A key advantage of angels is that as individuals, we can make decisions quicker and move faster than the average VC
As I wrote before in a previous article, an important thing I learnt about the angel and early-stage funding scene is that there is still lots of room for improvement among the investors in the region.
There has been talk about how the startup ecosystem is broken due to the lack of education of angel investors, and articles warning founders of types of angels investors that should be avoided.
While I am sure angels want the startups they invested in to succeed, they can unintentionally reduce the probability of their success through their actions. By learning from and speaking with many of the players in the startup ecosystem here, I have found 6 things angels can do to sabotage a startup’s success.
1. Taking too much equity
While it is natural that investors would look out for themselves and look to take as much ownership of the company as possible, it can actually have a negative effect on the startup in the long-run.
As mentioned previously, I have heard of stories where angels take as much as 50% of a startup’s equity. This brings about two main issues. First, there would be too little equity for VCs and other investors to entice them to participate in future rounds. Second, if founders own too little equity, they would not have enough incentive to do their best.
Both scenarios could potentially end badly for both angels and founders as they reduce the probability of the startup’s success. As mentioned before, a general guideline is for founders to give up 20-30% of equity in the earlier rounds.
2. Taking their time to respond to startups
A key advantage of angels is that as individuals, we can make decisions quicker and move faster than the average VC. Yet, many angels take their time when dealing with startups, such as when signing agreements and resolutions, transferring money, making soft commits, etc. They are slow to respond to what the startups need and prevent them from making business decisions.
As a result, you are preventing a startup to capitalise one of their biggest advantages over larger companies — speed.
3. Imposing complicated terms
Angel investors take a high amount of risk and it is natural we want to protect ourselves. However, by deciding to invest in a startup, it means we trust the founding team to do what is best for the business.
When angels include terms such as having startups to meet various conditions before disbursing the $$, it can affect the business’ ability to operate if it fails to meet their projected milestones; which is normal for early-stage startups.
Other examples include putting in complex preferences and rights for the angels, which can make for a messy cap table down the road. Similar to the point made above, this will reduce the willingness of VCs and other investors to participate in future rounds.
4. Hounding founders
As compared to the large listed companies around the world, startups do not have teams dedicated to investor relations which can prepare detailed investor reports or answer questions about the business regularly. Unfortunately, there are angels who constantly hound and question founders over every detail of the business.
While providing advice and seeking clarification is fine, there are angels who do it in an excessive manner. It is advisable not to do so as it will leave founders with less time and energy to focus on the core business as they are left to constantly manage the investors and their questions.
As a journey of a founder can be lonely and stressful, the last thing they need is for someone that is supposedly on the same boat to cause them further stress.
5. Providing advice by imagining themselves as the founder
I learnt about this when watching one of Y Combinator’s Angel Investing Course modules. Joe Kraus, Investment Partner of Google Ventures, mentioned that his biggest mistake as an angel was “putting himself in the shoes of a founder and imagining what he would have done with the business instead of looking from the founder’s point of view.”
This can be a mistake as strong founders tend to do things that are radically different from what most people would do. Thus, while it is good to provide suggestions or to share personal experiences, it could be counterproductive to expect founders to execute based on your advice alone.
On a related note, another thing angel investors do is to provide advice even though what they are advising on is not in their area of expertise. While they mean well, it would be a lot more useful if they simply said: “I don’t know.”
Also, he/she could introduce other angels or founders that are in a better position to provide advice on the specific subject instead. Many first-time founders, being new to the entrepreneurial and startup scene, might not have the necessary experience or expertise to discern the advice given to them. Thus, they might take the advice and make decisions that do not bring about the most optimal outcome for their businesses.
6. Putting their own interests over the company’s
While this might seem like a culmination of many of the things mentioned above, my belief is that most angels do not seek to harm the startup’s chances of successes on purpose.
Still, there have been instances where angels choose to prioritize their own interests than the startup. An example would be those that do horse trading.
This could happen when an angel knows of a perfect VC that would be a great partner for the startup he/she is an investor in. However, instead of introducing that perfect VC to the founder, you decide to introduce another VC instead. This is because you would expect that VC you introduced the startup to to return a similar favour to you in the future.
In the YCombinator course, Elad Gil recounts his personal experience where when his first company Mixer Labs exited to Twitter in 2009, an angel tried to block the exit as much as he could to try to get a better outcome for himself. While the deal did eventually go through, it shows how an angel has the potential to cause difficulties and issues for the entire company.
As the startup ecosystem in Southeast Asia continues to grow, it is great to know that over the past couple of years, the number of choices for beginning and experienced angels on startup investing has been growing.
For example, Lim Der Shing, an experienced angel investor in Southeast Asia, has trained over 150 angels in less than 2 years through AngelCentral, with a mission to build an active community of effective and competent angel investors in Southeast Asia.
There is YCombinator who launched Startup Investor School earlier this year, and Techstars and Kauffman Fellows Academy has also recently collaborated to launch a free 8-week course for investors based on the popular book, Venture Deals.
Such initiatives will do well in contributing to the growth of a healthy early stage funding scene in the region, and ensure that more angels are taught on how to behave effectively to support the startups’ success as well.
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