Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about
the pros and cons of angel investors. Let’s face it. Angel investors are going to be one
of the critical figures that you’re going to go after when it comes down to really needing
capital to getting that cash infusion so that you can continue to build and scale your business.
Now, there are pros, and there are cons on getting money from angel investors. In this
video today, we’re going to be covering what are all those pros, and what are all
those cons? So, with that being said, let’s get into it.
Angel investors, in a sense, what they are is individuals that are in a position of maybe
like a senior leadership role, or maybe they’re a successful entrepreneur that already did
an exit in the past, and they have the money to invest in early-stage companies. Those
are the people that ultimately invest anywhere between 5-10% of their portfolio into risky
investments, which are startups. Essentially, the term angel investor came back in the day
from those investors that were financing Broadway shows. They were not a good investment back
then, and that’s why they were called angels because that was money that they were giving,
and typically, the returns were not that great. In this case, it’s not an angel investor,
that individual that you see on LinkedIn with the “Angel Investor” title. Those are
going to be the ones that are going to make you work a lot for just $5,000 in terms of
an investment. The angel investors, at the end of the day, are those that are CEOs, that
are senior executives with a great salary, and they’re going to be investing in you
because they like your segment, because they understand it, because they are inspired by
your story, or because they are inspired by you. That’s why those angel investors make
those investments. They either do the investments directly, or
they make the investments via angel groups, which are associations or entities where all
those angels come together, and they invest essentially either all as a group, via perhaps
as a special-purpose vehicle, which is like an LLC, or perhaps via funds. Now, you see
many of those angel groups investing via a fund.
In terms of the cons of the angel investors, they’re always going to be that first stop
for startups. That’s going to be the first money that comes in after the friends and
family round, the people that love you, and that money that you’re going to be using
over the course of your seed financing cycle in order to get to the Series A, which is
the next round, where you have for the first time venture capital firms and other institutional
investors investing in your business. Now, the beauty here of angel investors is
that they are a very nice segue in order to get to those institutionals, and they can
also be very helpful specifically if they know your space, and if they can make perhaps
introductions around potential other investors, around distribution and business development
deals, and things of this nature where essentially it really helps you to move things forward
and to achieve your milestones faster and better versus if you were to do it on your
own. Next is that it’s really easy to raise money
from angel investors if you were to compare to perhaps institutional investors. The good
thing here about angel investors is that they’re investing their own money. We’re talking
about smaller checks. We’re talking about checks that range anywhere between, let’s
say, $5,000, the smaller checks, all the way to up even $50,000 if it’s angel investors.
Now, if it’s “super” angel investors, people that have more money like successfully
exited entrepreneurs that have sold their business, those have up to even $4 million
that they can put into companies, and they typically do that via family offices. But,
typically, the check ranges between $50,000 to $100,000 for these investors if we look
at the median average. But everything starts, really, at $5,000. Those are the smaller check
sizes. In essence, the good news here about the angels
is that it’s going to help you to get to where you want to go and get those introductions
to the people that you need. And since they’re investing their own money, there’s not going
to be heavy due diligence, going through different rounds of meeting with advisors of that VC,
or things like that, because you’re essentially dealing with individuals. That’s the good
thing about angel investors in which it is an easier and faster investment and less due
diligence versus if you were going to go, let’s say at a later round to an institutional
where there are different ways and different processes that they need to have in place
in order for them to make an investment in your business.
The next thing is that angels are really easy to work with. At the very early stage when
you’re at a seed-stage financing cycle, basically, what you’re going to see is that
you’re going to be iterating the product, the service, and trying to get it to product/market
fit, which is when it fits with the market, it covers that gap that is there, and then
the product starts flying off the shelves. That’s really where you want to get it,
but at this point, you’re testing a lot. The problem is if you were to get an institutional
investor like a venture capital firm, and you need to do a pivot, basically, it’s
going to be a turn-off for them. They’re potentially not going to make another investment
in your next round of financing, and that sends a negative signal to the market because
other people are going to be like, “Hold on. This investor has the money; they’re
not investing in this business, so there could be something wrong with the business, and
we’re absolutely not investing.” The good thing about an angel investor is
that they’re the complete opposite. If something is not working, they’re going to roll up
their sleeves, they’re going to help you in searching and finding that product/market
fit and getting it to the next level or the next financing cycle, which is going to be
the Series A in this type of lifecycle of a business, and when those capital firms would
come in. At that point, you have the business model figured out.
