Interest in Angel Investing from both investors and the entrepreneurs who need the money is at an all-time high. Many of the participants from both camps are relative neophytes at the process.
Here is a list of common pitfalls that can plague both Angels and Entrepreneurs.
Miss-Matched Expectations & Goal Alignment: Angel investing is a type of marriage and we all are aware of the poor statistics related to marriage success rates. The following bullet points mostly reference unaligned expectations by all parties involved.
Risk Appetite: If the Entrepreneur’s company is little more than an idea with zero to little sales, the capital received from the Angel needs to be “flyer” money- i.e. if it doesn’t come back, no one’s life is ruined. What people think their risk appetite is and what they can really stomach (a 50% stock portfolio drop in one year for example) needs to be fleshed out in black and white.
Management Styles: Does the Entrepreneur just want the capital and then be left alone? Does the Angel’s capital come with the expectation of being part of every decision big or small? I know of numerous examples where Angels and their Entrepreneurs are NO longer on speaking terms because the right questions and leadership parameters did not get asked before funding. An honest review done by a competent third party with no skin in the game is highly recommended.
Exit Strategy (or lack thereof): When is the day a company should start Exit Planning? The day the company is created. Bankers Advocate is in the Exit Strategy business and we see time and time again that a concise and flexible plan needs created and constantly updated. Time is not your friend and all contingencies need to be discussed. If the Entrepreneur expects to run the company forever and the Angel Investor is expecting a liquidity event in 3-5 years that and other differences need to be worked out. A viable Exit plan that all stakeholders agree on needs formulated.
Single Investor or Angel Group? For the Entrepreneur to receive monies/expertise from a group versus an individual is highly desirable but not always doable. As they say, beggars can’t be choosers. However, the skill sets a group can bring and the group dynamics of multiple Angel’s can help temper the idiosyncrasies of a single investor.
Candid Answers to Tough Questions: This point is squarely directed at the Entrepreneur. You will be asked many tough, smart, and insightful questions. Your answer should never be a guess. I would recommend multiple roll-playing sessions with your advisers to fully vette your presentation. Audiences can tell when you are just winging it and all credibility is quickly lost.
In summation, both those in need of and the suppliers of capital need to ask honest and sometimes humbling questions of themselves. The right research done before the check is cashed can save a tremendous amount of grief and frustration later.