Working with Angel Investors: It's the Relationship, Stupid!

Susan Preston, Of Counsel at Davis, Wright, Tremaine, LLP, and Entrepreneur-in-Residence at the Ewing Marion Kauffman Foundation, shared her insights and experiences on how entrepreneurs can build and maintain successful relationships with angel investors at yesterday's Northwest Entrepreneur Network Venture Breakfast.

Sue started out by presenting a number of statistics on angel and venture capital investments over the past few years.  In 2004, venture capital groups made 2,800 investments totalling approximately $21B; the trend for VC investments appears to be fewer, larger, later (= safer?).  In contrast, there were a total of 48,000 angel deals for a total of $22.5B in 2004.  She estimates that there are 225,000 active angel investors right now, which represents a tiny fraction (perhaps 1 / 7) of the total number of accredited individuals (with financial means and sophistication as well as risk tolerance) who are potential angel investors.  Angels tend to invest between $25K - 500K, with an expectation of return on investment on the order of 5 - 7 years.  A typical angel investment round for a company may bring in somewhere on the average of $1M - 3M ... although angel investment is not typical -- only 1% of companies obtain angel investment (compared with 0.1% of companies that receive venture capital investment, and 0.01% that go public -- Sue led us in an exercise "Altogether now, nod your head: IPO is not an exit strategy").

Sue provided a list of criteria that most angel investors [should] apply when considering investment opportunities, which might be summarized as "keep it simple, be open, and be real".  Specific factors include the business (scalability, novelty or disruptiveness of the concept and/or technology), the people (passion, skills and experience of the core team and their advisors), the plan and the opportunity for financial return.

The statistics were fascinating, and the criteria are very helpful, but I was most inspired by the similarities between entrepreneur / investor relationships and [other kinds of] personal relationships, e.g., between spouses, parents and children, and teachers and students.  While Sue emphasized that an angel investment is a business relationship, with an expectation of financial reward, it involves a number of other factors that transcend business (although I increasingly see fewer distinctions between business and other aspects of life), such as social responsibility and a number of factors that I would characterize as karma: a desire to give back to the community and pass on what they have learned to the next generation of entrepreneurs (Sue characterized many angel investors as "recovering entrepreneurs" ... and I would not be surprised if she counted herself in that category).

Sue spoke of the courtship process (3-6 months) between an entrepreneur and prospective angel investor, where open, honest and relatively frequent communication is critical (as in dating, or a marriage). Her emphasis on the mentoring and advising, and even nurturing (which was not a term she used, or perhaps even intended, but it seems very apt to me) role that angel investors often want to play in a company, parallels my conception of what an ideal parent/child or teacher/student relationship should be.  She also noted that the "coachability" of an entrepreneur -- his or her willingness to ask for and receive advice ... and act on it -- is a key factor in her assessment of an investment opportunity ("when the entrepreneur is ready, the investor appears").  I see this as yet another manifestation of one's willingness to open up to the abundance of the universe, and see even more clearly why these types of investors are called "angels".

One final note: the subtitle for this post, "It's the Relationship, Stupid!", was chosen specifically to channel the wisdom of Kathy Sierra's recent post on "It's the [?], Stupid!", where she emphasizes the importance of focusing on the meaningful benefits that a product or service really offers, which are often overlooked by those who are providing them -- shining a laser beam on what really matters to one's customers (or voters) ... or, in Kathy's rather irreverent and pithy way of expressing this, how to help your users kick *ss!  My intention in invoking this terminology is to reflect the idea that many aspects of the relationships between angel investors and entrepreneurs -- above and beyond the financial aspects that often constitute the primary (or sole) focus, at least on the part of some entrepreurs -- are often overlooked, but these less tangible dimensions of angel investments may, in fact, be the most valuable to the ultimate success of a venture.