Not All Angels Are Created Equal

On the Texas Startup Blog, Alex Muse writes about the types of angel investors: http://www.texasstartupblog.com/2009/05/05/how-to-find-angel-investors-revisited/

Here are his labels for angels:

• Type 1: Novice angels with financial objectives
• Type 2: Experienced angels with financial objectives
• Type 3: Novice angels with subject matter expertise
• Type 4: Experienced angels with subject matter expertise
• Type 5: Family, friends and colleagues

The classifications are exactly right and Alex says that a new venture seeking angels should shoot for types 3 and 4, which is spot on. But what if you can’t find those types or you’re forced to deal with sub-optimal angels? I personally believe that an entrepreneur’s worst funding nightmare is to take money from someone who is an inexperienced angel investor. Friends and family are difficult emotionally because it changes the dynamic of the relationship forever, and financial expectations must be managed separately from personal issues. On the other hand, ‘professional’ angels are much tougher, especially brand new angels. More often than not, new angels are using your deal to determine if being an investor is right for them. They don’t know what questions to ask and fumble around to determine what ‘feels’ right to them – which may or may not have any basis in the real world. They also don’t have any idea of the emotional toll it will take to see a their investment to a successful outcome. These types can burn up a lot of an entrepreneur’s time with multiple meetings and discussions about meaningless projections and untested assumptions. This is often done so that the angel is comforted and reassured that they are making an informed decision. Pulling the trigger and making the commitment to invest separates talkers from closers. A seasoned investor can make a decision on whether to invest or not in the first one hour meeting – of course it will take considerably longer to actually come to terms and a lot can go wrong in the meantime. A seasoned investor will also have a rolodex of other angels and industry contacts that will help push the startup along at an accelerated pace. An amateur investor requires a lot of hand-holding before (and after) a decision is made and that should be factored in when negotiating with angels.