- Limit your investor pool by aiming for fewer, larger investments; you’ll minimise dilution and management demands.
- Update all your investors with a monthly email to try to fend off time consuming inquiries.
- The more equity or pro-rata rights given to angel investors the more it may complicate later investments.
With venture capital investment in the UK hitting a record €14.bn in 20201, there is little doubt that the UK is a thriving VC market. Angel investors play an important role too, pumping an estimated £2bn into privately-owned UK businesses last year2, making the UK by far the largest angel investing community in Europe. The growing profile of angel investors means they’ll almost certainly contribute to your start-up’s journey, helping provide vital funds to get your business off the ground.
But like everything else in your start-up’s life, you need to watch out for potential problems. If you don’t manage your angels properly, they could hinder your start-up’s success. This advice from investors and founders will help you navigate the process of raising a successful angel round while avoiding some of the long-term problems it could unleash.
James Currier laughs at how little he knew as a first-time founder looking for angel investors back in 1999. The more investors the better, he thought — until he had to handle the fallout of an angel round with sixteen backers.
“They want you to talk to their lawyer and their tax accountant and, before you know it, my 16 angels turned into 64 different relationships,” says Currier, a four-time serial entrepreneur who is now a managing partner at early-stage venture firm NFX. “It quite quickly became almost a full-time job checking in with them and taking time to hear all their ideas.”
His advice to founders? Keep your circle of investors as small as possible so you can concentrate on what matters. “This is a time to be as focused as you can on product and customers and revenue,” he says.
"This is a time to be as focused as you can on product and customers and revenue"
Clearly, raising an angel round is a triumphant moment for any fledgling start-up. Yet, as with every step of a founder’s journey, there are potential landmines along the way. Failing to manage your angels, Currier and others warn, can distract a company and hurt, rather than help, its chances of success.
The first thing to keep in mind when thinking about raising an angel round is to choose carefully. In most cases, once angels make their investment and get their shares, they will either play a silent role or be very active. The key is to pick angels that can help advance your business, whilst knowing this is a long-term investment rather than a quick return. Founders that can pick angels to help support them early on and step back to let VCs take over later is the ideal scenario for most parties involved.
Set expectations and boundaries for communication
An even bigger challenge is time management and navigating relationships with 20 or 30 people to whom you’ll now feel obliged. “There’s a difference with angels between information versus advice and engagement,” Currier says. “As a CEO, you have to explain to angels the difference. Because some angels want to be entertained.” Those investors hope for a financial return, of course, but they also relish the idea of having a front-row seat to your entrepreneurial journey. To make sure that desire doesn’t turn into a burdensome series of check-ins and inopportune “how is it going” calls, NFX gives founders a template for communications with investors. A monthly report helps to set both expectations and boundaries, Currier says.
Serial entrepreneur Joe Beninato says he learned that lesson first-hand as he struggled to keep up with his investors’ inquiries. “It’s really hard to have regular individual meetings or phone calls with everyone,” he says. Over time he developed the same approach as Currier: a monthly email is often the most efficient way of managing your angels. “I tried to be transparent about what was going on, whether it was good news or bad news,” he says. Beninato would typically end each monthly update with things he could use help with. “I’d say 20 per cent of them followed up and the rest of them wrote back ‘sounds good’ or ‘thanks for the update,’ if they said anything at all,” he says.
Balance of power
Beninato also warns about ceding too much power to a single angel. Inexperienced founders, he says, sometimes fall prey to angels who oversell their expertise, clout or connections. As a result, they end up giving up too much equity, along with an advisory role or even a board seat.
“Sometimes an investor coming in subsequently has to say, ‘I know you gave that guy 5 per cent, but that’s insane,” Beninato says. That may force you to renegotiate the angel’s role and perhaps even their equity stake — more headaches and distractions when you need to be focused on company building.
Ideal number? Think about the future rounds
There’s no perfect number of angels. Gaviria recommends keeping the number under ten but tempers that advice by noting how subjective the question is. “Try to keep each investment at around £100,000 or more,” he advises. “Otherwise, it’s hard not to end up with a ton of people to raise a meaningful amount of money.”
Those who are part of an angel round are likely to look for double-digit share of the company — typically, between 10 – 20 percent depending on the deal terms.
"A monthly report helps to set both expectations and boundaries"
Yet, even if founders are careful, there’s still a chance that angel relationships can cause painful moments down the road. Traditionally, early-stage venture funds allow existing backers to invest on a pro-rata basis, effectively giving them the right to participate in subsequent funding rounds and maintain their percentage ownership in the company. But, with sometimes multiple investors chasing the same investment, company owners may be urged to alter that arrangement. “A lot of funds are feeling pressure to deploy that capital,” says Nikhil Basu Trivedi, a partner at Shasta Ventures. “So, when a fund – especially a larger fund – gets excited about a company, sometimes they’re squeezing out other investors,” Basu Trivedi says.
That can leave founders feeling “caught between a rock and a hard place,” Gaviria says. “The founders are all super-excited they have this new big investor.” But that investor may be insisting the founders reduce the number of parties with pro-rata and information rights. “Then the founders have to go back and take rights away from maybe somebody who was their mentor, or the first person that was willing to make an investment when the idea was just getting off the ground,” Gaviria says. “It can become a little bit of an emotional thing.”
The key lesson: limit your investor circle and control the relationships
Ideally, your angel round should deliver the capital and roadmap you need to reach the milestones that will position your start-up for a successful Series A - a company's first significant venture capital investment following a seed round. But as you seek to maximise the sums you raise, don’t lose track of pitfalls that could make your life a lot more difficult down the road.
Aim for a few big investments—not lots of smaller ones. Be mindful of who your investors are and how many you really need. And don’t forget to set proper expectations for their roles and privileges.