Too Many Angel Investors In Start-ups May Prove Detrimental

Angel investors are much sought after and readily available in the early stage funding of start-ups much before Venture Capitalists (VCs), who come in at the later stages of a company’s development, decide to loosen their purse strings.

However, entrepreneurs should be cautious about getting too many angel investors on board, since apart from losing a large part of equity to them, such a situation may scare off venture capitalists at a later stage, says an article in KelloggInsight blog quoting Scott Baker, assistant professor of finance at Kellogg Business School.

While raising money from angel investors may be easy, VC investment may require a much higher degree of financial discipline. Availability of easy funding may lead many an entrepreneur to splurge on non-essentials.

VCs, on their part, prefer to deal with start-ups that do not have too many angel investors as decision making becomes complicated. “It’s hard to go to a board meeting and discuss voting rights if there are 20–25 different investors, each with a small stake,” Baker says.

While VC firms may charge a fee and expect to own a sizable part of the business, they are better positioned to help accelerate growth. With their expertise, they could help connect the entrepreneur to a vast network and offer guidance.

In the case of angel investors, while most of them would be putting in money and may own stakes, most would not have the expertise or inclination to provide support that the VC firms provide.

Entrepreneurs should also resist the temptation to part with too much equity to angel investors. Fundraising is to be done only when absolutely necessary, Baker says.

He also suggests Bootstrapping as one way to avoid giving up equity. For startups offering a physical product, launching a campaign on a crowdfunding platform allows the business to bankroll itself while demonstrating viability to more serious investors. Baker gives the example of the Oculus Rift, a virtual-reality headset, introduced through a Kickstarter campaign back in 2012. The company is is now owned by Facebook and the product was launched in the market in March.

Another option is an Incubators that not only offer office rentals but also mentorship, networking and resource sharing with companies at similar stages. Startups can take advantage of these opportunities without giving up equity. Some companies working in incubators may also be chosen for accelerator programs, which provide funding to help companies that are close to launch.

Well-known incubators also provide certification. “The good ones can give you a gold seal, which will draw more attention from VCs later on,” Baker says.

Incubators also assist in legal processes, HR sector and even other issues enabling the start-ups to concentrate on its core competency. The temptation to take the maximum amount available should also be resisted.

Instead, the start-up founders should draw up a clear roadmap for growth that would make it easier for them to project to investors that funds are needed for specific requirements.

Disciplined manner of functioning without going overboard with publicity campaigns is also needed. However, there is no one size fit all strategy and changes would be needed according to varied requirements, Baker says. It works out to factors like the industry, type of company and the founder’s level of expertise. (Image Courtesy : www.youtube.com)