Heaven Sent

Good Chemistry

The importance of the chemistry between entrepreneur and investor cannot be underestimated. Consider that while a banker may completely trust and like an entrepreneur, he or she will not change the lending criteria a single iota because of these feelings. But with angel investors, the situation is quite different: If he or she develops a bond with an entrepreneur, an angel will agree to almost any deal.

Because of this phenomenon, angel investor Rich Bendis, who is also president of Kansas Technology Enterprise Corp. in Topeka, Kansas, says entrepreneurs must understand the basic investor personality types to help them forge the bond so vital to closing the deal. While private investors come in many different shapes, they can be categorized into five types: corporate angels, entrepreneurial angels, enthusiast angels, micromanagement angels and professional angels.

1. Corporate angels. Typically, corporate angels are former senior managers of Fortune 1000 corporations who have been outplaced or have taken early retirement. Corporate angels may say they're looking for investment opportunities, but in reality, they're looking for a job. This doesn't mean they won't invest. Bendis says they typically have about $1 million in cash and may invest as much as $200,000 in a deal, but some kind of position, usually unpaid at first, is part of the deal.

Nytzen and Lowenhielm, who had lengthy careers at Volvo and Electrolux, respectively, before striking out on their own, think a corporate angel might work out. "I understand their thinking because we came out of that mold," says Nytzen. "My one reservation would be that in start-ups, you have to wear a lot of hats, and people from large corporations with highly specialized skills can't always do that."

Lowenhielm concurs. If forced to choose a corporate angel who also wanted a position with the company, he says, "I would choose someone who left a large corporation to pursue other interests, as opposed to a senior person who got downsized out of his or her job."

Corporate angels typically make just one investment, unless their last one didn't work out, says Bendis. And with respect to that one investment, they tend to invest everything at once and may get nervous when the hat gets passed their way again.

2. Entrepreneurial angels. These are the most prevalent type of angel investors, according to Bendis. Most of them own and operate highly successful businesses. Because these investors have another source of income, and perhaps significant wealth from an initial public offering or partial buyout, they will take bigger risks and invest more capital than other types of angels. Whereas the corporate angel is looking for a job, entrepreneurial angels are looking for synergy with their current business, a way to diversify their portfolios or, in rarer instances, a way to prepare for life after their current business no longer requires their full attention. As a result, these investors seldom look at businesses outside their area of expertise and will participate in no more than a handful of investments at any one time.

"We are talking right now to an investor who owns a fabrication business," says Lowenhielm. "Obviously, there are some strong synergies. I like the idea that there is an incentive for each business to strengthen the other."

According to Bendis, entrepreneurial angels almost always require a seat on the board of directors but hardly ever want any kind of management duties. They typically make fair-sized investments--$200,000 to $500,000--and invest more as the company progresses. However, because of their agenda, when the synergy or the potential they initially perceived disappears, oftentimes so do they.

3. Enthusiast angels. While entrepreneurial angels tend to be somewhat calculating, enthusiasts simply like to be involved in deals. Bendis says most enthusiast angels are 65 or older, independently wealthy from success in a business they started, and have abbreviated work schedules. For them, investing is a hobby. They typically want no role in management and rarely seek board representation.

Because enthusiasts spread themselves across many companies, the size of their investments tends to be small--from as little as $10,000 to perhaps a few hundred thousand dollars. "On the plus side," says Bendis, "enthusiasts tend to have a difficult time saying no and often bring their friends into a deal."

Nytzen feels that enthusiast angels, affiliated with the company but free from the burden of board representation, would provide an invaluable resource for Universal. "When we created international advisory boards for Volvo, we were able to attract top people because there were no official responsibilities," Nytzen says. "We received tremendous support and counsel from them. I see enthusiasts as a very interesting source of capital."

4. Micromanagement angels. "Micromanagers are serious investors," says Bendis. "Some of them are born wealthy, but the vast majority attained wealth through their own efforts." Unfortunately, this heritage makes them dangerous. Because they have successfully built a company, micromanagers attempt to impose the same tactics they used with their own companies on the companies they're investing in. Though they do not seek an active management role, micromanagers usually demand a board seat. If the business is not doing well, they will try to bring in new managers.

"The idea of control has a little bit of a bad taste [for us]," says Lowenhielm. "The investor who wants to know how much we spend on paper clips would be a hindrance. The way I see it, investors who want to control want to restrain."

"This would be a tough fit for us," agrees Nytzen. "Right now as a start-up, we [have identified and are confident of] our market and our products. It would be difficult to put someone else in the driver's seat."

Bendis says it's possible to exploit the behavior patterns of micromanagers--but at a cost. "They enjoy having as much control as possible," Bendis says. "Many will gladly pay for it by putting more capital in the business." Micromanagers typically invest between $100,000 and $1 million.

5. Professional angels. The term "professional" in this context refers to the investor's occupation, such as doctor, lawyer and, in some rare instances, accountant. Bendis says professional angels like to invest in companies that offer a product or service with which they have some experience: A doctor will look at medical instrumentation companies, a franchise attorney will look at franchise deals, and so on.

These investors don't typically need to know what's going on in the business on a daily basis, and they do not micromanage their portfolio companies. In fact, professionals rarely seek board representation. However, Bendis says, they can be unpleasant to deal with and impatient when the going gets tough, and may think a company is in trouble before it actually is.

Bendis says professional angels invest in several companies at one time, and their capital contributions range from $25,000 to $200,000. "They are good for initial investments but are less likely to make follow-up investments," he says.

Perhaps more than any other investor, professionals operate within loosely defined but clear networks, and they tend to be more comfortable investing alongside their peers. Thus, the first professional investor you find will likely open a pathway to others. Professionals can also offer value when they have--and provide--legal, accounting or financial expertise for which the company would otherwise have to pay hefty fees. Be wary, however, because some professionals want to be hired after they invest.

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This article was originally published in the January 1998 print edition of Entrepreneur with the headline: Heaven Sent.

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