What Impelled VC-Backed Firms’ Founders To Turn Angels

In the heady, fundraising days of 2015and early2016,hardly aweek 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.

Whenaskedwhytheyturnangels,entrepreneurs maylistmotivesrangingfrom “asafellow entrepreneur,Iseetheteam/ideaholdspotentialandwouldliketogetsomeupsideasthey 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 isprobably wellinvested inone’sown venturein termsof realand sweat equity.Given that start-up equity is ahigh-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 ofapublicly listedcompany’sshares byits promotersor its leadershipteam is generally viewedas apositive sign of the company’s underlying worth.The corollaryof this could be extended to actions of founders of early and growth stage startups. If such a founder were to havethe marginal rupeeearmarked forthe start-up assetclass,would itnot bebest deployed byinvesting inhis/her ownstartup,thus doubling down onawinning asset andalso signaling its underlying value? One could makethe sameargument about anentrepreneur’s networks and politicalcapital, which are best deployed to further the cause of his own venture.

Advantage

ABetterUnderstanding: Raising money for abusiness is avery arduous and time-consuming process,involving several levels of meetings and presentations with various prospective investors.What better person to understand this than afellow businessman?When an entrepreneur turns businessman,he understands the nitty-gritty involved in setting up abusiness andis more understandingand patientthan someone who has never run a business.

Disadvantage

TooMuchEmpathy: Too muchempathy andunderstanding mightlead tothe angel making decisionsfrom the heartthereby leadingto losses.An angel needs to analyze and compute the prospects of abusiness 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 ownhealthybusinesswillhaveconfusionaboutwheretoinvestit.Investingitinhis businesswouldleadtoimmediatemoneywhereasinvestingitinanotherstart-up business increases the portfolio and can mean a bigger haul in the longer run.

Advantage

Stake InThe Company: Imagine getting to enjoy stock optionsin anothercompany and alsohavingaholdontheirdecisionmakingprocesswithout havingtoworrytoomuch aboutthecriticalities.An entrepreneurturnedangelinvestormayhavefoundedone 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

BenefitsYoungStart-upsToGrowQuickly: Not always isabusiness aboutmaking money.Sometimes helpingyoung companiesgrow andmentoring the team toenable them toestablish firmly in the marketgives asenseoffulfillment.Thisisavery important aspect to consider for every businessman.

Disadvantage

EgoClashesBetweenTheBusinessOwnerAndTheAngelInvestor: Whenanangel investor involves himself in a lot of management decisions and mentoring, he might end uprubbingthewrongsideofthefounderofthestart-up leadingtoalotof disagreements and ego clashes.

Advantage

HelpTheStart-upsInNetworkingEffectively: As an experiencedbusinessman 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 mightresultinhislosingclientsorfootholdintheindustrymakinghisownbusiness 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 investin theirbusiness.Oneneedstoreallyinvestalotoftimein 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 shareone’sexpert businessopinion andmentor theyoung start-ups,there arevarious 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.