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.

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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.