It started as a term on Broadway: investors who fund theatrical productions were called “angels.” These days it has come to mean an investor who provides capital funding for a business startup, usually for convertible debt or ownership equity. They can be a godsend (no pun intended) to an up-and-coming business looking for seed money. But are they really all they’re cracked up to be?
There are two types of angel investors. The first is the private angel investor—the wealthy individual who has a ton of cash and wants to help out a business in the hopes they will make it big. The second is more common, more complicated and is the type most startups are familiar with. These are the commercial angel investors, and while they do have value, you may not realize how they operate.
For a startup, the support of a commercial angel can push you from your seed round to Series A round. Great, right? That’s exactly what you wanted. But while you’re thinking in the long term, your angel just might be looking to get you to that A round as quickly as possible so the first venture capitalist on board will buy out their equity. And since they enter so early in your investment timeline, the percentage of stock they received is probably somewhere around 10%. That means your angel investor will double their money with a very quick turnaround. Another issue in this case is that the VC will probably wrap that buyout money into their investment, so you’ll be paying it either way!
While not necessarily negative, an angel investor’s agenda is not always completely transparent. In reality, they can be a great resource as you finalize your proof of concept and start building the customer relationships necessary to make the hockey stick graph a reality. But just like with anything as your startup moves forward, you need be aware of investor motivations, to what degree they align with your goals and how beneficial the relationship will be in the long term.