Just as angel investors try to pick the best startups to put their money into, founders should do due diligence to choose the right angel investors for their companies. Because there is more to the founder-angel investor relationship than just wiring money in return for some equity in the company. A good chemistry between those two can improve the prospects of the startup.
Here is a closer look at what angel investors bring to the table:
Running the day-to-day operations of a startup is different from having an idea and building an MVP. The daily tasks related to business, engineering, human resources, accounting, and networking aspects of a startup can be overwhelming for founders. As a founder, you have to make numerous decisions at a frenetic pace and, most of the time, on your own. Some of the decisions may involve major trade-offs; others might be about whether to stay the course or pivot. Sometimes you feel like you are at a fork in the road multiple times a day. That's when having someone you can bounce ideas off comes in handy. An angel investor is the ideal person for that. Just by making himself available for a chat or replying to founder emails without delay, an angel investor might make the decision-making process easier for a founder.
Having a stake in the company and caring about the long-term prospects of their investments, angel investors like to see solid foundations laid down at a startup. Doing this requires getting priorities straight. Prioritization is the name of the game early on in a startup's life. It not only defines how you will allocate your scarce resources but also has a significant impact on the company culture. Actually, culture is, in a sense, what you prioritize at your organization. By coaching founders about which metrics to prioritize and where to channel the limited resources at hand, an angel investor can ensure that the right values will be in place.
An angel investor’s phonebook is a bigger asset to a startup than his checkbook can ever be. Money can be raised from friends and family, but you need the right connections to hire the right people, receive good press or talk to the big shots of the industry.
Hiring is one of the trickiest tasks you will have to deal with as a founder: When you will hire or fire people can define the trajectory of your startup. Hire too many people too soon, and the cash burn and HR problems will start threatening your viability. Delay the necessary hiring or firing decisions for too long, and you will find yourself in trouble. Angel investors can help founders with such critical decisions.
Recruitment is a fairly straightforward process in the early stages of a startup. Friends from previous jobs or their friends are natural candidates for job openings at the beginning. But finding the right person to lead a 50-strong engineering team will not be that easy. Very few entrepreneurs have a phonebook containing suitable names to oversee the operations of a company with a multi-million dollar ARR. A well-connected angel investor can make a difference here by tapping into his network to suggest names and even planning a rigorous screening process to pick the best candidates. Startup founders cannot afford to pass on contributions like that.
Another problematic area for founders is distribution. Generating interest in the product, getting good press, connecting with podcast hosts, or even something as simple as distributing an opinion piece on the founder's vision for the industry and the company can be formidable challenges at the outset. Leaning on contacts, an angel investor can grease the wheels and help with product and idea distribution.
Bringing together founders with other entrepreneurs, professionals, and investors is when angel investors truly shine. For example, Ron Conway takes pride in introducing founders to his contacts at Apple, Facebook, Twitter, and Google. Having helped these tech giants recruit and take off in their early years, Conway can leverage his relationships with people he placed in those and ask for a favor or two.
What founders lack at an early-stage startup is not somebody they can fool around with and spend some of the money they raised. They don't need more friends as they probably have enough of them. What they truly need is someone—preferably with knowledge about the technical or business side of things—capable of giving them a reality check at times.
It is easy to be complacent as a startup founder. The occasional spike in traction seen from time to time, praise received during a demo, or simply having raised money can count as success for some founders. The team might be celebrating nailing the product-market fit when they didn't, and somebody has to tell them that it's a false alarm. They could be banking on protection from a moat when there is none. Even worse, problems between the co-founders might be getting out of hand.
When complacency and procrastination set in and problems are left to fester, someone with a stake in the startup has to step in and steer the ship in the right direction. An angel investor can bring up the hard truths the product team tries to avoid. Having been through similar stuff before as an investor and probably a founder, an angel investor can help keep the focus on the big prize. He can drill into a founder that, in order to raise a Series A, a feel-good story or a fancy plan won't be enough to raise a Series A, and tangible results will be needed.
Another common case during a startup's early stages is the panic that begins when the initial plan proves ineffective. A founder's typical reaction in such a situation is to either increase marketing spending or ship new features to make the product more attractive to people. Both these steps are bound to fail: The former will only increase cash burn as the newcomers, too, will churn since marketing doesn't solve what fundamentally is wrong with the product. The latter action will also turn out to be futile because, at that point, you probably don't know who you are building those features for. Developing features for an ambiguous customer persona is a waste of resources.
At moments like these, somebody has to be the voice of reason or the adult in the room, advise against doing the sexy thing, and instead, insist on getting the fundamentals right first. An experienced angel investor knows that the right thing to do when the initial plan fails is to start testing hypotheses until you find the product-market fit.
Although the amount invested by an investor and the valuation naturally dominate the discussions around founders and angel investors, figures do not tell everything. Founders would be well-advised to consider factors other than valuation when evaluating angel investors. In the right situation, an experienced, well-connected angel investor can be an immense asset to a startup, helping fill skills gaps, driving press exposure, or bringing in new investors. Making the right decision on an angel investor can save a founder from having to make many tough decisions down the road.