Finding the right angel

October 26, 2011

Good angel investors provide much more than capital.  Their networks and reputations can assist early stage companies with introductions to additional sources of financing, expertise, customers, and strategic partners.  It’s a long and difficult journey from idea to successful business, and entrepreneurs need partners who intuitively understand the right kind of support to offer over the long term during the inevitable challenges of building a business.

Angels have varied experiences, interests, strategies, reputations, and (in the case of angel groups) cultures.  Choosing the one who best fits requires as much rigor and thoughtfulness as any decision an entrepreneur makes.  In their October Knowledge Bank Scale Finance has published a “Roadmap to the Angel Investor Community” which divides angels into six categories:

  • Serial angels – perhaps the most productive type, often adds significant value to the companies in which they invest because they’ve done it before.
  • Tire kickers – the opposite of serial agents. They lack a genuine commitment to angel investing – at least at present – but they’re using the process as a means of educating themselves.
  • Trailblazer angels – experienced investors, typically partners in investment banks and venture capital firms who incubate deals too small for their firms while maintaining a link to their company for larger/later rounds.
  • Retired angels – business executives with enough personal capital to enable them to quit their jobs and “retire,” but who remain perfectly capable (and eager) to keep up in the so-called rat race.
  • Socially responsible angels – investors who are interested in doublebottom-line investing – that is, doing well by doing good.
  • Angel syndicates – groups who episodically invest together, joining their capital for more influence in more material deals.

The early-stage investors with whom we work (and many of them are also investors in BPV and work with our portfolio companies) may not always fit neatly into just one of these categories, but it is a useful way for entrepreneurs to think about a critical part of their ultimate success.  The author emphasizes this point with what he calls The Chaperone Rule: “(T)he odds of a startup company succeeding are significantly enhanced when the company has a chaperone from the get-go, an experienced guide on the trip from the embryo to the IPO.”

It’s not only the start-ups that benefit from angel involvement.  The prior success of these business-executives-turned-angels gives them both the tendency and the wherewithal to help support the next generation of high-growth companies that improve all our lives.  Forbes magazine discussed the critical role these successful business people (and their savings) play in fostering economic growth:

Saving is not the practice of the wealthy stashing money under plump mattresses. Rather, [those] savings are the funds [that allow] businesses access to the capital they need to grow. Firms use these funds to start or expand businesses and to buy machinery and other physical capital…

Because much of the savings that can drive investment and economic growth over time comes from the relatively small fraction of individuals in the top income tax bracket, permitting a tax increase on high-income earners would be a significant disincentive for savings…  This decision [to raise taxes on interest, dividends, and capital gains] will affect not only the near-term outlook for the economy but savings and investment decisions for the long-run as well. Consumer spending has its place, but it is not the answer to every economic question. By disparaging investment and in particular the taxpayers who account for most of that investment, Congress is biting the hand that feeds long-run economic growth.

With early stage activity at its lowest level since 1977 it’s imperative to support any and all politically feasible means to make the early stage piece of the entrepreneurial ecosystem more attractive:  tax relief to reduce the cost of capital and/or fund research, streamlined patent and FDA approval processes, and regulatory reform to relieve the deep uncertainty in the current business environment.

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