A great piece in the Financial Times this week by Jonathan Moules on the psychology of business angels.
He points out that some come from heaven and some from hell.
Here are some of the nightmares to look out for:
- Shark angels. This investor’s sole intention is to take advantage of a business founder’s lack of financial experience. Warning signs should start to appear during the due diligence or “termsheet” process. If it gets difficult, it may be time to respectfully bow out.
- Crazy, rich uncles. These angel investors are dangerous because they are so easy on the management team. They are mostly retired and living comfortably, and their mission in life is to “give back” to the next generation. They tend to have a weak statement of expectations.
- Litigious angels. This type of investor is not trying to achieve a return from your company’s growth but to make money by intimidation, threats and lawsuits. Litigious angels count on business owners lacking the resources to fight them. A good lawyer is vital if you end up with one of these angels.
- Superior angels. These people believe that they are destined for greatness and generally have an inflated opinion of their own ability. They are usually overbearing, negative people who are hypercritical of every decision a founder makes. The lesson is not to be intimidated by these people into making bad decisions.
- Megalomaniac angels. This type of angel starts out looking like your new best friend. He waits until you hit your first pothole and then points out “gotcha” clauses in your agreement that give him more control. This escalates into a requirement that he must step in to run your company himself. Only your board can save you.
- Chief executive angels. Their real agenda is to run your company from the back seat. They are very intrusive and will push you to make decisions and commit resources that will put your company at risk.
- Meddling angels. These investors are not after control, but want to hold your hand on every issue. You may be attracted by the offer of mentoring, but will soon realise that their desire to be helpful 24 hours a day is a curse. Keep your distance.
- Has-been angels. These are usually high-flyers with a liquidity problem. They will meet with you and ask a thousand questions, but never close the deal. The solution is to learn to ask the closing questions.
- Dumb angels. You can spot these investors by the questions they ask – or rather don’t ask. They are rich but have a complete lack of understanding about how to run a business. They may be useful, however, in introducing you to other angels. After all, rich people tend to know other rich people.