Angel Investing: Alone or With Others?

The Angel Investing Series continues...So here is a group of questions from a reader:

Is it better to have more or fewer co-investors?
If more investors are a good idea, is it advisable to try to get the pros/VC funds involved early, or find other angel investors first?
If I brought the companies to VC funds, is there a risk that I might be "cut out" of the investment opportunity?

When you are angel investing each investment situation is unique. While I have addressed some of the pros and cons of angel investing in my first and second posts on this topic, it really comes down to what your comfort level is and whether you want to be an active or passive investor.

Angel investing typically works best if there are a select group of other co-investors involved who have deep pockets and are similarly aligned. If everybody put in a decent chunk of money and works actively to help the company out, that is usually more effective than being the sole angel. Naturally, when you invest with others you are putting your money at risk with others and partially under the control of others who may not have similar goals for the company or investment.

In my early investments, I feel that the fewer investors the better. If I am not prepared to put in a lot of money over the life of the company, then I feel it is better to have more co-investors. I think a reasonable number is under 10 or 15 angels.

One of the problems with having too many investors, as this reader has alluded to, is that the management of shareholders can become burdensome. Similarly, future investors will not want a cumbersome arrangement. If you think of it in terms of an investment, would you rather have one large investor or several small ones? Naturally, it will be easier to deal with fewer people.

There are some cases where I believe that more investors is actually better for the company because those investors are a potential future source of revenue for the company. For instance, if I am starting an asset management firm, it may benefit me to have lots of high net worth investors who will likely buy the products and significantly increase assets under management from the start.

It is always good to contact pros/VC funds early to see if this is the type of enterprise that they would potentially like to be involved with. While most may shun your pitches, they will undoubtedly notice if you come back a year or so later with impressive revenue and growth numbers. At that point though, you may not even want a VC involved because the company is doing well.

If you bring a company to a VC fund that they end up funding, there is certainly the risk of being "cut out" from the funding round. However, this is unlikely because VCs like to reward people who bring good deal flow. You should make it clear to the company as well that you expect to have a stake in the financing should you connect it to a VC investment. The more likely scenario is when you bring a company to a VC fund that you have already invested in. In that scenario, you will surely be left out of future financing, unless you come with significant capital.

VCs believe that they are pros and when they come in, they want control to do their thing which they believe will lead to success. If you hang around you will undoubtedly be more of a nuisance than a help. However, if you are sophisticated as an investor or entrepreneur, you will know that once the VC puts money in, it is best for you to move on to the next endeavor. Please see my post "Should you take venture capital?" that really highlights the whole concept of reducing portfolio risk as an investor and an entrepreneur. You will then understand why when the VC investment comes after your angel or sweat equity, you are in the fortunate position to be riding the wave of VC talent. The best thing to do at that point is to move on to find the next company to invest in.