▸ When do angel investors turn into demons? Kallol Borah, CEO and Co-Founder, Verified AG, warns of three kinds of angels.
As a necessary part of the start-up ecosystem, angel investors often step in when no one else is willing to take the risk of investing in an entrepreneur. In more than 18 years as an entrepreneur, I have come across all sorts of ‘angels’ – from corporate professionals to high net worth families to successful first-generation entrepreneurs.
I have observed three kinds of angels – starting with the one who seeks to be noticed: this is the sort who will spray $20k–50k on every opportunity they like and then pray. These angels simply want to check out the scene whose return on investment is really getting invited to start-up conferences as speakers and getting listed as ‘prolific investors’ in start-ups.
The sophisticated ones are people who can not only invest enough ($300k and more) to turn an idea into a real product but also have connections to help with customer links. They have experienced and achieved enough that they can stay relevant on a start-up’s journey and create enough leverage with follow on investors to ensure an exit for them when the time comes.
Then, the ‘strategic’ moneybags are people who invest with an ulterior motive to perhaps actually own the business or bring in family members to run it or force a merger with an existing business they own. You know which ones to avoid. The strategic one!
Coming clean, on limits
Angel investors may bring in some money but they have limits on how much they can invest. It is best for entrepreneurs and angels to know those limits. If an angel goes overboard and invests more than they should and realises this later, they may want to exit prematurely and cause problems for the start-up. Or, come up and demand a price for the investment that the entrepreneur or the start-up cannot afford.
Angels can help instil basic corporate governance in young start-ups and bring in customer and investor connects. However, when it comes to managing money, no investor, angel or otherwise should be allowed to manage funds they have invested. If anything goes wrong with the start-up’s investment plan, the angel may blame the entrepreneur and as investment terms go, the entrepreneur will end up paying the price for the angel investor’s meddling in handling money.
When a start-up’s valuation is not clear, an angel may decide to take some equity but then if the amounts increase, there could be convertible debt or just a secured or unsecured loan for working capital. An investment instrument and associated agreements is a way to protect an investor as well as to balance risks on both sides. It is important for entrepreneurs to ultimately get to a point where the start-up becomes a business.
However, angels can turn into demons at any time. Entrepreneurs should be wary of getting angel investors on board and getting a few of them on board may be the way to de-risk individual evil actors.
ⓘ This article was first published on Entrepreneur.com. Considering its valuable for LAFFAZ’s readers, we republished it here.