Fundraising

Understanding Different Types of Angel Investors

We at NextView Ventures invest exclusively in a startup’s seed-stage round, meaning that many if not most of our deals are made alongside individual angel investors. These angels, however, come in many different shapes and sizes.

So to successfully raise a seed round of capital, founders should possess at least a basic understanding of the different types of angel investors they’ll encounter. Doing so can help entrepreneurs not only secure funding in general but better recognize the pros and cons of taking money from certain types of individuals. It can also help founders better approach angels in the first place.

Along those lines, here are a number of different angel investor types and categories.

The Super Angel

Much has been written about this category, so I won’t belabor the description except to say that the defining characteristic is the large number of investments that they makes.

Pros of taking their angel money include the feeder system to venture financing of the next round and the vast network of portfolio CEOs which can be tapped into for connections and help.

Cons of an investment from a Super Angel include potential lack of “value-add” because his or her time is spread so thin amongst many portfolio companies.

The Domain Angel

Investors in this category are usually operating executives who have spent their entire careers in a specific industry vertical, like internet travel, for example. They will have the ability to “see” the opportunity that the startup is going after unlike anyone else — aside from the entrepreneur — because they inherently get the space.

Pros: Industry-insider who serves as a validator for the rest of the investment syndicate, extremely helpful advice and network connections.

Cons: May be more proactive in “offering” advice that is uninvited (since they know/love the space and live and breathe it every day).

The Previous-Colleague Angel

Having someone who the founder or founding team has worked with before can be a good validator to other syndicate investors and future investors that they all work well together.

Pros: Nice signal to other investors, who always pay attention to that sort of thing.

Cons: Potentially not much value-add beyond initial financing round.

The Friends & Family Angel

These are the proverbial first-commit investors.

Pros: Known quantities who are usually the first people who are willing to write a check.

Cons: No value-add after the check has been written (given their typical lack of domain or business knowledge). They can also potentially and needlessly interject into operations or future financings in ways that are destructive for the company.

The Grouped Angels

Especially here on the East Coast, angel investors have formally grouped themselves together for various reasons. This can benefit entrepreneurs because of a one pitch/many investors process, but it can be challenging too. (Elaborating on both the pros and cons here are probably the topic of another post.)

The Fellow-Entrepreneur Angel

Entrepreneurs know other entrepreneurial endeavors best and can be great backers of other businesses. They’re also likely to be among the first to take the leap of faith and the first to help, which are just two of the Pros.

Cons: Depending on the size of their previous wins, they may not have a large checkbook. Additionally, if the relationship is more of a peer than an advisor, they may not be constructively critical.

The “True Believer” Angel

These angels are can as difficult to find as a diamond in the rough, but there are those angels out there who hear a startup’s story, instantly believe, and want to immediately invest sometimes in spite of the financial risks.

Pros: Over-the-top encouragement and support; a cheerleader as a balancing voice among other, what-have-you-done-for-me-lately investor syndicates.

Cons: They may lack a critical eye and not challenge an entrepreneur after the investment has closed.

The Financial Angel

There is a small cadre of angels out there who are diligently and intentionally, but also quietly, building a diverse list of early stage startup investments through the lens of a portfolio allocation model. Rather than investing in a fund manager to do the work for them, they are instead doing it themselves for the purposes of disbursing their personal capital.

Pros: Validation for other financially-savvy syndicate investors; lack of intrusion to let the entrepreneur run his own business.

Cons: Often very little help or involvement with the company post-investment, if at all. They’re typically focused on financial returns and little else when it comes to the entrepreneurial community.

The “Sport Fisherman” Angel

These mega-wealthy individuals, sometimes not from the startup world, invest an extremely small portion of their net wealth into early-stage startups so that they have something to talk about with their friends at cocktail parties. They do it merely for the entertainment value of participating and care very little if their investments actually yield a return (though that would make for even better conversation fodder).

Pros: Sometimes these individuals are well-connected or have a public persona which could be helpful to the business.

Cons: Potential lack of concern for the entrepreneur or the company, as there is always another fish to try to catch.

The Foolish Angel

Often bucketed with others above into a “Friends, Family, and Fools” category, I think that the truly naïve, blind, supporter-type angel deserves his own category.

Pros: Money is money.

Cons: Many cons, as a foolish owner of your business can influence it in foolish ways.

