There are many benefits to having angel investors.
You get capital + expertise + a relevant network, in the best cases. Angel investors can also become your best ambassadors and supporters. How awesome is that?
Startup-investor relationships can, however, turn very sour if you get the wrong ones on board.
Watch out! Here is what can happen:
- Control loss: investors may want to influence the business’s direction.
- Giving up a large portion of ownership. Some investors are greedy. To get a higher stake, they can push for a low valuation. They can also ask for non-dilution clauses which will cause you issues with future investors.
- The decision-making process may change: you may need to take their input and feedback into account.
- Pressure to deliver returns and growth at any cost. Investors are looking to make a return on their investment. That´s why they invest. They can put pressure on the founder and the business to perform financially. And if things go wrong, guess who takes the blame?
- Pressure to sell too early: investors may want to exit their investment at some point, which can put pressure on the business to sell or go public.
- Potential for misalignment: investors may have different expectations and agendas than the founders, which can lead to frustration and conflicts.
- Risk of losing the company’s culture: they may want to implement changes that may not align with the company’s culture, values, or mission.
- They can damage your reputation if you don’t comply with their advice.
- They can waste your time with many questions, reporting, and dialogues (even before investing, which is a huge 🚩).
- They can kick you out of your own company. Yep, I have seen that happen. In fact, I’ve seen all these scenarios play out.
Anyone can call themselves an angel investor…
Founders need to do their Due Diligence on potential investors ⚠️
How to make sure you are talking to the right one(s)?
Well, you can never be sure of anything (sorry to be a joy killer), but! There are some precautions we can take.
As Andy Chen, former CEO of Tidal (acquired by Jay Z) told my team 8 years ago when we approached him as a potential investor:
“I need to get into bed with you”.
Meaning 👉 Before investing, I need to get to know YOU ALL VERY WELL. And we were 5 on the team, so that was going to take some time.
So Andy joined us as an advisor, so we could get to know each other.
You can do the same: offer the potential investor to become an advisor. Work together.
Or add them to your newsletter for investors.
Or go have a drink with them, or several 🥂. Party with them.
Whatever works for you, find ways to get to know each other.
When I became an investor, I even went on holiday with some founders before investing in them. I needed to get to know them.
Here are a few questions you can ask investors to guide you in the process:
- What is your investment strategy?
- What is your process for due diligence?
- What is your timeline for making a decision?
- What is your experience investing in startups?
- What is the average size of your investments?
- Do you have the capacity to do follow-up investments? (Ideally, you want someone with deep pockets)
- Are there any restrictions on the use of funds?
- What other resources do you provide to startups? A relevant network? An office space? Expertise? Some free services?
- How do you identify potential investment opportunities?
- What kind of return do you expect from your investments?
- How much involvement do you plan to have in the startup?
- Why are you interested in investing?
- What did you do before starting to invest?
- How did you make your money?
- What is your story?
- What is your why?
Don´t be shy to ask any questions that you feel you need answers to.
Finally, some questions to ask yourself:
- How do I feel around them? (What´s your gut feeling telling you? Always follow your gut feeling)
- Do I like spending time with them? Would I want to work with them?
- What is their reputation?
- Do they understand what it is like to be a founder? Have they been a founder themselves?
- Do they have realistic expectations?
- Are we aligned on the expectations?
- Can I deliver what they expect?
- How would they react if things go wrong?
- Can I be vulnerable around them?
- Do I feel safe around them?
There is more:
Check their reputation 👉 talk to startups they invested in.
Don´t get investors “too early”, before you are crystal clear on your why and have demonstrated market validation.
‘Find out if you really need investors or if you just need cash 💸
Cash, you can also get from clients. This is how I love helping my clients. I help founders fundraise + increase their sales. So they are in a much better position when they are fundraising and negotiating with investors 💥💥💥
In February, I am hosting a group program for max 10 startups getting ready to fundraise and grow. Interested? Reach out 🚀
In the meantime, stay inspired!