I read your article, Angel Investors – The Good, Bad and Very Ugly and it is literally right on the money (no pun intended).

My situation is unique in that I had invested a great deal of time/money into a company that was pitched to me by (2) broker-dealers from NY. The company at one time had well over $300,000,000 in sales in the dietary supplement business but had filed for Bankruptcy protection after the FTC sued them for making a false claim.

The bottom line is that after I put money in, it was diverted/embezzled. I sued and obtained a 26-page Federal TRO and Preliminary Injunction. Towards the end of 2008 the Defendants settled and I ended up with all the assets, intellectual property, etc.

It is difficult finding both an honorable partner/investor to help re-build what is still the top 5 dietary supplement brand in the USA, has proven an extremely difficult task.

Best Regards
Alan

Dr. Smith, a great comprehensive article. I have to agree with another posting here that Angel groups are a great way to reach many potential investors, most of whom would be somewhat ‘vetted’ through the membership process. In the Pacific Northwest I suggest the Alliance of Angels, Puget Sound Venture Group, Vino Society or another more wide spread organization called Keiretsu Forum. Another valuable ‘filtered’ channel to potential investors can be through lawyers and accountants.

Accepting an investment creates a long-term relationship that the entrepreneur needs to manage, so my advice is to get to know the potential angel as well as you can (coffee, lunch, etc), do some high level background checks and be sure to set expectations before taking the check.

Once you have accepted an investment from an angel investor my #1 rule is keeping them informed on the company’s progress on a regular basis AND that includes both the good and bad news. This can be as simple as a bulleted list every 30-60 days or when significant milestones are reached. I have experienced entrepreneurs who have neglected their angel investors (passive or active) only to regret it later when it comes time for another round of funding.

Dr. Smith, a great comprehensive article. I have to agree with another posting here that Angel groups are a great way to reach many potential investors, most of whom would be somewhat ‘vetted’ through the membership process. In the Pacific Northwest I suggest the Alliance of Angels, Puget Sound Venture Group, Vino Society or another more wide spread organization called Keiretsu Forum. Another valuable ‘filtered’ channel to potential investors can be through lawyers and accountants.

Accepting an investment creates a long-term relationship that the entrepreneur needs to manage, so my advice is to get to know the potential angel as well as you can (coffee, lunch, etc), do some high level background checks and be sure to set expectations before taking the check.

Once you have accepted an investment from an angel investor my #1 rule is keeping them informed on the company’s progress on a regular basis AND that includes both the good and bad news. This can be as simple as a bulleted list every 30-60 days or when significant milestones are reached. I have experienced entrepreneurs who have neglected their angel investors (passive or active) only to regret it later when it comes time for another round of funding.

Hi Earl

Great article and perhaps a bit of the painful truth!

Just a contribution to your excellent advice:

1. Ask for a reference! Strange you may say when you have the proverbial begging bawl out, but the reality is any business relationship is a two-way street. When you are being interviewed for a job (remember those days?), did you ever ask to talk to existing employees? Well may be you should have. You are giving up a piece of your business which you have worked your guts out for, so why should anyone think it is strange to ask for a reference? Talk to other companies they have invested in, get their views and without the person being involved if you want the truth told!

2. Make a watertight contract and as Earl suggests make sure everything is covered. It is better to have a fall out before the wedding than afterwards. Remember divorces cost 10 times more than any cancelled wedding (ask Paul McCartney!).

3. Take professional advice. This is one of those occasions you should not rely on your entrepreneurial skills alone. Angels, non-execs and investors do this for a living, so what makes you think you can match them or outsmart them? Pay someone who does this for a living to put together an agreement that protects both parties’ interests. Remember a good deal is only when everyone wins.

Finally, if you are looking for funds we have investors that are willing to support any sound business that is looking for extra cash to deliver growth or survive tight cash flow situation but their banks are being … eh… well bankers!

Hi Earl, I’ ve had the chance to read your article and it is quite enlightening. I am a startup company looking for funding for our project and it is always nice to get advice on how to search for investors. One thing, it seems as if the angel investor community is a secret society. What are the best ways to find these angels and pitch a great idea?

Being on both sides of the VC desk for 25 years, allow me to add some comments:
1. Learn early to distinguish between tire-kickers, passive investors, and lead investors. Tire-kickers will never say ‘no’, will always be interested in hearing from you, but never commit to invest. Passive investors are interested but will only commit after someone else steps forward. Lead investors are your most rare, but important investor, as they will take the time to put structure into the agreement.
2. Writen Agreements are fine, but my experience is that no Agreement can take into consideration every struggle and challenge. My usual prescription is to take the time to develop a good working relationship between investors and management. And make sure you have a board you can trust. A PPM is the best protection for both management and investor, but this is only the start.
3. Valuation must be reasonable, but expect it will be challenged. Management must have a basis as to why the company’s and investment valuation, but angel investors will try to drive a hard bargain. Price it too high and it will tell prospects that you don’t know what you are talking about; price it too low and it will send the message that the company will not survive.
4. Don’t give up, but remember to look into the mirror every day. Overcoming difficulties comes with the territory. The entrepreneur’s job is to interpret the angel investor’s rejection as to a serious problem with the business model, or the simple statement that the plan works and you need to continure looking for that angel investor that works.

Hope this helps.

Tom Mahoney
Hilldale Ventures, Inc.

Excellent article!

Thank you Dr. Smith for a very accurate depiction of the field. Our recent experience exposed another player – the “Masked Angel” – claims to have money but really wants to be paid for consulting to introduce you to his “network” of potential investors. I put them below the Bottom Feeders. Thanks again.