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What Impelled VC-Backed Firms' Founders To Turn Angels

What Impelled VC-Backed Firms' Founders To Turn Angels
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In the heady, fundraising days of 2015  and early  2016,  hardly a  week seemed to pass without news of start-ups raising capital from angels and institutional investors. News of founders of VC-backed firms turning angels was also fairly common. Even in these not-so ebullient fundraising times,  news of such angel investments by active entrepreneurs pops up with reasonable frequency. 

When  asked  why  they  turn  angels,  entrepreneurs may  list  motives  ranging  from “as  a  fellow entrepreneur,  I  see  the  team/idea  holds  potential  and  would  like  to  get  some  upside  as  they grow” to “I’d like to pay it forward since my venture got a start from an angel” and “interacting with fresh ideas/teams keeps me intellectually stimulated” etc.

While these motives appear reasonable, a founder of a venture that is still in its growth phase might want to consider a few other factors before making the decision to sprout the metaphorical angel wings.

Too much of a good thing?

As an entrepreneur,  one is  probably well  invested in  one’s  own venture  in terms  of real  and sweat equity.  Given that start-up equity is a  high-risk,  high-reward asset class and that the entrepreneur’s personal investment portfolio already has significant exposure to it in the form of equity in her own start-up,  would further exposure from angel investments skew the portfolio?

Mixed Signals

Purchase of  a  publicly listed  company’s  shares by  its promoters  or its leadership  team is generally viewed  as a  positive sign of the company’s underlying worth.  The corollary  of this could be extended to actions of founders of early and growth stage startups. If such a founder were to have  the marginal rupee  earmarked for  the start-up asset  class,  would it  not be  best deployed by  investing in  his/her own  startup,  thus doubling down on  a  winning asset and  also signaling its underlying value? One could make  the same  argument about an  entrepreneur’s networks and political  capital, which are best deployed to further the cause of his own venture.

Advantage

A  Better  Understanding: Raising money for a  business is a  very arduous and time-consuming process,  involving several levels of meetings and presentations with various prospective investors.   What better person to understand this than a    fellow businessman?  When an entrepreneur turns businessman,  he understands the nitty-gritty involved in setting up a  business and  is more understanding  and patient  than someone who has never run a business.

Disadvantage

Too  Much  Empathy: Too much  empathy and  understanding might  lead to  the angel making decisions  from the heart  thereby leading  to losses.  An angel needs to analyze and compute the prospects of a  business before investing in it to minimize any untoward losses to him and his business.

Advantage 

Good Money Flow: Running your own company gives you access to a good money flow which can then be re-invested in other start-ups.

Disadvantage

May Lead To A Lot Of Confusion: In the advent of any incurring profits, an angel with his own  healthy  business  will  have  confusion  about  where  to  invest  it.  Investing  it  in  his business  would  lead  to  immediate  money  whereas  investing  it  in  another  start-up business increases the portfolio and can mean a bigger haul in the longer run.

Advantage

Stake In  The Company: Imagine getting to enjoy stock options  in another  company and also  having  a  hold  on  their  decision  making  process  without having  to  worry  too  much about  the  criticalities.  An entrepreneur  turned  angel  investor  may  have  founded  one company but is technically managing as many companies as he invests in.

Disadvantage

Difficult To Manage: Stakes in too many companies can become difficult to manage for an entrepreneur as he has his own business to run and many times this leads to a lot of management issues in terms of prioritizing.

Advantage

Benefits  Young  Start-ups  To  Grow  Quickly: Not always is  a  business about  making money.  Sometimes helping  young companies  grow and  mentoring the team to  enable them to  establish firmly in the market  gives a  sense  of  fulfillment.  This  is  a  very important aspect to consider for every businessman.

Disadvantage

Ego  Clashes  Between  The  Business  Owner  And  The  Angel  Investor: When  an  angel investor involves himself in a lot of management decisions and mentoring, he might end up   rubbing   the   wrong   side   of   the   founder   of   the   start-up leading   to   a   lot   of disagreements and ego clashes.

Advantage

Help  The  Start-ups  In  Networking  Effectively: As an experienced  businessman himself, an entrepreneur turned angel can enable the start-up in introducing him to other clients and business contacts enabling them to grow better.

Disadvantage

This Might Impact The Angel’s Own Business: In the case where an angel is investing in a business inside his own domain and industry, connecting contacts with another start-up might  result  in  his  losing  clients  or  foothold  in  the  industry  making  his  own  business vulnerable.

In conclusion 

There is a plethora of angel investors in the market and an even bigger pool of start-ups looking out for someone to invest  in their  business.  One  needs  to  really  invest  a  lot  of  time  in understanding the real need to start angel investing while running a business. If it is only for the profits, there are many less risky investment options, which can be considered. If the motive is to share  one's  expert business  opinion and  mentor the  young start-ups,  there are  various platforms and loads of young founders looking out for guidance. Before becoming an angel, it is very important to know if that would benefit your profile and help you accomplish something.

 
Edition: June 2017

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