Profiles in Courage

Knowing the number of angel investors who are in the game, and believing that most of them have not been duped by someone, one has to wonder what are some of the reasons why they do it. There’s undoubtedly some psychometric research out there that outlines the personality traits and life experiences that make for an active angel investor, but just through observation over the years I have noticed the following:

  • they are generally successful business people with an entrepreneurial streak;
  • they may be retired or recently exited from another gig, so they have some time on their hands;
  • they are still excited about the energy of the business (esp. startup) world;
  • they are reasonably patient, but have human lifespans;
  • they want to put some cash to work outside the public markets.

In terms of what they hope to get out of the experience, the rank looks something like:

  1. Financial return
  2. Opportunity to help grow a business (get their hands dirty; use their brains, skills and contacts)
  3. Giving back to their community (call it for-profit philanthropy: a recognition that they were helped along the way and want to do the same for someone else)
  4. Financial return

The last isn’t a typo — it’s just a reminder that in the end, if an angel loses money in a deal or it takes forever to pay off, s/he’ll probably be disappointed by the experience no matter how well the other bits went.

Angels tend to invest in things they understand as a by-product of their business and life experiences. While highly technical angels might be willing to invest in deeply technical startups, in my experience most look for opportunities they can understand at a “visceral” level: a better mousetrap, a tastier soft drink, a new service, a better way to deliver old services, etc.  Taking the “magic” out of the business proposal means they can focus on fundamentals like the team, market, channel, and so on.

Angels have also learned over the years to avoid capital-intensive markets, where their meagre investments will be stepped on repeatedly by much bigger feet just to get a product to market.  This is why only the most intrepid and knowledgeable angels (and a few hapless gamblers) participate in startups in the pharmaceuticals, biofuels, solar cell, semiconductor and other research-intensive or infrastructure-centric sectors. While the upside potential is impressive, the long durations and high expenditures are enough to keep most checkbooks unopened.

In most of these ways, angel investors differ from their VC counterparts.  As professional investors with funds whose horizons may extend ten years or more, VCs can play more of a bet-and-hold game, re-upping their bets as needed down the road.  Once VCs enter the deal, angels rarely have the staying power to remain “whole” for long.  VCs can also play more of an opportunity matrix strategy, scattering a few investments around several major sectors and riding the big waves.  For these reasons and others, angels and VCs aren’t inherently symbiotic: they may interact occasionally on certain deals, but the success of each is not dependent on the other.


5 Responses to Profiles in Courage

  1. Hi Steve,

    Another good post…

    One of the problems I have w/ the angel investing dynamic is the reality of “Angels tend to invest in things they understand…” This leaves emerging technologies in emerging markets w/ few investors that can function as lead investors for others.

    I’ve seen a number of gov. entities like the SBIR & NREL here in CO work to fill this gap, but it’s still double tough for entrepreneurs that have something in development that might shift a paradigm or two.

    So I think how we build & manage public/private partnerships in this space will become progressively more important if we’re to continue to lead the world in our ability to innovate.

    Any thoughts on that?


    • smurchie says:

      Thanks, Kevin. I think ultimately we’ll see more smale-scale funds that focus on the earliest stages and have professional management teams that can vet and negotiate the deals. This takes the “individual investor” dynamic out of the equation, and returns to the roots of venture capital. However, there some big, fat, furry problems managing small-scale funds: long durations, inability to participate in follow-on rounds, not enough fees to compensate the GPs, and on and on. There are some interesting public/private models emerging which might have promise, but I think the secret lies with more creative venture teams. And as you know, more refined network models can play an important role bringing together individuals who can share skills and resources.

  2. […] keeps them separate much of the time.  I’ll explore the reasons why in a couple of posts: Profiles in Courage and Mind the […]

  3. Steve, thanks for the clarification (and like the new blog). I’ve been coming across a similar inquiry lately in my discussions — how can angels spread their risk beyond being in one or two companies?

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