170: What You Don’t Know About Angel Investors
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In this episode, Steli and Hiten discuss the topic of angel investors. Not all entrepreneurs are able to bootstrap a business and may need the help of outside investors. Listen as Steli and Hiten discuss both sides of the relationship—how you can find the RIGHT angel investors and what great angel investors look for in their founders. Find out how you can get the investment you need without having to sacrifice yourself or your business.
Time Stamped Show Notes:
- 00:36 – An angel investor is an individual who helps fund a business
- 01:10 – Angel investors are decision makers
- 01:52 – Personal relationships often become the bridge between you and investors
- 02:17 – Angel investors are founder-friendly
- 02:36 – Founders may find angel investors easier to talk to and convince
- 03:49 – Just like any other investor, don’t rely too much on angel investors’ opinions
- 04:22 – Are your investors investing because they like your content or product OR because they believe in you?
- 05:29 – Find investors who are OK with how you want to run your business
- 05:50 – Angel investors sometimes take too much time getting to know you before writing a cheque
- 07:06 – Don’t spend all your time raising money if you don’t have to
- 08:05 – The success of your business should always be on YOUR hands – not somebody else’s
- 09:35 – Inexperienced investors may mean trouble to your business
- 10:54 – You have to know your investor’s background
- 11:32 – The best angel investors always focus on the TEAM
- 12:55 – Angel investors are just investors – YOU own your company
- 13:59 – Pay attention to your investors’ attitude towards you and your business
- 14:30 – Don’t blindly take advice from your investors
- 16:19 – Angel investors have their differences
- 17:02 – Hiten, as an investor, looks for founders who have thought out their business very well
- 17:52 – Angel investors should base their predictions of whether a company will succeed or not ON the founders and the team
- 18:28 – Investors want to know if the founder can execute
- 19:32 – Set up a business where your customers NEED to stay and use that customer loyalty to reassure your investor that you are in control
- 19:56 – Investors want to know that the founders know themselves
- 21:11 – Find someone who is confident in what they they do WITHOUT being delusional
- 22:42 – Look for somebody who is balanced
- 24:09 – Make a personal level approach
- 24:13 – Sell yourself, your team, and who you are – not just your business and projections
- 24:30 – That’s it for today’s episode!
3 Key Points:
- Keep building relationships – it can bridge you to an investor.
- It’s important to know your potential investors’ background in investing.
- Your company is yours – having an angel investor does NOT mean they own it.
Steli Efti: All right. Hey this is Steli Efti.
Hiten Shah: And this is Hiten Shah.
Steli Efti: In today’s episode of we’re going to talk about how to raise money successful from angel investors. First of all, Hiten, I’m pretty sure that our audience is fairly educated but still, a quick definition on what makes somebody an angel investor?
Hiten Shah: Yeah, usually an angel investor is someone who writes a check as an individual. They don’t have a partnership. They’re just one individual writing a check. Now, some people who are one individual, individuals writing checks have a small fund. Let’s say a five, 10, 20, maybe even 30 million dollar fund themselves. Some people are just writing checks that are sort of personal. Many times I’ve done that. I don’t know if you’ve done that ever. It’s my own capital and I invest it. There is a broad definition these days but at the end of the day, it’s somebody, I would define as making a decision basically themselves. They don’t have anyone else to look at to make the decision and often times it’s just an individual founder, a CEO, somebody like that or a professional angel investor who just, all they do, all day is give money. There’s a few buckets but at the end of the day, the decision making process is in one person’s hands.
Steli Efti: Okay. Obviously there’s a ton of information out there on angel investors and how to raise money. How to raise a seed round, how to raise money from angel investors. I think what we’re going to try to do here is to talk about some of the things that are not as broadly talked about or thought about. Just like we typically do. If you think about … typically, when people try to raise money from angel investors it’s individual relationships. They reach out to a bigger group of people. It’s not just going to be one angel investor typically that’s going to write, fill out your entire round. It’s going to be a group of people. Often times, there’s this idea that these people, these angel investors, they write smaller checks but they write them faster with less kind of paperwork and headache and negotiation going on and they are a lot more founder friendly because many of them are founders or operators. Often times they’ll bring some expertise to the table, maybe they have a lot of contacts, maybe they know a lot about your industry and also they’re going to kind of help with maybe running the business or just in any kind of ways that just people that are more hands on. A lot of times for founders, what is so appealing about angel investors is that these people are going to be easier to talk to, easier to convince and then they’re not just going to write me a check but they might help me get more checks and more investors. They might help me get customers, they’re going to be involved a lot more and they’re going to be a resource that I can use. What are some of the things that a lot of founders get wrong in the way that they think about angel investors? You’ve been an angel investor, you’ve invested a lot . What have been some your frustrations with founders in terms of how they approached you, or even after you’ve written the check or didn’t write the check, how the relationship continued afterwards? What are kind of some misconceptions or some things that founders get wrong about raising money from angel investors?
