The Inexperienced Angel Investor: A Wolf In Sheep’s Clothing

By December 21, 2012

wolf sheep

Last week, I went to an event hosted by an angel investing group. I entered the event, located at a local law office, hopeful that I would meet fellow entrepreneurs who are building early stage startups and learn more about applying for a chance to pitch in front of the angel group. Instead of gaining insight from the experience, I left feeling confused and irritated.

I’d heard about networks like this. I was warned about “pay to pitch” schemes and I knew that as an entrepreneur, paying somebody hundreds of dollars in exchange for a few minutes on stage is a raw deal. I have seen inexperienced investors freak out and get way too involved to the point where they emotionally suffocate a CEO. But I’ve never witnessed the number of things that went wrong all at once during this meeting.

Let’s start with the attendees.

Instead of rubbing elbows with other inspiring teams, we were seated behind a duo that was trying to get their nonprofit funded, and next to a guy who wanted to pitch an idea on stage with no prototype. In front of him was a team that wanted to fund their organic snack company. None of them should have been there, but that didn’t seem to matter.

First, the nonprofit team tried to dominate the conversation by drilling the presenter about “how angel investors feel about nonprofits”. The presenter gently reminded the team that angel investors expect a return on their investment in the form of profit, and therefore they do not invest in nonprofits. These questions were so asinine, that I could not believe that they didn’t just pack it up and leave. Luckily, the “idea guy” cut in and spent 10 minutes finding different angles to ask the presenter about the same thing: how to get an idea funded to prove his concept. He noted that he would need $6 million before he even could test his idea. Again, nothing but a gentle reminder that angel groups don’t invest millions into an idea.

Once the presenter was allowed to move into the actual presentation, he noted that the angel group existed to not only fund startups, but also to teach people how to be angel investors. This is a major problem because the decisions about what to fund and how to manage those relationships are being made by people who don’t know what they are doing. Even worse, most of the angels in the group had never run a company before. Yes, doctors and lawyers need investment opportunities, but that doesn’t mean that you should offer up your lamb of a startup to the alter of an inexperienced angel investor, because your soul is going to get slaughtered by someone who has no idea how the internet works.

The presenter then discussed the application requirements for an annual pitch competition. I noticed that a five year financial projection was part of the application. I raised my hand. “For tech startups, we all know that these numbers will be hocus pocus, so why would investors ever make a decision based on magical thinking?” I asked. The presenter paused, and gave a nod of recognition.

“But we still need to know that you are planning to give us a return, and that your company can produce the type of return that we are looking for.”

“In technology though, you can’t even predict what is going to happen in six months,” I said.

He dismissed my question and moved on, talking about how excited he was about last year’s big investment . . . a soy burger company.

If you are ever in a situation like this as a technology startup entrepreneur, don’t stick around like I did to hear that it will cost almost $400 to pitch to this angel group. Make a beeline out the door and don’t look back. Beware the inexperienced angel investors, who are more like wolves in sheeps’ clothing than potential partners who will help your venture grow.