It takes more than money for an investment to flourish. This is especially true for startups and early-stage investment opportunities. Angel investors typically possess an additional number of skills and resources that increase the likelihood of success for a business. Startups will need these skills and resources to achieve early-stage milestones called Value Events. The level of support offered to a startup will largely depend on three critical factors: the investor(s) participation role, value events, and the type of startup. The crossroads of these three factors are further explored below in an attempt to better understand Supporting as a key fundamental of early-stage investing.
Investor Participation Roles
Angel investors can undertake a variety of roles within an investment deal. David Amis and Howard Stevenson identify five primary investor roles: Silent, Reserve Force, Team Member, Coach, and Controlling. As shown below, each role offers a unique set of resources to an early-stage startup.
Silent Investor – Purely financial, will take no active interest in the company.
Reserve Force Investor – Ready, willing, and able to help as requested by the entrepreneur (depending on skills).
Team Member Investor – Works in the company on particular projects or in a functional area.
Coach Investor – High impact investor who does not control the company. Provides support, advice, and any assistance as needed and requested by the entrepreneur.
Controlling Investor – Investor becomes the entrepreneur by taking control (outright or through conventions) and manages the company.
It is important to note that roles are not static. An angel investor can start with one participation role and transition onto another as the needs of the startup change. As Eliot Peper, a contributor to The Startup, explains, “angels can be crucial and sometimes add substantial value beyond cash by making key introductions and giving critical advice” (2017). This is extremely important because as the venture progresses and faces new Value Events, it will require different resources.
Value Events
It is clear that the dynamics of startups are vastly different from those of established businesses. As such, their early progress is measured in terms of achieving Value Events. Amis and Stevenson define Value Events as “the key events needed for the company to succeed and for you to get a financial win” (p. 254, 2001). Depending on their role, angel investors can become essential in achieving these milestones. Value Events happen throughout all functional areas of the business such as marketing, financial, or production. Therefore, it important to have a clear understanding of all non-financial investor resources and their availability to entrepreneurs.
Types of Startups
The four main types of startups businesses are product, service, retail, and e-business. Each of these business types is unique and have different Value Events. Below are a few examples of those Value Events associated with each business type.
Product Business – Defining the product; Building a first prototype; & Scale production.
Service Business – Defining the service concept; Raising the first round of capital; & Initiating operations.
Retail Business – Formulating the retail concept; Store launch; & Incorporating an expansion team.
E-Business – Developing an e-business concept; Building a site; & Attaining critical mass (viral usage).
Each of these three components must effectively interlock with each other to increase the likelihood of success. These interactions can be explicitly embedded within the deal terms or kept informal (verbal) to allow for flexibility. Either way, the relationship between the angel investors and entrepreneurs should be such that these interactions occur as seamlessly as possible. Supporting activities can ultimately make or break an early-stage investment deal, so it would be in everyone’s interest to foster strong working relationships and understand each other’s expectations.
Resources
Amis, D. & Stevenson, H. (2001). Winning angels: the 7 fundamentals of early stage investing. London: Pearson Education Limited 2001.
Peper, E. (2017, January, 10). A founder’s guide to working with angel investors. The Startup. Retrieved from https://medium.com/swlh/a-founders-guide-to-working-with-angel-investors-dec8619b50b6
Hi Jose,
Like you mentioned, I think it’s critical to understand what stage the business is in in order to determine what kind of support they need. A business just starting out might need more coaching then that of a more seasoned business that might just need capital to take them to the next level. As an entrepreneur, I wonder when these landmarks are in the business journey when angel investors can or should be brought in. As someone who is running a start-up I would personally lean towards having a coach in order to learn from them what best practices are in the industry.
Carter Jones
Jose,
It was indeed clever of you to consider the three elements of Investor’s Resources, Value Events & the type of Start up that is being manifested. I didn’t connect them to reach a single conceptualization as a team of factors that go into “Supporting” at all. Having it presented in such a way allows me to see more of what I clearly skipped over unintentionally. And this is a perfect example of the benefit of learning through an LCM.
Thanks for the insight,
AK