Angel Investors: How to choose the one that's right for you
Angel investors or business angels as they are also called are a group of investors who through various means have acquired substantial personal wealth. These investors are interested in investing some of that wealth to assist new start-up entities by providing much needed start-up capital.
Show me the money?
Generally, entrepreneurs will be tempted only to ask themselves "How much can I get?" Don't choose investors based solely on the amount of liquidity they're offering. Look past the cash infusion to the overall contribution an investor makes to your firm's long-term welfare.
The qualities you'll want to look for in a potential investor include past investment performance and reputation. Remember, you're looking for an associate, not a best friend. Beware of investors who cross that line, and insure they bring more than money.
Pitfalls to avoid
- No accountability: Avoid investors who play fast and loose with their money. While this seems like a good problem to have, there is a downside as finger-pointing and lawsuits can result if things go bad.
- No Investment agreement: The days of handshakes sealing the deal are over. Terms sheets are not adequate either. You and your investors both need an legal agreement to protect your interests as well as define roles, responsibilities and entitlements (like cash disbursement and divestment).
- IP Vampires: some investors only are looking to develop intellectual properties as opposed to corporate growth writ large. Avoid this trap, as they may insist on shutting down the company and taking the patents with them if the investment doesn't pan out.
Simply put, when it comes to choosing an angel investor, don't let money blind you to the long-term interests of your firm.
Beyond that, the concept of angel investing is fairly straight forward. You need anyway to consider the different types of investors that operate in this arena and also various types of investments. It is very important for the entrepreneur seeking the start-up capital to do their homework and find an angel investor that operates under a style that works well with the business plan of the entrepreneur.
Typically angel investors fall into one of three basic categories:
- Mentor angels, which will leverage their entrepreneur culture and drive the entrepreneur to success. This kind of angel will be acting as a strategic adviser, making use of their own network for the benefit of the start-up.
- Manager angels, which in exchange for their capital investment earn the right to participate actively in the management of the newly formed company, as a business manager.
- ROI angels, or Return-on-investment angels, which are primarily concerned with making a strong return in exchange for their investment in the inherently risky start-up business market.
The most critical component of the decision to work with an angel investor is to find one that has a philosophy that complements that of the business owner.
An experienced entrepreneur with dreams of forming and running a great company will probably not need a Mentor and will want to avoid dealing with a Manager angel seeking to manage the business and potentially create control issues.
On the other hand a young entrepreneur with a great idea, but no idea how to run the business management aspect of the company will not want to align themselves with a ROI angel who will not offer any management assistance and only be around when it is time to get paid.
Angel investor networks are a great system to allow established and successful business persons to use the means that they have acquired through their success to help the next generation of ambitious entrepreneurs to reach their dreams too.
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