Accredited Investors Are Not Necessarily Professional Investors
It goes without saying that the startup fundraising process is long, brutal, and ego crushing. Some people are better than others when it comes to raising capital, but it is never an easy process. What you quickly find however is that some sources of money are a little less daunted to come by than others.
Many of the stories you often hear about are targeted at bad VC behavior. There is a lot of carping that the process is broken from the cutthroat tactics used to the aloof meetings to the secretive dealings. While working with VC’s can be maddening, you know what you are expecting when you start the process. There is a modus operandi in how most venture capital firms function. There is plenty written on various blogs and in books about the process. You start to get this rhythm once you have had enough conversations across a number of VC associates and partners.
Working with angel investors is another story completely. Until Congress deems otherwise (aka JOBS Act), a person has to be an accredited investor in order to invest in private companies. These potential angel investors run the gamut of financial professionals, general contractors, small business owners, serial tech entrepreneurs, lawyers, celebrities, and the like. And while most of these folks have a lot of money and have had a track record of professional success, none of them have the foggiest notion of what startup investing is all about.
Being an accredited investor does not make someone a knowledgeable, professional, and rational investor. Even people that have worked in the financial industry have little idea of what early stage startups seek or how the funding process works. This is not because people are dumb or lazy, but like any endeavor, there is a basic foundation of knowledge that needs to be attained before becoming competent.
With knowledge and understanding also comes professionalism. By understanding the dynamics and needs of startup entrepreneurs, investors tend to behave and operate with a more structured and measured approach. This is not always the case in the angel investor crowd however. With VC’s and even to a lesser extend in formal angel groups, the socialization of groups evens out some of the more egregious and outlandish behavior of individual investors. There are things people would never dream of doing in the presence of a group that gets a pass when they are left to their own devices.
Much of the seemingly irrational angel behavior boils down to the fact that they are playing with their own money. Angels are for the most part lone wolf investors. It is not some fund or another person’s money. Regardless of how much money and investor may have, there is a higher level of emotional attachment that comes with investing one’s own cash. They have no fiduciary responsibility. They do not have to fund anything or fund something according to a timeline. They like to hold onto their money for as long as possible.
Besides emotion however is the fact that the cash may not be as liquid as it appears. Angels may have the money, but it is tied into their own business fortunes, life choices, and family situations. That is why I say “seemingly irrational” because to the entrepreneur, it appears that their potential hard-circled investor was a major flake or fraud. In my previous startup, I lost out on potential funding because one investor went bankrupt due to the 2008 crash, another investor’s wife put the kibosh on investing, and another had a serious medical emergency hit his family. All were certainly valid reasons for dropping funding, but none of this made the process hurt any less.
This is little comfort for entrepreneurs however. In order to avoid disappointment, it is better to seek funding from folks that have some experience and track record in angel investing. You can check that out easily enough on sites like AngelList or Gust. I also tend to recommend avoiding funding from personal connections such as friends and family if possible which are akin to accepting dumb money offers from folks that have no experience in angel investing and no knowledge about your idea and market. At the very least, make sure you have a strong pipeline of committed investors to cover those investors that drop out in the last hour.
The best thing that entrepreneurs can do though is to understand their potential investors. Understand whether an investor has made early stage startup investments in the past, the type of deals he/she has signed, the level of funding provided, and the process for making a decision. Also understand the investor’s background and professional experience. Lastly, and most importantly, get to know the investor better by keeping in regular contact. By building a relationship and having an open going communication, you minimize surprises and strengthen the likelihood of getting the deal signed and the cash delivered.
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