A Practical Guide to Angel Investing: How to Achieve Good Returns

Chapter 1 - Set Good Targets

1.1 Personal Motivation for Angel Investing

People have widely varying reasons for being an Angel, and it is vital to know your own.This personal-value-based approach will drive all your other investment decisions. Is it primarily about the money? working with interesting people and companies? making a contribution? socializing with other Angels? buying a job for yourself?

There have been many academic studies of Angels' motivations over the years(Morrissette). Sullivan & Miller were the first to show that a large number of Angels were willing to accept lower returns by essentially exchanging non-economic psychic or social rewards for financial ones. They classified them into three major types,depending on their primary motivation:

47% of Angels are economic investors who primarily want to maximize monetary wealth:

• ROI is the most important
• Highest ROI expectation (30% ROI expected vs only 21% ROI for non-economic investors)
• Largest average investment size

31% of Angels also seek non-economic or psychic rewards:

• Enjoy investing, like the entrepreneurial process and the fun of being involved in an exciting company. Enjoy the thrill of the ride!
• Lowest ROI expectation (21% expected vs 30% for economic investor)
• More likely to invest with a group
• Skew slightly older

22% of Angels also have altruistic motivations and want to help entrepreneurs and/or society; sometimes called "pay-it- forward" reasons for investing:

• See the value in supporting new business and/or socially beneficial products
• Most patient investor, willing to hold for seven years or more
• Smallest average investment size

Mary Long-Irwin, of Northern Ontario Angels, agrees with the importance of this motivation: "We live in smaller communities and we know each other and want to make sure the companies are successful. The investors care about the economic growth of their communities. It's about creating jobs and wealth where they live."

There are as many motivations for Angel investing as there are Angels. Understanding your own motivation or style will help you make better decisions and help you select better co-investment partners. Co-investing with someone is a long-term commitment,and you should know each other's expectations before working together.

What Kind of Angel Are You?

Several writers have provided extensive descriptions of Angels (e.g., Gaston; Hill & Power; and Benjamin & Margulis). Do any of these describe you?

• Archangel or Super Angel: Wealthy, powerful, experienced Angel who has done a lot of deals
• Guardian Angel: Provides mentorship, advice and life coaching
• Cherub: A neophyte Angel, usually following other Angels to learn the ropes
• Angel-Knows- Best: Becomes bossy, arrogant or overbearing
• Corporate Angel: Often a corporate venture capital investor disguised as small or nice
• Will-Work- for-Equity Angel: Wants to barter services for a share of ownership (often not an Angel)
• Unaccredited Angel: An oxymoron (like jumbo shrimp)
• Dragon (aka Lion or Shark): Celebrity Angel who does deals on TV, often using extreme behaviour
• Daddy Warbucks: Very wealthy Angel, often investing without extensive due diligence
• Dark Angel: Wants to kick out the founders and take over the company
• Fallen Angel: Lost reputation through bad behaviour, loss of wealth or liquidity issues
• Consultant: Not an Angel at all, looking to be hired to do accounting, legal or other services
• The Godfather: An Angel with an air of being well-connected and knowing everyone, usually retired
• Peer: A fellow successful entrepreneur Angel (includes one-third of all Angels)
• Dr. Kildare: An Angel who is a doctor, lawyer, accountant or other professional passively investing small amounts
• Business Devil: An Angel who wants absolute control, insists on 51% or restrictive covenants
• High-Tech Angel: Invests only in high-tech
• Lead Dog: Rounds up other Angels to co-invest or syndicate deals
• Lone Wolf: An Angel investing on his or her own
• Silver Spoon with Silver Wings: An Angel with second-generation money, born wealthy and well-connected
• Cousin Randy: A relative who invests small amounts and often wants to work inside the company
• Chorus of Angels: Collective noun for a group of Angel investors, also called a consortium or syndicate