Hiten Shah: Yeah, it’s great. I agree with you about a lot of the things about angel investors and the hands on and all that stuff. It’s definitely something common where they just get more involved or have more of a opinion, I guess, and are able to give you some advice. Sometimes it’s a specialty of, they happen to be really great at sales and they’re angel investing. Sometimes it’s just they’re just helpful. They just tend to be more helpful because they help you kind of gather the round together and things like that. I think what people get wrong about angel investors is just like any other investor, you don’t want to rely to heavily on their opinion, to be honest, unless they’re giving you … unless you’re asking them for advice that’s very prescriptive for your business. One of the reasons I say that is angel investors are usually giving you money at the earliest stages of your business. If they have too strong of an opinion about your business and then you learn something that goes against it but they gave you money against that opinion they have, then they can actually be a lot of trouble for you. You want to weigh those angel investors in the way of like, are they investing because they believe in your category or they believe in a certain approach you have that might change? Or are the investing because they believe in you and the team? You want angel investors that believe in you and the team, not ones that are just so excited about your category and what you’re doing. Often times, business change quite a bit from when an angel investor invests. I’ve had business I’ve invested in where I invested and they were B to B business and then they turned into a B to C some time from now. Usually it goes the other way. They start as a B to C business, turn into a B to B. I’m someone who can help either way so that’s cool, but I’ve dealt with angel investors on the other side. The other angel investors in that company that were freaking out or the founders were worried that, oh this angel investor invested because we were a B to B company, now we’re turning into a B to C company because of something we discovered and an opportunity and we don’t know how to communicate that to this person because they invested in something different. Then you get all this stuff in your head. Should I return the money? How are they going to feel? All that. It’s just crap. It’s your business. Make your decision and move forward and find investors who are okay with that. It’s hard to gauge in the beginning but you have to remember that you want someone who’s invested in you and your team and your ability to execute, not in just a single idea. I’ll give one more. Another thing is angel investors, it’s just really odd sometimes. Angel investors who should be writing checks much faster and quicker, sometimes you can get a sense that they’re not … I’m not saying they should be fast. They should definitely get comfortable with you and you should give them enough information but some of them want to hang out with you and meet with you once a week for like a month and get to know you and have drinks with you and have dinner with you, and they’re going to write you a 10K check. 10 thousand dollars but they want to know you that well and honestly, it’s your decision. If you want to spend that much energy on one angel investor because they’re worth it or whatever and you think they are beyond the money, then go ahead. Most of the time I’ve seen that those investors are essentially not very professional in investing. They don’t have a lot of experience. They write small checks and they really are better off just investing in friends because that’s just their model and they’re good at it. For me, often times when I know that an angel investor is like that, I will not really intro a founder to that angel investor because they’re not looking for slow money. Not slow small amounts of money because they might as well just go pitch somebody who can write a 100 or 250 K check and spend all that time with that person because it’s going to be more impactful for their time. You don’t want to spend all your time raising money and talking to these investors if you don’t have to. That’s another big one and a big red flag for me, unless I invite that and I really want that person’s time. Then it’s different. Usually, that’s not the case. Usually they’re wasting your time. They’re trying to get good with you or know you when really they’ve maybe made a few dozen investments in their life and most of them have been friends and they shouldn’t even be talking to you.
