While at first glance angel investing may not have a lot to teach directors on performing their responsibilities at established companies, in actuality, there is much to learn from the process angel investors take and the roles they fill.
According to the Angel Capital Association, angel investors “invest their own money in high-risk, high-growth early-stage enterprises” and “are the primary source of outside capital for promising start-ups and entrepreneurs.” They usually provide funds before a company meets the requirements of venture capital and these resources help the start-ups get through development and into early growth stages. Beyond funding, angel investors provide companies with business advice, industry experience and valuable connections. While angel investors may be of direct interest for directors of start-up companies looking to raise capital, this article looks more broadly at the lessons that angel investing can share with directors looking to guide established companies to growth and success.
Betting on the “jockey” (founder and leadership team) more than the “horse” (start-up idea) is commonly heard in angel investing. This is not intended to diminish the importance of the business and market that a company is in, but to emphasize the critical role of good leadership. Just as angel investors look closely at the ability of the founder and his or her ability to adapt to the unexpected challenges that may arise, it is incumbent upon directors of more mature firms to evaluate the ability of the CEO and executive team to achieve the strategy and goals. Boards should be confident in the leadership team’s ability to develop and execute strategy and motivate employees to achieve the accompanying goals or recommend the training and development activities to help leadership reach that level. This also leads to the board’s role in ensuring that there is a well-defined succession plan to minimize disruption should an executive unexpectedly no longer serve in their role. Some angel investing groups ask founders who would manage the start-up if they were incapacitated, and boards should be asking similar questions.
Start-up founders often have the idea, drive and passion but may not have the connections and experience that can help the company grow, especially those founders who have recently come out of universities. Angel investors often provide that perspective of diverse, longer business histories and extensive networks, whether to find customers, service providers (IT, lawyers, accountants, etc.) or existing tools that may benefit the young company. Directors serve a similar role supporting their companies. They may know advisors, potential employees or even new board members who they can recommend to fill critical roles supporting the firm. In one example, when the company whose board the author sits on was looking for financial guidance and analysis, the author recommended a fractional CFO who has been supporting the owners and executives ever since. More-established companies can also benefit from the experience of their board members, who may have already actively addressed elsewhere some of the challenges and opportunities facing the company. Based on his experience creating a risk-mitigation program as an executive at another firm, one board member guided a company in establishing a risk committee and understanding what that required from company leaders.
Managing risk itself is another area where both angel investors and directors share similar interests. Angel investors often address risk by diversifying their investments — across different companies, industries and stages of development. Directors should pursue similar risk-mitigation goals inside a company by guiding executives through strategies that diversify the company’s product offering, customer base and supply chain. These are not only important for the firm’s success, but are also key considerations when private equity, family foundations or others are considering acquiring that company.
The ability of a start-up’s leadership team to create or support financial statements and recognize the business levers that drive the current and projected results is something that angel investors value. Angel investors themselves, while not needing to be CPAs, benefit from being able to read start-up company financial statements and projections (even if they are often optimistic) to the extent that they can ask about assumptions and potential inconsistencies. This level of financial acumen is a key skill for angel investors and directors alike. This is especially valuable during the annual process of proposed budget approval by the board and the ensuing comparison to actual company performance. In fact, companies often include this as a qualification when seeking new directors.
Prior to making an investment in a start-up company, an angel investor seeks to understand the company’s strategy, market fit and size, opportunities, competition and risks. The investor or the angel group will collect that information by several means in the process of due diligence. This involves asking a series of questions, sometimes in the form of a questionnaire, that the start-up founder completes. The investors and founders meet to understand the responses in more depth. While perhaps less formal, directors also seek to understand similar aspects of their companies, albeit from a different perspective. A director can then use that knowledge to provide any necessary guidance and suggested modifications. Both do so by conducting due diligence and asking questions, which require time and effort from all involved. While the similarities are most obvious when comparing an angel investor considering an investment with a board evaluating a proposed acquisition, these techniques allow directors to exercise the expected duty of care for a wide range of issues.
Angel investors and directors fill very different positions in the success of companies. However, directors can learn a lot from the ways angel investors evaluate and help start-ups, the processes they use and the questions they ask. Equipped with these skills, directors can increase the value they provide.
Steven Lustig is founder and CEO of Lustig Global Consulting and an experienced supply chain executive. He is a recognized thought leader in supply chain and risk mitigation and serves on the boards of Loh Medical and Atlanta Technology Angels.