Selecting angel investors is a minefield: Play the game right and you’ll win. One wrong step and it’ll blow up in your face. But the dream of riches and Techcrunch-fame distracts many founders from the truth until it’s too late.
While the right investors will increase your startup’s success rates, the wrong ones will put your business on the wrong trajectory, waste your time, and even cause you to miss opportunities to raise more money. Here are the three least discussed mistakes founders make when selecting angel investors, strategies you can use to avoid them, and the two traits that will make you insanely appealing to the right angel investors.
Mistake #1: Picking investors who are infatuated with your idea
In the early days of your startup, you’re in love with your idea. You envision it disrupting industries and changing the world. It’s your newborn and you want everyone to love it. So when you do find angel investors who love your idea, you’re ecstatic! They understand and love your idea as much as you do, enough to give you cold, hard cash.
And that’s the worst thing possible. Because if you have to kill your idea and your angel investors don’t agree, they will make your life difficult.
You might have to kill your original idea and pivot for a range of reasons: you're solving a problem no one cares about, your business can't scale, you've burnt out, etc.
However, when angels are too emotionally invested in the original idea, they won’t allow you to do what's necessary. They’ll argue with you, and threaten to withhold money and support. They'd rather you limp along with a half-dead idea than cut your losses and move on.
How to avoid this mistake: Look for investors who love your team
Ask yourself: Are they investing because they believe in my idea (which may change)? Or are they investing because they believe in my team and me?
The best angel investors believe in teams more than ideas. In a way, they're like gamblers. They’re betting it's your team’s combination of skills and passion that will lead to success, not your idea. A strong team with a good idea will go further than a weak team with a great idea.
As a result, while good angel investors will like your idea and believe it has a chance to succeed, they're not attached to it. If your startup pivots, they’re able to embrace change.
Mistake #2: Wasting time on the wrong types of investors
There are many types of investors but here are two types you should avoid: “friend” investors and “wannabe” angel investors.
Investors have their own reasons for helping startups. Some want to make money, others like giving back. But some angel investors take it further than that: They want to be friends with you. They want to hang out with you, have drinks and dinners, and meet weekly. They'll have you jumping through hoops only to sign a tiny check months later.
For the same amount of time you spent with a friend investor, you could’ve pitched somebody capable of writing a six-figure check. Friend investors not only cost you opportunities but are a time sink: once, because you spent weeks raising so little and twice, because you’ll need to raise more money in the future. Every minute you spend fundraisingis a minute you’re not investing in your business.
Wannabe angel investor
The second type of angel investor you need to avoid? The wannabe angel investor. They want to be an angel for the exact same reason Shark Tank, a show where entrepreneurs pitch investors their ideas, is wildly successful:
“People love the vicarious thrill of being able to sit in judgment of someone else asking you for something. [...] It is even more compelling when it’s you they’re begging from. The biggest thrill in angel investing is that people flatter you and beg you for your resources, and this makes you feel powerful and respected. [emphasis added]” — Tucker Max, serial entrepreneur, ex-angel investor
No one is immune from the desire to feel powerful and respected. The difference, though, between a real and wannabe angel investor is that the former invests; the latter fantasizes about investing (and wastes your time).
How to avoid this mistake: Vet your angel investors
What distinguishes an angel investor from a wealthy person who wants to invest? Experience.
A real angel investor has ran, built, or helped startups in the past. More than their money, it’s their experience that makes them an invaluable advisor.
A wealthy person with cash to spare, on the other hand, lacks this experience. Their sole source of knowledge is breathless writeups on “sexy” startups and when they invest, they quickly become a liability. They don’t know how to make business decisions or remove themselves from day-to-day operations. If things don't go well, they panic, creating extra stress and mayhem.
The key to avoiding this nightmare? Be selective. Before you accept a single dollar from an investor, find out:
- When was the last time they made an investment?
- Do they have experience in the industry you’re in?
- How many investments have they made?
- How many failures have they had?
- Why are they investing?
Always vet your angel investor on their track record, not just their check book.
Mistake #3: Treating angel investors like miracle workers
Angel investors are people, not miracle workers. Yet, that’s exactly how many founders view them. The list of miracles founders expect from angel investors, includes, but isn’t limited to:
- Giving them a ton of money and helping them raise more money
- Connecting them to the press
- Getting them boatloads of customers
No one benefits from these hyped up expectations. Founders put too much faith into angels and come to blindly rely on their advice. This only encourages angels, who aren’t immune to power trips, to treat the businesses they invest in like they own them.
How to avoid this mistake: Take ownership of your success
Success isn’t a gift others give you; it’s what you and your team earn through your own efforts. You chose your team for their intelligence, passion, and ability to get shit done, right? Then, you already have the necessary ingredients for success. Don’t believe anything otherwise.
Taking ownership of your success goes hand in hand with maintaining reasonable expectation for angel investors. Founders overestimate what angel investors can do in the short-term but underestimate what they can do in the long-term.
Angels can’t make you rich but they can provide valuable introductions to future investors, business partners, or employees. They can’t solve all of your problems but can give you advice on how they solved similar issues. Once you understand what angels can and can’t do, you’re on the way to having a healthy relationship with your investors.
The 2 traits angel investors love to see in founders
Investing is a two-way street. You’re vetting angels but they’re also vetting you. So far, the emphasis has been on how you can avoid choosing the wrong investors but what do the best investors look for in founders? It all boils down to two things: self-awareness and the ability to execute.
Silicon Valley worships over-the-top entrepreneurs like Steve Jobs. What worked for Steve, however, won’t necessarily work for you. If you want to impress an angel, you need to be self-aware: secure and confident yet aware of your weaknesses.
Being self-aware makes you more coachable. While investor don’t expect you to have all of the answers, they want to see that you’re open to advice yet critical. Because at the end of the day, it’s up to you to make the hard choices. You can’t do that if you’re not able to consider new evidence and evaluate it.
Be able to execute
Not only do investors want to know who you are, but they want to know what you can do.
Part of being able to execute is understanding your business, or knowing which stages your business needs to reach to achieve its goals. Vision isn’t a substitute for a plan yet too many would-be founders act as though it is. Once you understand your business, the rest boils down to your ability to execute. Anyone can come up with a great idea but not everyone can to turn it into reality.
Sidestepping the minefield
As everyone competes to be the next Google or invest in the next Google, angel investing will continue to grow. Yet, mo’ money, mo’ problems.
Sometimes the dangers of angel investing are obvious: wannabe and friend investors. Other times, they come from mismanaged expectations, whether it’s angels who are too invested in an idea or founders who are too invested in what angels can do for them. That’s why vetting angel investors and having reasonable expectations is crucial. Clear communication cuts down on conflict and confusion.
If you want to stand out, sell investors the entire package—what your idea is and who you and your team are. Ideas may be continually dreamt up, changed, and scrapped but teams who are self-aware and able to execute are much harder to find. That’s why great angels invest in people, not just ideas.
Want to make fundraising an eaiser, more effective process? We've put together a fundraising guide to help you walk into every investor meeting with confidence and raise money on your own terms.
Podcast: What you don't know about angel investors
This post was inspired by a conversation Hiten Shah and Steli Efti had on their podcast, The Startup Chat. Listen to it here!
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