Its Monday again, and we’re back on the treadmill. Many of us will be sat at our desks, wondering how we found the energy to make the commute, leaving our families and loved ones behind, when the weekend didn’t allow us half the time to do all the things we had planned to do.
There are a few pretty obvious reasons why we did. Money. Loyalty to our team mates. Because what we do at work actually excites us. But what about an angel investor? These people have been successful enough at whatever they do for a living to be able to pursue other interests. They want their money to work hard for them, and they don’t especially like to lose. So wouldn’t the best idea for them simply be to keep doing what they are doing? If it made them their first million, it’s a pretty good bet it will make them a second, third, fourth, right? Maybe, but there’s a little more to it than that.
When it comes to Angel investing, we always talk about the founder, searching for backers, as the inspirational one, the one building a brave new world, but in order for them to do that, somebody had to bob and weave and duck and dive and come up with a spare couple of million, above and beyond the demands of their day to day lives, nearest and dearest, houses, transport, and taxes, to make it all happen. Spare a thought for the investor.
It’s not always easy for the moneyed and the moneyless to form an effective working relationship, but that is what, in the case of start-up funding, both parties are trying to achieve. There is bound to be mutual suspicion; the investor is just trying to tease out good ideas with the promise of extra funding as part of their relentless pursuit of profits. The founder is a serial failure using smoke and mirrors to persuade the less knowledgeable that they are onto something. Neither is true, usually, but when times get tough, it’s all too easy to fall back on stereotypes.
In reality the investor is working long, inconvenient hours; going to events, networking, sitting in on board meetings, resolving disputes, giving their money away. Wherever they go people want to bend their ear, twist their arm, and feel their pockets. Helping people is often not all that easy. Ever tried to give a beggar a cup of hot soup and a sandwich when they’ve asked you for cold, hard cash. The results can be messy.
It’s an extreme example, obviously, but worth bearing in mind that an investor is not in the business of giving people what they want, they are in the business of getting what they want. Here are the 5 reasons we believe investors make investments in start-up businesses.
Think of the Bill and Melinda gates foundation; or Warren Buffet’s promise to give 99% of his fortune away to charitable causes before he dies. There are plenty of people whose primary motivation in life is to “give something back” and many of them are materially well off. This is true of some angel investors. They may have detailed knowledge of the sector they are helping to fund, they may be trying to implement a formula for wealth distribution that they believe to be tried and tested and equal and fair, or they may be motivated by a firm belief in the power of a particular industry to make a positive difference to people’s lives. In short, these types of investors are making calls about how things ought to be and putting their money where their mouths are. They are worth listening to because of who they are and what they know, so pay close attention to their careers to date and make sure you can see how your interests align with theirs. It will be a very good litmus test for your business.
Some angels are less interested in “giving something back” because they have less to give, they are still in the business of accumulating their wealth. They possibly see start-up investing as a way to diversify their portfolio, gain valuable exposure to other industries or modes of working, and to take control of the destiny of a company whilst it is still at an early stage. They are likely to be hands on in a different way to the altruist, more nervous and jumpy perhaps, with more to lose. They may be taking a gamble by investing, risking their futures financially. They may be more dependent on a founder’s sound judgment and less controlling, but be more demanding and less useful to a founder as a result. Then again, they will have plenty of energy and dynamism. It’s our opinion that you should possibly expect more of a roller coaster ride from a profit chasing angel.
- Tax efficiency
Some investors simply want to find an alternative to paying large tax bills. They may be investing through an intermediary, a wealth manager, or IFA for example, and taking their advice. They may not care a fig for what your business is trying to achieve, because they know that their downside risk is capped at 70% of their investment, the same amount they would have lost to the taxman anyway (simplistically true of EIS and SEIS investment schemes).
Clearly they won’t invest without completing some due diligence, but they are less likely to sit on your board, provide you with contacts or expect to be acting as a mentor. They may, however, be asking others to do this for you on their behalf. If an angel is investing with you for reasons of tax efficiency, it may be best for you if they are doing so through a fund, as the fund manager will try to provide you with the resources that you require. Having said that, an EIS or SEIS investor will be on board for at least 3 years as that is the period shares must be held for in order to qualify for the tax breaks, so they are bound to take an interest, but it may not be wise to expect intensive mentorship from a tax efficient investor.
They say that passion is the key ingredient when it comes to start-up success, so is the passionate investor therefore the one you most want to be with? They may be disruptive, demanding, and keep you awake at night with phone calls and requests to open the books, but they get results, and they make things happen.
There could be a downside, however. A passionate investor will be driven and have strong vision, meaning that a difference of opinion may not be to their liking. Equally, it will not do to sit back and let a passionate investor do their thing; they will expect you to match their energy levels. Not seeing eye-to-eye with a passionate angel could be problematic, so before you climb into bed with this kind of character ask yourself if you are ready to fight tooth and nail for the integrity of your company. If you aren’t, you might feel overrun, and organic growth rather than an injection of rocket fuel may be a better path for you to follow. Finally, make sure this person is passionate for the right reasons, Are they trying to make up for something, fighting an unseen battle, or trying to make a point to their influential friends. Don’t let them use you and your company as a plaything, or as part of a campaign, if you can help it.
An investor looking to become more influential can be a good thing. They may be the empire building type, and by joining them, you might find you have unparalleled access to resources such as staff, mentors, funding and contacts. Perhaps, they anticipated that your company may challenge their supremacy in certain key strategic areas, which is why they are prepared to invest. They may be so much further on in their journey than you are that you are able to act with an almost completely free hand, and develop every aspect of your start-up exactly as you had always wanted. But ultimately, you have a boss, not a co-conspirator.
An influential investor can be dangerous. You may find your company swallowed up into a larger enterprise, your ability to act independently constrained by the values of a conglomerate; it could be a belittling experience, and those with more influence than you have may decide that they do not need you on board, particularly hard on you if you are used to feeling like a big fish in a small pond.
Play your cards right politically, however, and you may become a powerful person who wields serious influence. This type of investment is categorically more Death Star than Rebel Alliance, however, not for the Han Solo’s amongst us. Don’t expect R2D2 and Chewy to approve.
We hope this has been of some help to you, reader, whether you are a founder, serial entrepreneur, first time investor or VC kingpin. We’d welcome your comments below. Mind you, look at the clock, it’s almost home time!