Updated July 24, 2011Doc Sheldon
Can an Angel Investor Bring Sunshine to a Rainy Day?
Angel investors are basically individuals with available funds to assist with early developmental and operational costs of start-ups (although angel groups are appearing, as well). Their investment presents high risk, as there may be no working prototype yet and the parties are still largely unknown to each other. They are buying a “pig in a poke”, so to speak.
Aside from the perception of marketability of the product, the angel will also have to consider the players. Their skills, capabilities, past history and to some extent, personality will enter into the equation. Most angels will want to be intimately involved with operations, at least early on, and if every decision is likely to degenerate into an argument because of personality clashes or lack of understanding, they may well decide to back away.
Because of the high risk involved in angel investing, most angels will want to see at least a 5X to 10X return on their money over a 5 year period. This can vary greatly, however, depending upon the angel’s exit strategy. The funding provided by an angel investor may be just a few thousand dollars or several hundred thousand. In some cases, it may even reach one or two million dollars.
Funding isn’t the only advantage to joining forces with an angel investor, however. Because they will nearly always be heavily involved in the day to day operations, you’ll also have the benefit of a mentor that is well versed in marketing, finance and operations. In reality, this is often of even greater importance than the money they bring to the table.
For the venture to have the greatest chance of success, it’s important that both parties are totally aware of the strengths and weaknesses of each other, the product and the market. The investor may be more versed in the vagaries of the market, although the entrepreneur will often be much more familiar with the specific niche.
That is why the partnership’s future will often hinge upon the transparency that each offers the other. Entrepreneurs tend to see only the positive possibilities (much like parents), while investors are, by nature, more objective (much like parole officers). Only by frank sharing and extensive communication will they maximize their venture’s potential.
I think the relationship between the entrepreneur and the angel investor is often much like that of newlyweds. There’s an exciting newness, given the expanded opportunities, yet there’s still some perceived negatives.
Kind of like knowing that sex-on-demand is in the offing, but still having that issue with the toilet seat being left up or the bathroom counter being full of new creams and devices.
And in both cases, of course, there’s a certain loss of freedom.
Still, an angel investor can bring some sunshine to an otherwise rainy day. 😉