Steli Efti: Yeah. That’s a beautiful one. I think that most founders grossly overestimate the value of an angel investor can bring in the short term and grossly underestimate the value they can develop over, with an angel investor, over long term. They think this angel investor, he’s going to help us raise all the round and get all the customers and get all the press and this person’s kind of like … whenever you see an external entity as your key to full to whole success, to me that’s always a big red flag. There’s something going wrong here. As a founder and as a founding team and as a startup, the success should be always in your hands and external forces should be able to enhance that success or accelerate it at certain times but it should not be, success or failure shouldn’t lie with somebody else outside of your own team. I think that there’s a bunch of things with angel investors that I think you pointed out that are really important for founders to know and a lot of them don’t. One is, I think even the question is this somebody that is … how experienced is this person as an investor? Even if he or she is an angel investor. Meaning, what was the last time they made an investment? How many investments have they made? How many failures have they had? All these things matter and there’s a big difference between, I think, the angel investor that’s a wealthy individual that has very little experience in your area. Let’s say if you’re a startup that has no experience in startups, it’s a dentist. A wealthy dentist, great person but has no experience in technology or startups, running them, building them, helping with them, but they saw a bunch of movies, they hear all the hype and they think, you know what? I should do some angel investing. They have money but they don’t have investing, they don’t have sophistication in the type of business that you do and in investing. This type of person to me, more often than not, there’s always exceptions to this rule, but more often than not this type of angel investor will be trouble down the line just because they’re so inexperienced in investing. They might take too much time, they might want to be too involved, if things don’t go well, they might create a lot of panic and urgency, they might get … they’re just trouble. I would really vet my angel investors and trying to understand, is this somebody that has a lot of experience in the area that we’re in and has this person really invested and how much and how frequently and how recently? The funny thing is, just investor, or angel investor, just like advisor, they’re such prestigious titles that a lot of people want to just have them to have them. A lot of people like to play investor. You brought up one example where somebody just wants to have friends.
Hiten Shah: Yeah.
Steli Efti: Another flavor of that is somebody who just wants to play angel investor. He or she wants to have lots and lots of meetings of young entrepreneurs pitching them their ideas. They want to feel the power trip of looking at that and judging it and questioning it and getting more information. They like the fantasy of maybe investing but if you ask them last two years, they’ve not made a single investment in . They just meet with all these people and the last time they invested was four years ago. Knowing about kind of is this somebody that’s doing this somewhat frequently, has done it somewhat recently, has some experience in doing the type of investment in companies like ours. I think all these questions are really important. A lot of times founders are not asking them because they are so blinded by the prospect of getting millions of dollars, of getting lots and lots of money that they are not as critical as they should be. The other thing is, as you said, you might . If the person is totally in love with just the idea but doesn’t care that much about your team, that could spell trouble. Our best angel investors, or the best angel investors that I know always really always focus on the team and they fully buy into the team more so than the company. They know the company or the idea is two months old or three months old or whatever and there’s a very high chance it is going to change. Although they need to like the idea and understand it and feel like the idea has a chance for success, they’re not attached to it. If the startup pivots and goes from B to C to B to B or the other way around or completely changes what they do, good angel investors they’re not fazed by that because they always bet on the team and they made the bet that if the idea is working out, this team is going to pivot and change until they figure something out that works. That’s the bet they’re making. They’re not making the bet on this is an idea that’s so great that it will work and I don’t care about who’s working on the idea. The idea is what I’m putting money in. If the idea doesn’t work out, then you have a person, as you said, that’s going to create all kinds of trouble. They’re going to want to push you to keep with the idea. it’s not working, they’re going to be really upset if you change what you are doing, especially if it’s something they’re not excited about or they don’t find sexy or cool. They’re going to be really discouraging and they might create real harm in your business by pushing against what really needs to happen.
