Myths about Angel and Venture Capital Investors

Most entrepreneurs have been exposed to myths about angel investors and venture capital investors. Let me dispell some of these myths:

• Myth - Venture capital investors invest in technology, not the people. Wrong. Venture capital investors invest in the management team far ahead of the technology that is the basis for the company. Their experience is that a highly qualified management team will engage the market, react and change the product or service the company offers as needed to succeed. Since most companies don't succeed with the first version of its product or service, a management team that can assess the market and make changes will more likely succeed.
• Myth - Angel investor groups act quickly when presented with an investment opportunity. Wrong. There is a trend toward angels forming groups to evaluate investment opportunities, select from the many opportunities they see, negotiate the terms of investment and make the investment. However, in most groups, this takes an inordinate length of time, especially if the angel group does not have a paid managing director to keep things moving. Most angel groups don't have a paid managing director. The reasons for the slow moving process is that the group often only meets once per month, a single naysayer in the group often causes the process to stop until others in the group override the negative opinion and the group has a preferred set of terms that may not be acceptable to advanced entrepreneurs, slowing the process down to get the group to accept other terms. It's not unusual for a company to make a presentation to an angel group one month, come back the next month to answer questions, begin negotiations lasting 30 days, then waiting another 30 days for the legal documentation to be completed before a closing occurs. Is it any wonder advanced entrepreneurs don't want to deal with angel investor groups? On the other hand, early stage entrepreneurs often have no choice but to raise capital from angel groups and don't realize how long the process will take.
• Myth - Venture capital investors want to control your company from the start. Wrong. Professional venture capital firms do not want to take control of companies when they make their first investment. First, they aren't staffed to exercise that degree of control over the companies. Second, if they have to have control in order to make the investment, they have concluded the management team is incapable of running the company which should lead to the decision not to invest. On the other hand, there are individuals and groups out there who hold themselves out as venture capitalists, but who will only invest if they obtain control. These individuals and groups are not true venture capitalists and advanced entrepreneurs should usually avoid them.
• Myth - Angel investors invest to make money. Usually wrong. Most angel investors are successful entrepreneurs who have cashed out. They invest to "be in the hunt" or to join with other angels who they want to be associated with or to have the opportunity to watch an entrepreneurial company go through the growing pains and, hopefully, succeed. Since, by definition, angel investors are wealthy, they don't have to make highly risky investments to increase their net worth. But, they HATE to lose money. Yet, angels will lose their entire investment in most of the investments they make in young companies. How do angel investors reconcile the risk-taking with hating to lose money? It's a mystery.
• Myth - Angel investors bring good advice to the table for the entrepreneur in addition to money. Usually wrong. The best thing an angel investor can bring to the table other than money is relationships, i.e relationships with potential investors, relationships with investment bankers, relationships with potentially large customers, relationships with law firms, accounting firms and banks, etc.

I've run out of time today. I'll continue this another day.