Where Have All the Lead-Angel Investors Gone?

What is the cause
of the current
drought in early
stage investments?

Where have
the lead angels gone?

Without
lead angel investors today, there
will be few deals for venture
capitalists to fund tomorrow.

The lead angel investor
makes the early stage investment
happen negotiating with the
entrepreneur to establish the
terms of the investment deal,
and often actively serving on
the board and as an advisor
to the early stage firm. It’s
a time consuming and often
uncompensated role, often
requiring something other than
cash to motivate an angel.

The
current shortage of lead angel
investors is mainly caused by
a failure of today’s investing
environment to provide those
“other” benefits that drive lead
angel investors to take on the
extra effort and complete new
investment deals.

….

Early stage entrepreneurs
require a better
understanding of what lead
angels need and want from
their investing experience.

At a
past MIT Enterprise Forum®
Global Broadcast, Guy Kawasaki
of Garage.com, highlighted the
needs and desires of an angel
investor in his own “top 10 list.”
Specifically, he noted that the
angel investor wants:

(1) A method to pay back
society. Angels have already
made a considerable amount and
want to help the next generation
of entrepreneurs.

(2) The prospect of funding
the next “status symbol.” Angels
love to be able to say they
were in the Series A of a hot
company.

(3) To live vicariously. Angel
investors enjoy the thrill of
building a company and a team,
but they don’t want to do it full
time.

(4) The earliest stage
investment. Because it leads to
the greatest re-turn. Angels are
long haul hitters.

(5) To work with “nice
people.” In other words, “kids”
that they like.

(6) To help change the world.
For example, some angel wanted
to make buying books possible
24 hours a day.

(7) Entrepreneurs who are
malleable. Angels want entrepreneurs
who are looking for and need help.

(8) A company with a
product or service the angel can
explain to their spouse or other
layperson.

(9) To invest along people
they like socially. Angels enjoy
sitting around and talking to
others, helping to solve problems.

(10) Fifteen times return in
three years or the company is
gone.

Note that only the last on this
list involves money (a return on
investment); the
other benefits lead
angels seek are
non-financial. This
contrasts to VCs
who focus mainly
on the financial
rewards.

Those
entrepreneurs who
think of angel
investors as “small
venture capitalists”
are likely to either
fail to attract angel investors and/
or create a very un-satisfactory
investment experience for any
angels they do attract. Thus,
entrepreneurs need to be better
educated on what true angel
investors need, and appreciate
the benefits that angels offer over
VCs.

by Roy Morris, past Chair, MIT Enterprise Forum of Washington-Baltimore

Full Story in the Spring 05 Forum Focus from MIT Enterprise Forum: http://enterpriseforum.mit.edu/mindshare/publications/focus/spring05.pdf