The dark side of angel finance

The academic year has well and truly started and I am running a range of courses on management, leadership, and, of course, new venture finance (so busy!). As a result, I’ve been talking a lot about investors and I reflected that we tend to make the assumption that angel financiers are good for business. 

People generally believe that the world is a just and fair place – even though there are lots of examples to suggest it isn’t. While I was collecting data for my PhD, I heard lots of stories about ‘huge egos’ in the Australian angel finance market, and stories with some pretty bad behaviour (I won’t repeat them here though).

For entrepreneurs, its important to know what to look for in an investor. The ego investor is probably the first thing to look out for. One of the people I interviewed said “They buy a Ferrari, get a mistress, and call themselves an angel investor.” The implication here is that status is the driver for these investors. 

Ego investors are bad for business.

Ego investors are hard to spot, but they don’t bring much in the way of human or social capital, are usually pretty passive (but like to call themselves an angel investor), and they often take credit for other people’s successes. 

To avoid these types of angels, its best to ask lots of questions and probe if you get vague responses.

The other dark side are institutions themselves. There are some great incubators and angel networks out there, but there are also some pretty bad ones. For the record, most of the angel investors I interviewed were pretty sceptical about things like incubators (though in the US they have been hugely successful).

A general principle is to watch out for self-interest. If the incubator is trying to make money out of your start-up (particularly for one of services) then that’s a signal that things might not be all they seem. 

If they are vague about what they do – well, that’s a pretty clear sign too. Talk to other entrepreneurs – not just in the incubator, but those in other incubators and accelerator programs. 

There are also organisations out there that ‘masquerade’ as venture capital firms or ‘start-up generators’ (I got spammed by a few of these last week). Some of these businesses have unusual operating models.

Watch out for overly complicated business models for a firm that should be straightforward

These firms will charge your start-up a large amount of money to join (often with promises of meeting other incredible talent in exotic locations).

Other models want you to join groups of strangers so you can brainstorm ideas and start a business (paying the ‘start-up generator’ for the privilege, of course). Do a bit of digging and find out all you can about the organisation (and don’t rely on them for your info).

Entrepreneurs are optimistic and they have a really tough job. Growing your business is hard, particularly when you are cash strapped. Make sure you do your research, and feel free to contact me if you've come across some organisations that are too good to be true.