COVID-19 battered the economy, affecting practically every sector and vertical. Sure, some areas like healthtech and SaaS tools enjoyed the silver lining, but most of the economy just experienced the cloud.
Not too surprisingly, the pandemic-induced downturn also made angel investors think twice about their investment decisions. Startups, like other companies, are still struggling through a drop in business. In June 2020, only 12% said they were seeing revenue growth, and 40% said their revenue had fallen by 40% or more. Consumers are spending less, and business buyers have seen their budgets slashed as executives focus on getting more out of their existing purchases before they make new ones.
I understand why many investors might want to double down on their existing investments rather than branching out to new entrepreneurs. In my view, this is a risky but potentially exhilarating time to be an angel investor. There are still excellent ideas, top teams, and awesome entrepreneurs who are worth supporting. We all know that a downturn can be a good time to ‘pick up bargains’, and the entrepreneurs that can weather this crisis and still present an appealing pitch deserve at least a second look.
But alongside questions about how to pick the new targets, investors are reexamining how much they should get involved in the startups they support. With the markets starting to reopen as vaccines roll out, startup founders and investors alike are hoping to see revenues pick up.
Do you have a right to call the tune, if you’re the one paying the piper, and more to the point, would it be a wise thing to do?
You have a certain right to interfere
A lot of angel investors say you shouldn’t invest unless you are ready to lose your money. They’ll tell you they invest to advance innovation, embrace tech development, and/or because they believe in the field, but emphasize that 9 out of 10 angel-funded enterprises fail.
In my opinion, that’s not entirely fair. If you expected to fail, you wouldn’t invest, so let’s acknowledge that it’s your money and you care about what’s going to happen to it. You’ve invested this money in exchange for a voice in the business, and it’s reasonable to use it.
On top of that, there’s the human side of things. You’ll only invest once you’ve met and got to know the team, and that creates a relationship. If you care about their chances of success, why wouldn’t you speak up to stop them making mistakes that you could prevent? There’s no obligation to make them learn from their own mistakes.
And hopefully, founders want to hear your advice. Most business angels invest in the field that they worked in themselves, often where they already successfully built their own startup. You have experience in this arena, and good founders are usually eager to hear and learn from it.
Unlike crowdfunding or VC funding, seeking funds from angel investors is a package deal that comes with advice and mentorship. The best angel investors become sought-after precisely because they put so much time and energy into helping their startups.
There are investors who want to put the money and not be bothered with anything further, and there are founders who appreciate that approach, but generally speaking, if you’re looking for that kind of funding you wouldn’t turn to an angel.
It’s not your startup
That said, you have to remind yourself that this is not your company. It can be a huge temptation for experienced entrepreneurs, who’ve now switched lanes to become angel investors. You have strong opinions about the direction the startup should take, how it should direct product development, its branding, messaging, target markets, and more — but it’s not your decision any more.
Your role today is to invest, not to be the CEO. You can provide advice, but you can’t make anyone take it. If you chose to invest in this startup because you think that you can make it into a success, you probably made a bad investment decision.
Investing as an angel investor is all about trust. You have to trust the founders not to lose your money, and they have to trust you not to cut the funding suddenly, or to go to the other extreme and take over the whole show. Sadly, I’ve seen investors who destroy the startups they invested in by forcing them into decisions, sometimes micromanaging to the extent of editing their press releases. Overbearing investors can be like little children who kill seedling flowers with too much attention.
Do your homework
You need to know all about the founders, the team, the product, the market, etc. before making a decision. This way, you’ll know exactly what they are bringing to the table and the ways that you can help, so you feel confident in their abilities and they’ll trust you to add value to their business ideas.
Investors who lack domain expertise tend to be the ones who are overly opinionated, because they’re nervous that they might have made a mistake.
The secret is to invest within your own domain of expertise. If you come from an AgTech background, for example, don’t invest in cybersecurity. When you’re knowledgeable about the niche, you’ll have confidence in your initial vetting. The worst thing to do is to allow anxiety over changing economic or financial circumstances to drive you to meddle in decisions you’d otherwise have left alone.
Angel investing isn’t for the faint of heart
Angel investing is a delicate balancing act between advising and helping entrepreneurs while still believing in their abilities. You have a right to share your advice, and if the founders are worth backing they’ll want to hear it, but at the end of the day, this is not your company. You pay the piper, but you only get to suggest the tune.
About Avishai Sam Bitton
Avishai is an Israeli business entrepreneur, angel investor and the CEO of Brainye.