Beware of This Type of Angel Investor!
Exactly a year ago, I wrote about a growing malaise in the angel investment ecosystem in the post You are NOT an angel investor. It is serendipity that I am writing about sub 5-lakh ($7500) investments from angel investors that are starting to cloud the cap table.
Founders that are raising multiple small cheques from many different angel investors are only shooting themselves in the foot. They should take a moment and ask themselves (and hopefully the investor) why the investors aren’t willing to put in a respectable investment of at least Rs. 5 lakhs?
- Lack conviction in the venture?
- Are hedging their bets by spraying and praying?
- Are they testing this new investment class?
- Do they not have the liquidity required to invest more?
If the answer to any of these questions is a “yes”, the founder has reason to be gravely concerned. Investors that lack conviction in your venture are coming along for a ride only if it is smooth, the moment your ship starts swaying in rough waters, they will be the first ones to jump off. The scenario isn’t any better for the spray and pray investor. Both these investor types will create havoc for the founders not only by paying late on the investment but also reneging on their commitments if the company goes through stormy weather. If the cheque size is Rs. 5 lakhs or more, it is still worth getting these passive investors albeit they pay on time. However, to raise a small cheque from an unreliable investor are two variables that can be best avoided.
The investor that doesn’t understand angel investing or doesn’t have to wherewithal to invest a respectable sum of money into your start-up, is only making you the petri dish to understand a new investment class. Why should your venture be that experiment? Why don’t these investors just pay for executive education programmes on angel investing in India or abroad? This will only set them back about the same amount of money that they are willing to invest in your venture. Let them learn investment lessons on their own dime (and time) and not use your bandwidth to do so. In addition, you can avoid the mess that these rookie investors will, later on, create by needling on non-issues or holding up later rounds because they didn’t get the upside that they envisioned.
A second thing that the founder should be wary of is an investor who has a limited net worth and is investing it in a highly risky investment class like startups. What will they do if the investment goes south, like a majority of startup investments do? (it’s the truth, whether we like it or not) Can these small investors gang up and sue you for selling them an investment opportunity that they did not understand? In most western countries, only accredited investors who have the money and understanding of sophisticated investing are allowed to invest in startups. Despite petitioning different government organizations to bring in this type of accreditation, I have seen no action. Why should your startup become the case study to create that accreditation in India?
I have personally been in investments where these small cheque investors were invited with much fanfare. They were responsible for ruining good opportunities for exits, acquisitions and even raising new rounds of finance. The reward you will get from this small investor is just not worth effort. Avoid this investor at all costs.