Originally published in VentureBeat.
In entrepreneurial communities, there are a lot of preconceived notions about who angel investors are and what they do. Our clients are all successfully funded early-stage companies that have worked with a wide range of investors. This gives us some real insight into the truth about angel investors.
Here are what I see as the five most common misconceptions around angel investing:
1. Angel investors hold all the power
There’s a lot of information out there about what angel investors look for in a startup, from management team to user numbers, revenue to channel partners, market size to traction. But there’s very little about what you, as an entrepreneur, should be looking for in an early-stage investor. Articles from the angel investor’s perspective seem to imply that, when you’re seeking funding, all of the power lies in the hands of those who hold the money: What is it they are looking for, and how can you show them you’ve got what they want? While it is true that in order to get funding, you need to impress upon investors the value of your company, it is not true that you are powerless. You need to play an active role in pursuing funds from the “right” investors—those with the connections, background, and knowledge that will most benefit your company. This is not a case of “beggars can’t be choosers.” You can—and should—be choosy, targeting only those angel investors who are credible in your market and whom you feel you can trust and build a real relationship with.
2. It’s easier to get angel money than to close a VC deal
This is simply not true. In fact, it’s often just the opposite. Angel investors are investing their own money, which can make them hold onto their purse strings more tightly. Angel investors are also likely to be experts in your industry, which can make them a harder sell. Remember, funding companies is not necessary for angel investors. In other words, it’s not their job. Unlike venture capitalists, whose livelihood depends on making investments, angel investors can choose not to invest at all and use their money for other things.
3. Angel money is better/worse than VC funding
The truth is that angel money isn’t better or worse than VC funding—it’s just different. Your decision to pursue VC funding should depend on a number of factors, including how much money you need, what stage your company is in, and what you are looking to get out of the relationship besides money (like industry expertise, advice, mentorship, etc.). In addition to considering the amount of capital you need now, remember to take into account possible later rounds (additional funding is a greater possibility with a VC). If you are interested in greater investor involvement, venture capital is probably a better choice for you than angel funding. If you’re less interested in sharing the reins, angel money is probably the way to go. Weigh all the factors to determine the best funding source for you.
4. The higher the valuation, the better
Just because one angel investor offers you a higher valuation than another, doesn’t mean you should jump. While you may be tempted to get as much as you can when it comes to raising capital, this is actually a mistake. It’s what you do with your money, not how much you get, that determines your success. Capital efficiency (raising the amount of capital you need to achieve your established milestones) is a greater indicator of startup success than capital access. The capital source also needs to be factored into the equation. That is, if you get a higher valuation from an unsophisticated investor without any industry connections, be wary. A higher valuation leads to more money which, in turn, leads to unnecessary dilution, a rush to scale, and greater expectations.
5. If investors won’t give you anything, your idea must be doomed to fail
Not necessarily. Even some of the most successful companies couldn’t initially get funded, so don’t let it get you down. Keep setting your milestones and working towards your goals. And take this opportunity to bootstrap as a gift that will enable you to retain more control over the direction your company is heading. Remember, bootstrapping is a powerful business decision, not a sign of defeat.
Are you seeking capital from an angel investor? What are your challenges? Tell us about it in comments below.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial services to companies at every stage of the development process. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.