Extracting More Than Cash From Your Angel Investors


A version of this article previously appeared on Forbes.

In order to extract value beyond your Angel investors' cash, you must first assess three important parameters: (i) the relative strength of their personal brand, (ii) their ability to add operational value, and (iii) the amount of care and feeding they will demand from you.

Angel investors are often the sole source of funding for startups at the critical pre-launch stage. Ideally, such early-stage investors should have the experiences and motivation to help their ventures establish a sustainable business model, rather than simply writing a check before moving on to their next investment.

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Four Common Angel Archetypes

There are a variety of factors entrepreneurs should consider when evaluating a potential early-stage investor. Three criteria that impact an investor’s ability to add non-monetary value to your venture are: Brand, Tactical Impact and Overhead. Four distinct types of Angels emerge when they are evaluated per these parameters, as shown below.

Brand - Value on this axis is delivered by mere association with the Angel, in the form of social proof. Angels with a strong brand offer credibility and validation that influences other constituents of the startup ecosystem. Even if an Angel with a highly-visible, well respected brand never lifts a finger on your behalf after their cash hits your balance sheet, their association with your venture will continue to generate value, through (and potentially beyond), your first institutional funding round.

Warning: the more high profile and prolific an investor, the greater the demands on her time and thus the lower likelihood she will consistently be available to add value when you call upon her. Thus, even well-intentioned High-Profile Investors can inadvertently become disengaged over time.

Overhead - The second measure of an Angel's relative worth assesses the amount of energy the investor extracts from your venture. Energy can be drained by gratuitous updates, lengthy and unhelpful "strategy" conversations and time spent tracking down the investor for routine tasks, such as coordinating schedules or obtaining signatures.

Startup Founders always have more things to do than time to do them, so the last thing they need is an Angel who draws upon their time and energy and offers little in return beyond cash. Steer clear of High-Overhead Angels, whether they be interfering obstructionists or perpetually unavailable phantoms.

Impact - In this context, value-added is defined as worthwhile actions performed by an Angel on behalf of your venture, such as: introductions, executive recruiting, product feedback and strategic advice.

The Elusive Engaged, High-Profile Investor

An Angel who judiciously adds value, provides reputational validation and is a pleasure to interact with is ideal. In contrast, Hands-on Clueless Investors should be avoided, unless your company will imminently fail without their money and you have no other viable sources of cash. In such instances, take their money and work diligently to convert them into a disengaged investor.

Prioritize the remaining boxes as you see fit, depending on the particular needs of your venture. For example, if your team lacks solid UI/UX talent, a Hands-on Former Operator who shores up this weakness will be a great fit. Alternatively, if you have plenty of Engaged Angels, a Disengaged High-Profile Angel might be optimum.

Painfully Diligent Investors

Even though it can be painful and frustrating, Engaged and Hands-on investors may require to you expend significant energy helping them assess the veracity of your venture's prospects. This process is additive for all concerned when an informed investor appropriately challenges the entrepreneur's point of view regarding substantive issues, such as: positioning visa-vi competitors, the size and accessibility of proposed target markets, pricing mechanics, market trends and emerging technologies.

If an Angel's diligence focuses on a checklist of legal and administrative issues, you are likely dealing with a Clueless Investor. In such cases, the process will require little of your time or attention. Correspondingly, minimal value will result, as the investor will lack the necessary grounding of your business to offer meaningful input.

Yep, Sounds Good

Implicitly represented in the above matrix is a fifth Angel type that abides by the "Sounds Good" school of investing. If the pitch sounds good, they are "in." This approach allows such investors to rapidly deploy and diversity their capital.

The obvious downside of this strategy is that most pitches from experienced entrepreneurs "sound good." It is not until time and attention are applied to the entrepreneur's underlying assumptions that potential pitfalls become evident.

Similar to Clueless Investors who perform perfunctory diligence, the lack of thoughtful contemplation from "Sounds Good" investors often leaves them with an incomplete and inaccurate understanding of your business. Thus, absent a strong personal brand, a Sounds Good investor usually offers little value beyond their checkbook.

The Beauty Of Low Expectations

Without question, the more value you can derive from your Angel investors, the better. However, entrepreneurs frequently over-estimate the impact an investor will have on their venture. With this in mind, if you expect little value beyond your investors' cash, you will seldom be disappointed.

Note: This entry was based on this Quora answer posted by my brilliant Partner at Rincon, Jim Andelman.

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet about the Clueless Angel Investors or tell you about that killer burrito I just ate. 

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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