I love buzzwords. Synergy; disruptive; mission critical. They’re meaningless words that simultaneously animate the creator as they baffle the consumer. But, for the most part, they’re harmless. Until they’re not.
Angel investor is a buzzworthy term whose meaning has strayed far from its original intent. The outcome can have a negative impact on the careers of impressionable entrepreneurs, which is why it is important that the true meaning of the word is reclaimed and used accordingly.
Let me unpack some of the implications behind what I think is a loaded term.
Who is not an angel investor
To begin with the word angel immediately sets the power dynamic away from the entrepreneur. The person with money, i.e. the angel investor, is being associated with a supernatural being. Why? For the fact that this person has money to invest? Is that trait alone enough to raise someone beyond the realm of man into lofty angelic heights?
A lot of people have money. Isn’t how they earned their money a far better indicator of what type of investor they will be and if they are relevant to your startup?
For an early-stage company, there are many roadblocks on the path to success. Startup founders need an angel investor who can be called upon to help clear the way thereby accelerating the journey. A person with money, even someone who earned that money through their own hard work and natural talents, like a doctor, lawyer or professional athlete, might not be qualified to help a SaaS business scale. Money alone isn’t enough.
In fact, access to money isn’t always a good thing. Not all ideas are good and even good ideas might not equate to a profitable business. I know, as a society, we glorify tenacity. We love phrases like “success is simply holding on after others have let go.” But sometimes a ship is truly sinking. Receiving outside capital can be a false validator. Angel investment from an inexperienced investor can get you to sea or keep your boat afloat just long enough for you to drown.
Here’s an example that plays nicely with my above boat-themed metaphor: professional baseball player Torii Hunter invested $70,000 in an inflatable raft invention. The pitch was that in the case of a flood, a homeowner could inflate the raft thereby keeping a large piece of furniture dry.
As you may suspect this idea did not float. But it didn’t stop the entrepreneur from returning to Hunter asking for an additional $500,000 in investment. Hunter became enamored with a neat idea that didn’t translate to a great business. His angel investment only prolonged an inevitable outcome.
If the only value add you provide to an entrepreneur is money, you’re not an angel investor. You are though angel investing, i.e. there is an incredible act of faith in what you’re doing. Investing in early-stage companies is hard. Markets shift. People change. If you’re not living and breathing startups, technology trends, acquisitions, funding announcements, etc. then you might as well light your money on fire. Because even when you know all the best entrepreneurs, scaled a successful company and understand product-market fit, it is still hard. But at least when you have all of that going for you you’re not hoping for divine intervention, you can play a role in the outcome of a startup.
All of the above being said, if you have money you’re looking to invest in early stage companies you can become a true angel investor. I’ll explain that in a bit but first let me be clear: not all investment is created equal.
Nor are all angels created equal.
Remember, Satan was once an angel.
Which brings me to the next point on the term angel investor. Angel implies some type of benevolence on behalf of the investor. Our guardian angel, for example, is supposed to protect us as we navigate through life. An unsuspecting entrepreneur may believe that an angel investor has their best interest at heart. More often than not that is the case. There are instances, however, when investors like this early stage because it allows them to negotiate disproportionate equity. If that is your modus operandi as an investor, I would argue that is short-sighted but it is certainly your prerogative.
I would say though that you are not an angel investor. You’re a seed investor.
Who is an angel investor
Angel investors are people who have more to offer an entrepreneur than capital. They have relevant domain expertise in a field that is applicable to the startup they’re hoping to invest in. They understand that investment comes in many forms and that time and sweat are the two that will have the most impact.
They invest first in people and then in the startup. There are no shortage of good ideas out there. But there is a shortage of qualified entrepreneurs who can transform an idea into a reality. Angel investors nurture the next generation of entrepreneurs sharing the tips and tricks they’ve accumulated along the way. In some ways this is altruistic. Investing in a person means you are investing in their ultimate success. Startups fail in the short term. People generally succeed in the long term. If you’re playing the long game and believe in the entrepreneurs you’re investing in and your ability to ultimately make them succeed with their startup – even if it is their current startup – then you are an angel investor.
Angel investors obviously want to make money on their investment but they also understand that funding capable entrepreneurs who have the ability to grow businesses is also an investment in their local community. Arming these entrepreneurs with skills and money to gain real world experience is more impactful than writing a check to a local non-profit. As this entrepreneur succeeds, others within the community will rise alongside her. Good companies enrich communities, nurture careers and create wealth and legacy. Angel investors understand legacy is not measured in X% of return.
To better understand who are actual angel investors, another example will help. Opposite of Torii Hunter, there is Gil Penchina, who was in early at eBay which kickstarted his angel investing career. Gil is someone who understands that alongside the product, there is a person/team that needs investing and guidance. He says “They invest because they want to give back, are excited about the company or personally like the CEO. Sometimes they do it to learn to be a professional investor. There are a lot of ways people get non-economic payback–learning, networking and relationships.” when talking about Angels as a whole. Gil is looking for a different type of return when he invests.
He has the background knowledge to truly offer advice and gain the attention of entrepreneurs. He has been part of a startup that made it big. He has an investment background where there have been huge exits and then some tough losses. Having big wins and losses is all apart of a learning experience that a future entrepreneur can use for future advice.
Going back to defining an angel investor, angel investors are people who have more to offer an entrepreneur than capital, an exact reason Gil is in the investing game. He cares to help the entrepreneurs out there because new products and crazy ideas excite him, not making more money. He proves this because at the very end of an interview he did, he encourages entrepreneurs to reach out to him and his syndicate as he says, “Lastly, call us. If you are a serious entrepreneur we are here to help.”
Reviewing the above criteria, you’ll realize there aren’t as many true angel investors as we are led to believe. But there are many wonderful ones out there. And many of them have their own syndicates where they track their investment opportunities and open those up for other investors who maybe don’t have the time or background to provide the type of intimate support that helps ensure success. Some people may even call them modern venture capitalists changing an old-school and antiquated game. Find those syndicates and support them and you too will be playing a role as a true angel investor.