There comes a time when a startup may need to consider raising funding from angel investors. Particularly if it is too early for venture capital, it might be time to accept a small round of angel investment instead of continuing to bootstrap your growth.
However, before you wake up with an investment partner you’ll regret, consider the qualities that make an angel investor less than appealing. Knowing which bad characters to look out for now can save you all sorts of heartache further down the startup road.
Trust your instincts, do your research, don’t be afraid to dig deeply into their backgrounds, and consider whether each potential investor would make an acceptable long-term partner. Think of investors as spouses: If you wouldn’t want to have them in your life long-term, don’t jump into bed with them now.
If an entrepreneur is able to recognize these five characteristics, they can avoid the “morning after” regrets of accepting angel investment.
As a founder, the last thing you need is to have your chain yanked. A firm “no” is far better than “we’ll think about it” or “we’ll take it under advisement.”
If you feel like an angel is stringing you along, trust your gut. Chances are pretty good they are afraid of making a commitment until they know who else is joining the round. Beware of the sheep in angel’s clothing.
There are numerous angel investors that will only make a move when they know other high-profile investors are clamoring to get in. We’ll call them “sheepsters”: They’re more like sheep following the flock than tried and true angel investors that aren’t afraid to commit to a round even without knowing who else is investing.
If you can close your round with as many leaders and as few followers as possible, chances are good you’ll have an easier time raising a second round.
Beware of the angel investors that want to give you advice without any substantial knowledge of the space you’re in. Just because they’ve used a product or service similar to yours doesn’t mean they’re qualified to advise you on how to grow your startup, what features you need to add, or what pivots you should make.
If an angel investor is jumpy with their investment, you might want to consider running in the opposite direction. If they’re asking how soon they’ll get their investment back even before they’ve signed a term sheet, you know they’re going to be trouble once the funds are out of their grasp.
A quality investor knows that more often than not, timelines don’t run according to projected benchmarks and a second round of raising capital is more likely to happen than a fast exit or acquisition.
These are the angels that will only help with strings attached. They’ll invest if you make them a cofounder. They’ll make an introduction to another investor if you give them better terms than other investors.
Ethical angels don’t do this; now is your time to head for the hills in search of high-quality investors. Beware the angel investor that is preying on your need and naiveté. If you think their investment ethics make you queasy now, just wait till they think they have a say in how you run your company.
—Jenny Q. Ta is the founder and CEO of Sqeeqee, the first-of-its-kind social networthing™ site. Launched in 2014, the site gives individuals, businesses, celebrities, politicians, and nonprofit organizations the ability to monetize their profiles in unprecedented ways.