In my original Top 10 list of criteria for selecting an angel investor, there were two items that aren’t often discussed, but are worth scrutinizing during the fundraising process: (1) Honesty and integrity and (2) Are they respectful of entrepreneurs
If you talk to founders and CEOs that have gone through early-stage fundraising, many will share their personal stories about dealing with as***le angels. On several occasions I’ve observed angels (and not members of the Pasadena Angels) publicly berate entrepreneurs. Probably the most memorable was when a member of another angel group looked a founder square in the eyes and told them in an obnoxious manner they weren’t CEO material—a rather ironic comment, since this angel had probably spent their working life as a service provider and had never been in an operational role, and especially not one in a startup.
One of the key questions entrepreneurs often ask: How do as***le angels survive and why isn’t there a self-correcting mechanism that purges them from our ecosystem? In addition to losing bad angels for economic reasons, it also seems reasonable that the best entrepreneurs would avoid working with them and would force/encourage these angels to ply their trade somewhere else.
According to the Angel Capital Association, approximately 250,000 people have made an angel investment in the last two years, which would somewhat qualify them as angel investors. I suspect the majority of these individuals are decent people. As with other professions—or life in general—there will always be some bad apples.
Based on my experiences as an angel investor over the past 10 years, I have three theories about why this occurs:
1. There’s a significant imbalance between early-stage capital and good fundable companies, which means it’s a buyer’s market for investors, and companies can’t be as discriminating. I’ve talked in past posts about the funnels for most institutionalized angel groups and VCs, and that only about 1% of all the companies that apply get funded.
2. Entrepreneurs hear the hype about particular angel investors and that they’ve done the most deals and/or they’ve been around the longest, and are completely blinded by it. In many of these instances, entrepreneurs have done little/no diligence on these angels and have tended to overlook their negative character traits.
3. Money talks and entrepreneurs get blinded once the term sheets and money appear, and once again don’t do sufficient diligence on their investors.
In addition to understanding why they survive, it’s also important to understand what created the as***le angels in the first place. For the good angels it’s an opportunity to give back and they enjoy working with entrepreneurs. For the as***le angels, it’s often they’re wanna-be VCs and/or relish the opportunity to express themselves in ways they weren’t able to in their previous careers. Apparently they’ve seen some VCs behaving badly and figure acting this way will give them some VC cred. (note to these types: you’re not really a VC if it’s personal and friends & family money, as opposed to institutional—unless you happen to be Haim Saban).
Even if an angel is on their best behavior during the early stages, you should still do some diligence on their personalities and post-investment reputations. Another good barometer for predicting these behaviors can be found in your initial experiences with the admin staff-or gatekeepers—for an angel group, as these people frequently reflect the attitudes and corporate culture of the angels that employ them.