The Hidden Costs of Bringing on an Angel Investor
There are plenty of valid reasons for a business owner to turn to an angel investor. While this solution is most common in the case of startups who need capital to grow, most businesses will eventually find themselves trying to decide whether to bring in outside capital. The question, however, that every business owner must answer is if an angel investor is the right solution for their cash struggles.
The unfortunate truth is that not every angel investor situation is quite as romantic as striking a deal on Shark Tank (though we all certainly wish it was). And many business owners walk into the relationship without knowing exactly what they are getting into, typically because it is their first experience with having an outside investor.
With an angel investor, this is complicated by the fact that the owner is considering a single individual, or maybe a small group of individuals. The owner is faced with trying to get to know who these individuals really are in a short period of time.
The Capitalist Alliance is all about supporting business owners so that they can make an informed decision for their situation. While there are many resources on why angel investors are a good thing (and we agree with many of those reasons), we believe it’s important for business owners to also understand the hidden costs of bringing on an angel investor or some outside investors that may not be obvious to business owners considering this option for the first-time.
1. Loss of control in decision making
When someone chooses to write you a big, fat check, it’s unreasonable for a business owner to expect the investor to be hands-off after the check has been deposited. Your angel investor will be as involved as they feel they need to be to make back what they have put into the business plus a healthy return. For this reason, sooner or later, you the founder / business owner shouldn’t be surprised by a growing loss of control of the business you founded.
While this may seem like an obvious cost, the difficulties that come with loss of control as a primary owner are often unexpected. For some reason, it seems that there is a disconnect between the relief felt when receiving God-sent, business-saving funding and the realization that you are no longer 100% in control.
You now have someone else to answer to and you have another financial commitment. As Murray Newlands at Startup Grind writes, “If you are expecting them to take a hands-off approach, you might be in for a rude awakening. It is more likely that the angel is going to want to take an active part in making decisions which affect your organization’s outcome. Even if they give you control, you will still be accountable for explaining the reasons behind some of your decisions.”
You will no longer be the only voice in making final decisions on business strategy, selecting new technologies, keeping or letting go of employees, budgeting and financial controls, setting the company’s culture, and defining your own role. These weighty decisions can become much heavier or stress-filled when there is another set of opinions involved that can overrule your preferences.
2. Compromising personal or corporate values
Angel investors are all unique. Accordingly, their values, vision, and goals are all different and may very well be different than yours. When engaging a potential investor, it’s important to remember that their personality, ideals, and character will influence your business just as yours are embedded in the organization you created to date. As Noam Wasserman of Harvard Business Review writes in the article The Founder’s Dilemma, “The founder creates the organizational culture, which is an extension of his or her style, personality, and preferences. From the get-go, employees, customers, and business partners identify start-ups with their founders, who take great pride in their founder-cum-CEO status.”
If your new investor happens to abide by a different moral code or view of money than you do, you will find yourself in situations where you must bend your personal ethics to flex to the relationship. Many of these differences are not a simple “good vs. evil” decision, but reflect personal preferences or core values related to “grey” areas of the business.
For example, let’s say that you purchase office supplies from a local small business rather than a big box retailer. Though you pay a higher price for the supplies, the local office supply company has fantastic customer service and superior products. Plus, you also like to support other small businesses when you can.
Now, your new partner is looking at ways to cut costs and immediately sees the cost of office supplies as being unnecessarily high. She poses that you should move to a large retailer for office supplies as they have a wider variety of products and fast delivery. While she understands your desire to support other small businesses, she’s focused on cutting spending right now.
Both perspectives have merit but they are based on different end goals. Your end goal is to have hassle-free service and support other business owners. Her end goal is to cut costs where you can in order to increase the bottom line.
Initially, these small disagreements may feel just that—small. But if you are met by resistance on many issues, the small compromises you make on your values will add up and can easily result in resentment or demotivation. As Nir Eyal of Harvard Business Review writes in an insightful article, “Even well-meaning angels can become devils when conditions are challenging.”
3. Disproportionate work to ownership ratio
Even when a business owner is happy with the investment they received from an angel investor, the “wow” of that investment can often wear off.
Picture this. You now have the cash that the business has been desperately needing but you have given up some decision-making authority, control of the company vision, and potentially, your personal and corporate values. On top of this, you are still the one who deals with and carries the burden of the day-to-day struggles of ownership—managing employee challenges, working with difficult clients, and setting the pace for the entire organization.
This is how taking someone else’s money works—you knew that going in, but you still feel that you are doing all the work but now it’s no longer “yours”. You may find motivation literally seeping out of you. The fact that the business belongs to you, is your “baby,” can unknowingly be what has propelled you through your most difficult times. Only now, it’s not just yours. You not only have to continue growing your business, but you need to do so at an even faster rate than before and for a smaller slice of the reward.
You can have a fantastic investor whom you get along with and value tremendously, but if you begin to feel that you are working harder for your smaller piece of pie than they are, you may never be able to recover from that feeling.
Once you’ve grown used to working for yourself—comfortable with being the one person who is equally responsible for great successes and explosive failures—it is difficult to share that responsibility with someone else who isn’t sweating, sacrificing, and building next to you.
Before you jump at the idea of partnering with an angel investor, we recommend you do your research and not ignore these three hidden costs.