Hiten Shah: Yeah. I have coached many entrepreneurs to this and it’s like, it’s your company not their company. You can figure that out early on if you just start thinking through when you’re talking to these angel investors, how do they talk to you about it? Are they using the words like, words that make you feel like it’s theirs or yours? I have a bunch of angel investor friends now and I even call them on their words. They basically start acting like the company is there’s. My companies. What? What do you mean your companies? This aint your company. It aint your company. It’s not your company. It’s the people who are working in the company. It’s the founder’s company. It is not your company as an investor. Yeah, just watch the language investors use because you probably don’t want an investor that says it’s their company. I have, some of my favorite angel investors use that language. I’ve called them on it. If they’re listening today, yeah, stop doing that. It’s not your company. A lot of them ran companies. Would you want an investor running around saying my company? My companies? No. That’s just messed up. I feel like what entrepreneurs need to hear about this is that it’s your company. Be very on it when you’re talking to angel investors. Don’t get overly excited and go really pay attention to what their attitude is about your business. Is it about you? Is it about your team? Is it about helping you build a business or is it about their perception of your idea or their opinion about your idea and what you should do? Founders, entrepreneurs, they so often just take the advice blindly about like, oh you should do this or you should do that. If you’re going to take the advice blindly and not actually dig into it and figure out whether it’s right for you, then you shouldn’t be even raising money because it’s your responsibility to run your company, not the angel investor’s or anybody else. I can tell you that’s probably the number one thing I see with angel investors is on both sides. It’s not just an angel investor’s fault. It’s not just an entrepreneur’s fault. Sometimes people are just angel investing to basically get that feeling of having that startup risk or that startup, I’m starting up. That’s cool. I get a rush out of it too. I love startups and I love helping business grow but I also realize when I’m an investor, when I’m an advisor, when I’m not working in the company as an employee or I’m not the founder, it’s not my company. Actually, that’s helped me a lot thinking about it like that versus thinking about it like I’m so invested in it and it’s mine or anything like that. Also, I entrepreneurs or founders that advice and there’s a whole different on how companies are not your baby but that’s going to be a separate episode.
Steli Efti: Yes.
Hiten Shah: That’s got to be a separate episode . Anyways-
Steli Efti: Okay I think all this is really important advice and not common ones so it’s important people to hear that. Let’s flip this script real quick. You as an angel investor. Startups come and they pitch you and they pitch you and they pitch you. What is the stuff that you’re like, I wish they would do this differently? I wish they would think about this differently because then they would have more success getting my money? They would have more success raising their angel round. What are some of the common things or uncommon things that founders should do or are not doing that you wish people would do?
Hiten Shah: Yeah, I love the question. I haven’t really thought about it. I always think about it the other way for myself, which is how can I help them. The first thing I’ll say is, I think, it’s just like individuals. Angel investors are very different. There’s probably a few archetypes of the type and we’ve probably gone through a couple already. To me, the kind I am and that doesn’t mean everyone else is like me, many folks though that are operators are like me, I’ll say that much, is we want to help you operate. We want to know that you can be coached. I don’t mean you do what I say. Never. What I mean is when I tell you something that’s right for your business and I explain it to you logically from a business standpoint, you listen and you actually understand what I’m saying. That doesn’t mean I’m going to go force you to do anything or anything like that or anyone should do that, but that does mean you’re logical, you’re rational, you’re thinking about your business. I look for founders that are thinking about their business on the most fundamental level because that’s really where the rubber meets the road, as they say. It’s a business. You’re doing this to make money. Don’t tell me that you have this vision and this future is going to happen no matter what but you can’t tell me how you’re going to get there or you can’t tell me the broad strokes of the stages your business needs to be in and what you got to do next. That’s why a lot of times I’m talking to somebody, they haven’t sent me their deck yet, and I’m like, hey can we just review the deck right now? I’ll just give you feedback. I don’t know if I’m going to invest. I have no idea. I’ll give you feedback on it. As I’m doing that, I’m giving them feedback, I’m listening to them, I’m hearing how they take it and I’m seeing what they think. Honestly, I just want to understand how they think because what I’m doing and what most angel investors should be doing is predicting in their minds whether this company can be successful or not based on the founders and the team and how they think about their business and their market and their customers and their opportunity. That’s what matters. In the earliest stages, because angel investing happens typically in the earliest stages of a business, sometimes before anything is even any code is written, sometimes before a customer has come, usually not these days but back in the day it was different. Now it’s like, you got customers, you have things going on but either way, I want to know that the founder is thinking about their business. I want to know that the founder can execute. I also want to know, and this is obviously probably a lot more personal, I want to know that they’re going to be able to deal with whatever is thrown at them. That’s different for different founders. For you, it’s like you’ll literally bash through the wall if you have to. You will bash through the wall. I