Clarifying “Beware of Angel Investors Who Aren’t”

When Brad Feld and I wrote “Do More Faster” we included a chapter called “Beware of Angel Investors Who Aren’t.” This chapter was selected as one of ten chapters used to promote the book, and was therefore publicly available on its own and out of context to the entire chapter on fundraising.

Christopher Mirabile called me recently to give me some constructive feedback which was much appreciated. Taken on its own, this chapter sends a very strong message that many angel groups are evil. This isn’t the case, nor was it my intent, so I wanted to clarify a few things about this chapter.

The intent of this chapter was to let entrepreneurs know that not everyone who says that they are an angel investor actually is one. I’ve had some bad experiences personally with angel groups, but it was absolutely not my intent to say that most of them have bad intentions.

Perhaps the biggest offending statement was this one:

“I have been involved in several angel groups, and most of them have sucked. The reason is very simple—most of the members of most angel groups are not actually angel investors. They’re often there for what I call gig-flow.”

While this statement is most certainly too strong in general, it was nonetheless my own personal experience. Most of the angel groups I’ve attended were people who almost never invested in a startup. I was using this story to surface the fact that it is possible that entrepreneurs might run into self-proclaimed angels who aren’t really investors, since I myself have.

To be clear, there are many excellent angel groups out there. The reason that we included this chapter was to make sure that people knew that there were in fact angel investors and angel groups who are not very useful in the world. It was not to say that most of them are not useful.

Specifically, the core of the chapter is this advice, which is very strong and useful:

“There are a handful of very straightforward tactics to making sure you’re dealing with a legitimate angel investor. First, ask the prospective investor how long he has been making angel investments, how many he has made, and how much he typically invests each time. If you get dodgy answers, or fundamentally tiny ones such as ‘I’ve done one angel investment in the last seventeen years,’ beware. Don’t proceed with any other questions until you have this answer.

If an angel investor says he is just getting into making angel investments, this should set off your Spidey sense. In this case, do your homework and start checking highly trusted references that you source yourself. Check with known reputable angel investors and local venture capitalists on both the person and the companies he has been involved in to get a sense of how real the prospective investor is. Research his background—is he really likely to have the type of money necessary to make angel investments?

If your prospective investor says he’s been investing for a year or more, ask him to introduce you to two companies he has invested in during the last year. If he can’t name two in the past year, then ask him for the last three he has invested in. If there aren’t three, recognize that this person is at best investing as a hobbyist and has very limited experience doing so. Now call or e-mail all three companies and ask to speak to the founders. Verify that the person actually invested dollars in that company. Check the reference while you’re at it and ask if they were helpful to the company or not.

None of these questions or tactics will be offensive to real angel investors. In fact, they will give the real ones more confidence in you. These tactics might offend the fake ones, driving them away. Recognize that that’s just fine.”

If any angel groups were offended by what I wrote, I take responsibility and I apologize. It was not my intent to damage the good work that most angel groups do! I simply felt strongly that entrepreneurs need to understand that legitimate angel groups (and individual angels) will have no problem answering questions about their investing history, and that this is a wise move to avoid wasting time and spinning their wheels.

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One response to “Clarifying “Beware of Angel Investors Who Aren’t”

  1. David,

    I am not offended by this, even though I co-founded an Angel Group in Chicago, IL, Hyde Park Angels.

    What bugs me is the angel groups that are supposedly angel groups but are actually investment bankers instead. They will raise a bunch of capital for the entrepreneur-but take a percentage of the raise as a fee. Then they don’t support or mentor the entrepreneur.

    Without support, and by taking the cream off the top of the deal they de-risk themselves. After all, aren’t we supposed to be taking calculated risks as angels?

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