The same venture event that I wrote about a few days ago had a panel of investors and entrepreneurs that addressed the question "are some angel investors devils in disguise?" The local paper wrote up the event here. The event is summed up nicely in this quote:
A match with the wrong angel can become "a distraction, and an expensive one at times," said Dale J. Boden, president and chief executive of BF Capital, a Louisville private investment firm. Sometimes the investor becomes a disruptive back-seat driver.
The most interesting thing to me was the discussion about the financial conditions that angels expect to see in entrepreneurs. Many entrepreneurs look for angel money because they don't want to risk their own capital. According to the panel, that usually tells angels that you don't have faith in the business. They like to see entrepreneurs who are overleveraged.
Entrepreneurs looking for angel money need to realize they also are being evaluated. Part of the investor's focus will be on how much money the founder has in the startup.
"It's surprising how many people don't put their own money into it," Fischer said. "For a real entrepreneur, you expect them to be leveraged up to the hilt."
"We like to see three or four credit cards maxed out," Boden said. Fear of financial failure "tends to be a great motivator."
All the more reason to pick your angel well. If you take on angel investment, now your financial future depends on them too. If you really are leveraged to the hilt, you don't want an angel making trouble that distracts you from running your business.
Greg Fischer, one of the angel investors on the panel, analyzed the 22 deals he has done as an angel investor. For most of those deals, he co-invested with other angels and sometimes VCs. He said that in 13 of the 22 deals there were no problems. In 3 of the 22 deals, the venture capitalists were the problem. In 6 of the 22 deals, the founders were the problem. Only one out of the 22 deals had a problem angel investor. (Yes, they add up to 23. My assumption is that one of the deals had two bad participants)
The lesson to take from this is that you, the entrepreneur, are more likely to be the problem than your angel investors. The matches much of the other talk I've heard locally about some entrepreneurs who are apparently ego-centric drama queens. Let's face it – you have to have confidence to go out on your own and risk financial failure when the odds are 4 to 1 against you. Of course you will get some ego-driven people in that kind of situation.
So what was the lesson from all this? The nature of angel investing means that it is unlikely the angel will be the problem. Angels tend to be hands-off, and they invest for more reasons than just financial return. Still, you can't afford to have a devil making trouble for your startup. Put in the time it takes to find the good angels – the ones that see things the way you do. Startups have enough issues to deal with. Don't let a bad angel be your downfall.