know that about you and so if you came to me and said, hey I’m raising money for this. The approach I would take of just talking to you about it would be much more oriented around the fact that I just get that feeling that you’re going to bash through it. I would tell you, hey, what if half your customers leave you? What are you going to do Steli? You know what Steli would say? I know what Steli would say. Steli would be like, I’ll go get more. I’ll just go get more. That’s not a problem. I’ll go get more and I would believe you dude because you will. For me, if someone asked me that, flipping the table on myself and getting to the other side of it, if half would leave, I’d be like, I’d make sure half of them would never want to leave because that would be my attitude about it. I’d be like, I’d make it so they would never leave. I’d do whatever I can to make sure they never left because getting them is so hard. That’s my perspective. I’d just set it up so that they have no reason to leave and if I had to and they all left, then I would go figure it out. I wouldn’t give people the confidence you would on, oh, I’ll just go get more. That’s the different attitude probably similar execution at the end of the day of what we end up needing to do but what I’m hearing and what I would want to know is this founder knows themselves. This founder knows how to approach a business based on their own point of view, their own personality and where they think they might need to grow. I love it and this is the last thing I’ll say. I love it when a founder tells me where they suck and how they’re going to get better at that because it’s so important. That just, that does it for me. The amount of times they can do that and say it, honestly and truthfully, that means that they will be able to figure it out. That means that they give me the confidence that they’re going to be able to execute. The reason for that is, at the earliest stages it is the hardest job. It is literally, and I hate the word hard, I’ve used it twice already right now but it’s the hardest job. It’s one of those jobs where you’re creating the impossible. Yes, it’s not like giving birth to a child or anything. That shit is hard too. It hurts. All that. Whatever. This is hard. You’re creating something from nothing. All you really have as an angel investor to look at is any evidence they have so far of what they’ve done and then your ability to predict what they’re going to do in the future and how they’re going to deal with all the shit that comes of running a company.
Steli Efti: Yeah, I think that one of the most attractive traits, and it’s so attractive because it’s so incredibly rare is to find somebody who is completely confident and has real clarity on what they want to do without being completely delusional at the same time and impossible to talk to. If you can find the balance of being convinced and having confidence in what you do or what you believe in, but still find an open mind to explore or explore other possibilities or challenge your own assumptions, I think that that’s the most attractive things that I see in founders. Usually founders fall into one of the two spectrums when they talk to me about raising money. One is they’re overly confident to the point where it’s impossible to coach them, it’s impossible to raise any concern. They’re not really listening, their listening skills suck because they’re so in their own head, constantly convincing themselves and everybody else. They don’t really hear what you’re saying. That sucks. I don’t want to work, I don’t want to invest in a founder like that, I don’t want to work with a founder like that. Then there’s the exact opposite case which happens a lot as well where the founder is completely open to submit to everything and anything you say. They’re like, well we think we should be doing this and that. What do you think? And then you go, well, I don’t like the idea. I think maybe you should do something totally different like this and this and this. They go, oh yeah, that sounds great. That’s horrible. That’s horrible as well. Somebody that’s just going to do anything, say yes to everything, doubts all their own opinions is kind of a pushover when it comes to that. That’s super unattractive and it’s not going to make me confident that this founder is going to through all the challenges and all the pain and all the change and be able to see through it. What I’m looking for, and this is exactly what you described as well just in a different way, is somebody that is balanced. Somebody that can push back when they need to push back and can be open minded and explore certain different points of opinions when it seems to make sense. Somebody that’s going to take full responsibility for running this company, owns it. They’re not looking outside for advice what to do and how to do. They’re looking for feedback, they’re looking for ideas but they’re going to make this company a success with or without me, but they’re still people that are smart enough to listen and they self aware enough to know what they know, what they don’t know, what their strengths and what their weaknesses are. I think what it boils down to on the angel investor side is that since it’s individuals that are writing the check, honestly, it is an exercise in convincing these individuals. It is an exercise in creating a connection between that individual, making that person truly believe in you and your team and making the person also think. A lot of the times for angel investors, yes, it’s about getting a return and being part of something great but it’s also like the decision, yeah, I want to work with these people. I want to work with this team. This team is energizing me. This team is exciting, this team is different and I want to have a relationship with these people. It’s much more personal when you raise a round from individuals. You have to approach it on a very kind of personal level and make sure that you sell yourself and your team and who you are and not just your idea and your projections and the market trends and all that stuff, which is all important but it’s not … I would not prioritize it as the first order of priority when you talk to angel investors.
Hiten Shah: I agree. Yeah.
Steli Efti: All right. I think that’s it from us for this week. We’ll you guys very soon.
Hiten Shah: Bye.
Steli Efti: Bye bye.