Chapter 5 - Investor Management
IN THIS LESSON
How Angels Differ
Angel investors are different from venture capitalists (VCs) in many ways. Angels usually invest at an earlier stage in a start-up than VCs do. They usually invest between $25k and $100k as an individual angel, while VCs usually invest millions at a later stage to accelerate growth and market share gains. An angel usually can make an independent decision quickly, while VCs need to go through a more formal, slower-moving process with a group of people approving the investment. But out of all the differences, there is one difference that all start-up founders and CEO need to understand clearly, and it’s worth reiterating. Angel investors are always acquisition-focused, especially early on.
The issue is the exit strategy as well as the expectation for when to exit a company (timing) to make the money back that had been invested. VCs are more likely to stick with you for 7-10 years or even 15 years if you are growing and making money. VCs can also consider your company for an IPO if you meet the requirements. However, angels are not looking at 15 years for an exit. They’d prefer an acquisition of your company to get a positive return on the invested capital. They may want their money back, plus the capital gain, within three to five years.
The implication for you as an entrepreneur is that you may have to help arrange an exit for an angel who had invested in an early stage of your company. This is not necessarily the norm, but it can happen if the start-up takes too long to exit. The angel may go off to look for their own buyer, albeit they would need your permission if you drafted the documents correctly. While you may not want to say “no,” you also don’t want an investor that you don’t know. Sometimes a VC in a later round can take over the stake, or the partners of the VC will make a personal investment by buying out the angel. This is not necessarily the norm, but you need to be aware that this is a real possibility.
It would be helpful to you to understand the expectations of any potential angel investors in terms of when they prefer to exit the company. How committed to your company are they? Or are they just looking to make a quick buck in 18-24 months? The angel may tell you that he/she is in it for the long haul, but you should have a strategy in mind in case things change and the angel gets a sense of urgency to exit. You don’t want it to disrupt your business or force you to make a rash decision.
Fortunately, you don’t have to figure it out on your own; this is why you have mentors, a lead investor, trusted advisors, and other reliable resources. But it is good for you to go into deals with angel investors with eyes wide open that they will likely urge you to sell the company to another company sooner rather than later, so they can get their positive ROI and exit. If your dream is an IPO and you believe you can do it, you may want to think about practical exit strategies for early-stage angels. And even if you are aiming to be acquired, you want to be acquired by the right company that is a strategic fit. You will want to manage expectations. Keep the lines of communication open with the angels.