Dispelling the 3 most common myths about Angel investing

Regular contributor and investor Pip Wilson dispels the 3 most common myths about Angel investing.

I’ve written in the past about the roots of Angel investing in Broadway, and its modern association with the disruptive tech companies of Silicon Valley.

Ask a person in the street what they know about Angel investing, and they’ll probably mention Facebook or Uber. But there are many myths attached to Angel investing that could be preventing potential investors from funding worthwhile startups (and therefore preventing those startups from receiving the funding they might desperately need.)

Here are three of the most common ones.

1. Angel investors are ‘better’ than VCs

Angel investing is just one form of investment with its own characteristics, benefits and disadvantages.

Maybe because of the ‘Angel’ moniker, there’s an idea that Angel investors are in some way ‘better’ than VCs, who have a reputation for dispassionately viewing potential investments only in terms of profit. But, venture capitalists are your best bet if you need a large sum of money. Some Angels do rival VCs in the amount of capital they’re willing to invest, but by and large, bigger businesses and those that need a large investment are probably better suited to VC funding.

Uber, to give one example, turned to VC funding so it could scale rapidly and dominate the market in multiple cities before competitors or copycat operations took their business. It’s very unlikely that Travis Kalanick and his team could have achieved this if they hadn’t received millions in investment from venture capitalists. But, there are also drawbacks.

Very few businesses are right for VC funding, it only suits very fast growing companies, often technology-based that have the potential for very big returns within a relatively short timeframe. There is also evidence that female-led startups received relatively little investment from those in the VC space. Both angel investing and venture capitalist funding have their pros and cons.

2. Angel investors are very wealthy and invest hundreds of thousands in each venture

There’s a pervasive idea that angel investing is an exclusive club whose members are also members of the super-rich.

In part that’s because of ‘celebrity’ angel investors such as Ashton Kutcher, Justin Bieber or Peter Thiel, and in part it’s because Angel investing comes with risk and very rich people are better placed to bear that risk.

But, this gives the wrong impression of Angel investors. In the United Kingdom, there are around 18,000 active Angel investors, according to the UK Business Angels Association, and angel investing is the most significant source of investment in startup and early-stage businesses seeking equity.

The amount invested annually by angels, which comes to £1.5bn, is three times the amount of venture capital invested in early-stage businesses annually.

In the US, the median angel investment is just $10,000 – still a great deal of money to most people, but a long way from the hundreds of thousands in investment that many people equate with Angel investing. Angel investing may not be considered ‘common’, but there are enough investors, and a small enough average investment, to illustrate that there is nothing elite about it.

3. Angel investors have all the power

In ‘The Social Network‘, which tells the story of the creation and rise of Facebook, Mark Zuckerberg and Sean Parker meet with PayPal co-founder Peter Thiel, who oozes authority as he tells the young entrepreneurs that he’ll invest in their business but needs to talk to them ‘about some corporate restructuring’. Many people think this is a typical founder-angel relationship, but it isn’t. The level of involvement differs dramatically.

Sometimes investors and founders have a formal agreement, sometimes there’s an investor ‘board’ or an investor on an advisory board, and sometimes there’s an informal discussion or no agreement at all.

Some Angels are very hands-on and some are more aloof. As someone who invests and has been invested in, I’ve had a whole range of different experiences. Some of the best founders that I’ve worked with have been the most demanding. But always, my approach has been to offer my knowledge and expertise if I feel I can help, and be honest about where my limitations are. When it comes to the investor-founder relationship, there really is no template.

Angel investing can be incredibly rewarding if you go into it with your eyes open and no illusions about the time and energy you’ll need to invest. But in order to get to that stage, you have to understand what angel investing itself is – and what it isn’t.