What Angel Investors Don’t Want Entrepreneurs To Know

Cynthia Kocialski – Start-up Entrepreneurs’ Blog

Entrepreneurs often seek out angel investors looking for funding. Are they really from heaven? What do angel investors really want? How have the angels fared with their investments? Why has it been getting more difficult to attract angels to start-ups?

The New Hampshire Center for Venture Research released their annual report on angels. Here are some eye opening statistics:

For 2010, 66% of angel exits were acquisitions and 27% were bankruptcies. Only half of the 66% of acquisitions were profitable for angels and the profits ranged from 24% to 36%.  Overall, this means approximately one-third were a total loss, one-third were somewhat of a loss, and one-third made money, but the money makers didn’t cover the losses.
Where are the angels placing their bets? Angel investment in seed and early stage companies declined to 31%. They prefer start-ups in the expansion stage. This translates into wanting less risk and an already working business model that is poised to scale.  Mostly angels invested in Internet and software start-ups.
Have start-ups lived up the national promise of leading the way of leading the way out of the lackluster recession? The reports show that last year, start-ups created 370,000 jobs with an average of 6 new jobs per company. In comparison, the number of unemployed is currently 13.5 million individuals.

This begs the question of where are entrepreneurs with not much more than an idea getting their early money. Fenwick and West released their angel survey for Silicon Valley and Seattle in April, and according to the report, venture capitalists are providing funding for 24% of the these start-ups, seed- stage funds account for 45% of funding, and the rest was angel investors. Of course, many more are self-funded or bootstrapped.

A large angel financing is considered to be upwards of $1 million, most are much smaller amounts. The smaller the financing, the more likely convertible debt was used, whereas, the larger financings were more likely to be preferred equity transactions.

Who are angels? Some of the angels are the likes of Bill Gates and Michael Dell, most are not. Many are local business people or independent professionals. While they have money to invest in fledgling companies, they don’t have so much money that they can throw caution to the wind and take a true gambler’s odds with their investment. Venture capitalists are fund managers and as such, are far more likely to swing for the fences than angels.

What do angels want?

Angels want as-soon-as-possible exits. They prefer M&A’s. They want the total investment to be kept under $5 million.  Many don’t want to get involved with the larger venture capitalists because this ultimately may mean their share gets diluted down to next to nothing. They rather get involved with other angels.

My own personal experience reveals the same as these reports.  I use a service that is offered by a local company run by the former president of Sandhill Angels, and revenue at his business for the past few years has been down 60% from the peak.  Another angel group told me angels usually lose the most money in the first three years of becoming an angel, even with the support and guidance of an angel group, and overall only the top angel groups are profitable, most yield results slightly below breakeven.  And yet another told me angel groups were much more of a “social” club than anything else. I can say that angels always want to tell me how many investments they’ve made in recent years, but no one ever wants to tell me what the results were.  Contacts, who work with small companies across the country, paint the same picture of the angel’s behavior in recent years: they want to invest in late stage companies, those ready to scale, those with revenue (and preferably $1 million to $2 million in sales).

Just the other day, I was at a conference and one of the seed stage funds sent a representative to root out possible start-up investments. The presentation ended up in a heated discussion.  Why? Because they were addressing a crowd of 30-something professionals, saying they wanted entrepreneurs but didn’t want them to collect any salary for several years.  I’ve heard this from several seed stage funds and angels, and it’s what is being referred to as “Ramen Noodle” founders, young entrepreneurs capable of living off of air (or Mom and dad) for years to come. In fact, one of the top seed funds in the valley told me “we invest in young men and women, those people like we’d hoped our kids would have become, but didn’t.”

The bottom line is angels want to make money. Since it’s truly their money that’s being invested and most don’t come from the ranks of the super rich,  they often don’t act like they’re from heaven after all.

And while the term angel investor dates back to those providing financing to Broadway show productions, I wonder why the term “angel” was used at all. In contrast, why accepting funding from a venture capitalist is considered doing business with the “devil”?  I’m sure there must be a good story behind the usage of these words.

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