reality Based Learning Company, was mixed from the standpoint of financing the company, with much of the financing coming from venture capitalists and a handful of angel investors. What I did experience was that angel investors were generally much more willing to give personal advice and assistance and truly willing to roll up their sleeves and help me tackle problems. They brought not only financial acumen, but also the ability to walk me through the task of setting a strategic direction and prioritizing the products under development.

Money Comes First

I’ve seen the same scenario unfold from the other side: as well as money, I believe I bring the intangibles of experience because of “having walked through the fire myself” to the entrepreneurial companies in which I invest.

Now, don’t get me wrong. Angel investors, first and foremost, expect a return on their investment – this is not a philanthropic venture. And despite a lingering image as lone ranger, or the oft-used saying that I personally find distasteful of friends, family, and fools, angel investors are hardly unsophisticated. Indeed, as venture capitalists increasingly back away from funding start ups and focus on later-stage investments, angels are banding together to share investing wisdom and achieve an even greater level of monetary savvy.

In short, angels are investors whose primary goal is making money –- and who seek, when all is said and done, opportunities that offer the likelihood of a greater-than-usual return on their investment.

Benefits Make a Difference

With VCs retreating from the early-stage arena –- in 2003, according to the National Venture Capital Association http://www.nvca.org/ , venture capitalists put only 2 percent of their investment capital into seed or early-stage companies, a mere $354 million into 166 companies. Compare this figure with VC investments just five years earlier of $3.3 billion in 809 such companies (although still only 6.1 percent of total investment dollars in 1999.) It does not take a rocket scientist to figure out that venture capitalists are no longer the source of financing for early-stage companies, and that angels are playing an even larger role in the financing of these fledgling companies.

Indeed, angels might well be the only viable source of funding for such companies other than family, friends, and founders’ own personal resources. Estimates from the Center for Venture Research (CVR) http://www.unh.edu/cvr/ at the University of New Hampshire show that angel investors placed approximately $18.1 billion dollars in 42,000 deals in 2003. Compared that to the total investment amount in all companies by VCs of $18.3 billion.

Thus, with the entrepreneur’s need for funding meeting an investor’s quest for above average returns, it is money that grounds and establishes the relationship. Generally, today’s angel investors are more sophisticated in terms of investment strategy, deal structure, and due diligence. They have learned through experience as entrepreneurs themselves or through successful, or not-so-successful, investments, that objective evaluation of investment opportunities is essential. Angel investors are looking for much the same attributes as any other investor, including venture capitalists, including a scalable business, solid management, realistic business approach and valuation, and, of course, opportunity for financial return.

However, it is the other-than-monetary issues that can be the real benefit to entrepreneurs and nurture and sustain angel investors, enabling promising fledglings to become thriving enterprises.

In addition to that desired monetary return, angels, many of whom are former entrepreneurs, can provide an essential role in the process of launching and building companies. They can be exceptional mentors to younger entrepreneurs, dispensing advice, either formally as board members or informally as advisors.

Angels also have an interest in their community and, because they are often successful entrepreneurs themselves, desire continued involvement in their community. Not surprisingly, these interests and desires are shown through their predominantly local investment approach. Angels consider their efforts as much about bettering the community as building a company.

In my own case, I have helped entrepreneurs find a potential marketing partner (for example, linking a virtual reality company with a publishing company) or better understand their management structure (for example, by developing a relationship with a person who, I knew, could make a difference and has since become the chief executive officer.)

Reality Is Essential

Angels are also adept at steering companies away from trouble and keeping them focused on moving forward. In some cases, I’ve told entrepreneurs seeking funding that they don’t have a unique technology, or marketing approach, or management expertise necessary for the launch of a company. But even when delivering less-than-desired news, I have tried to help them find and understand their potential and their company’s viability.

In other cases, when I’ve liked the management team and the product, I’ve been honest about valuation. Recently a company was seeking funding at the $20 million valuation level. While I was favorably impressed with the founders, I also could see that the company hadn’t fully developed its product nor did it have any customers. To the refrain, “We’ll be worth billions someday,” I could bring the angel investor’s perspective: “Sure; but not at $20 million today.”

Never has the environment been so necessary for relationships to develop between entrepreneurs and angel investors. Mutually beneficial relationships depend upon an understanding that angels add value. While money lies at the core, their value is more than just monetary.