So, that’s the good part about the angel investors is that they’re easy to work with.
They’re going to be more understanding, and they’re going to have more patience
when it comes to understanding how to get to your customers and give them what they
need. In terms of the disadvantages of the angel
investors is that we’re talking about small check sizes. Again, going back to what I was
saying earlier, it’s going to be on the smaller scale, so versus a venture capital
firm that is going to give you anywhere between $2 million and let’s say $10 million if
you were to do a Series A. On a seed round where you’re going for angel investors,
what we’re looking at is anywhere between $5,000 to maybe like $100,000 on average.
Obviously, you have the exception where it goes over $100,000, but you’re going to
see anything of $100,000 and under. So, with that being said, you’re going to
need a lot of angel investors if you want to raise a big amount. For that reason, your
cap table may become a little bit of a mess, so you want to be very careful with that,
and if it comes to that point, one thing that you could use is a special-purpose vehicle
where you group all the investors into one single entity and add one managing member
that would represent all those investors. And if you need to do another round of financing
or an acquisition, rather than chasing all those dozens of investors, you only go after
the managing member. Again, those SPVs, you can group them up to 99 individuals. So, it’s
a fantastic way to keep your own cap table and the way that you’re recording who is
investing in what and how you’re chasing for signatures to make it clean and organized.
The next thing that you want to keep in mind here in terms of the cons is that it’s very
hard to find them. As I was mentioning, the angel investor, the best ones, they’re not
going to be on LinkedIn with that title of “Angel Investors.” Those are going to
be individuals that essentially you’re going to have to be introduced by someone else,
that maybe someone is going to tell you about that maybe you may be able to find something
online via websites like PitchBook or CrunchBase, but it’s very difficult to find them if
you were to compare that with, for example, the venture capital firms where they really
like to be on the press, where they want to announce the companies that they’re investing
in. Another tool that you could use for finding
angels is AngelList. AngelList is a great universe that they’ve created there where
they group all these investors into one single place. Now, the tough thing about AngelList
is that it’s very difficult to be able to connect with people that you don’t know,
so it’s more about signaling and people that you have in common versus being able
to reach out cold and things like that. Maybe a place where you can start is CrunchBase,
where some of your direct and indirect competitors have been receiving the money. In many instances,
CrunchBase provides investors. So what you will want to do here is grab founders of portfolio
companies meaning that they have received money from those investors and ultimately
ask those founders for an introduction to that specific angel investor that you want
to target. The other disadvantage is giving up equity
and control. Obviously, here, you’re going to be raising on an idea for the most part.
You’re going to be raising on possibilities. You’re going to be raising on the future.
In many instances, those investors are going to ask for significant amounts of equity upfront.
The problem here, which is something that you don’t encounter as you continue to go
forward is that on future rounds of financing, you already have something more tangible that
the investor can look, that the investor can feel, and essentially, it’s going to be
more based on historicals where the business is already up and running.
You have to be prepared to give a significant amount of equity, but again, you need to keep
in mind the rule of thumb, and that is that it doesn’t matter. The financing cycle that
you’re in, you’re never going to dilute yourself by more than 20% to 25%. Otherwise,
it’s going to be very difficult for you to have a good exit, yourself as a founder,
not as a company itself because you need to think what’s going to be your founder exit
down the line, and for that, you need to really understand what that may look like today if
you were to look into the future and reverse-back engineer the process to where you are today.
The next disadvantage is that angel investors are not as experienced, sophisticated, or
organized as the venture capital firms would be or any other institutional investor. Again,
those angel investors are investing for fun. They’re investing on the side. They’re
investing a small percentage of their own money, and for that reason, they’re not
professionals, meaning full-time at it for the most part.
These are not going to be people that are going to be on top of it. They’re not going
to be providing that level of sophistication that maybe a venture firm is going to bring
where they bring a network, and so forth. In some instances, I think that you could
balance that disadvantage by maybe getting an angel investor that is a successful entrepreneur,
that in the past has built a business that is similar to yours where they bring their
own networks. But for the most part, what you can expect here is that angel investors
are not going to bring that level of value that perhaps you may be getting from a venture
capital firm. With that being said, hopefully, you liked
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