If, as an entrepreneur, you’re currently seeking and pitching angel investors, and he or she doesn’t fit into one of the above categories, then there’s a good chance it’s going to be tough to get them over the line and commit to writing a check. All of the people in the above categories have their own different motivations, but they at least have somewhat obvious motivations as drivers towards investing. Without a specific rationale, it’s an uphill battle to convince an angel investor part with his own personal capital.

Conversely, when starting a financing process which includes raising money from individual angels, using the above schema as a guide to thinking about who within your network (and your network’s network) might be interested in participating as an early investor is a good first step.

At the end of the day, all money is green. But if you have the fortunate ability to be oversubscribed in a seed round and are selecting who you let into limited space within the round, it’s important to think about composing a syndicate of angel investors according to their motivations. By selecting deliberating from a range of the above categories, you’ll maximize the benefits and hopefully diffuse some of the potential drawbacks.

This is an updated version of a post written on David’s blog, GenuineVC.com.

David Beisel

David Beisel is a co-founder and Partner at NextView Ventures. He has been focused on early stage Internet startups his entire career, both as an entrepreneur and venture capitalist. As an investor in the digital media space, David was most recently a Vice President at Venrock and previously a Principal at Masthead Venture Partners. Prior to becoming a venture capitalist, David co-founded Sombasa Media, an e-mail marketing company best known for its flagship product BargainDog. Sombasa was successfully acquired by About.com where David served as Vice President of Marketing. David holds an MBA from the Stanford Graduate School of Business and an AB in Economics, magna cum laude and Phi Beta Kappa, from Duke University. He also founded and leads the Boston Innovators Group, an organization which holds quarterly entrepreneur events drawing a thousand attendees.

  • Great summary; thanks for the post. Do you guys put any value (positive or negative) on having a broad distribution of different types of angels in a seed round? Does a wide breadth of seed investor-types add value, hassle, or both?

    • Alex, having a broad set of angels in a seed round can indeed be helpful. Diverse experiences and networks which can add insight and facilitate relevant introductions certainly expands with additions. You raise the correct point, however, that there’s a balance to strike in not having too many investors which can increase the time spent on individual “investor relations.” If entrepreneurs have the luxury of complete choice about who participates in a(n oversubscribed) round, each angel included ideally would bring some unique strategic value. But in many cases, the investment itself is value enough.

  • Steve Munce

    Nice breakdown. However I am amazed at the number of Angel Investors that are almost exclusively ‘early-stage to Series A round’. I am often approached with the request for a “Proof-of-concept” in a disruptive technology. As there is only one “proof-of-concept” to reference it to which is a multi-billion dollar business I get confused as the fact they want to see a more comparables.

    It’s really mind blowing. I guess I am searching for the rare “Fellow-entrepreneur” that is also a mentoring advisor. It is likely that I will simply cash in all my chips and scale the launch design back to get the business rolling. It would almost be like Elon Musk launching Spacex with a slightly used Apollo 1.

    I know my business will be a success. Its just frustrating that there was so much time lost in trying to find that fellow visionary who could simply ‘see it’! Many of my fellow entrepreneurs love the business plan but are afraid of the growth rate and infrastructure that needs to be managed long term. That is why I need the ‘hands on’ expertise.

    Is there a visionary entrepreneuristic angel group out there that understands what disruptive technology is and its broader than just a dot com site? If so, why are they only in silicone valley? I am at the point where I will cash in everything I own to launch this. It may not have the immediate bang and sizzle but it will succeed.

  • Great post, David and very timely for me as I’m exploring the differences and possibilities in transitioning from more traditional consulting roles to advising/investing in healthcare startups. I guess this would put me in the “Domain Angel” group (hopefully not one of those offering “uninvited” advice :)) Any thoughts on Domain Angels taking a more active role than the ad hoc advice typically provided by angels, sort of a hybrid angel/medical director role?

    • You asked David, not me. But how would you feel if you had an employee that had something over your head? “Medical director role” would be an employee, wouldn’t it? So you’re setting yourself up for possibly the worse “uninvited advice” situation possible. The real question, why would you need the role title? Couldn’t you add value as an angel? Or just for the sake of argument, apply as an employee and see if they hire you (without mentioning investment). That may provide a view into how the founders would feel as having you as an employee. If you’re thinking of this as anything other than an employee, I think you’ve already crossed the line he was warning about.