Receiving investment commitments from angel investors can feel a bit like striking gold. After months of networking, pitching, and refining your investor documents, the thought of rejecting a hard-won investment commitment might seem crazy.
As counterintuitive as it may be, there are few reasons why you may want to turn down commitments from angel investors, and it could be a smart move for your company’s future.
In a recent Funding Mastermind workshop a few founders in our community shared their first-hand experiences of turning down investment, their motivations behind saying “no” to angel investors, and why they believe they are better for rejecting the investment.
1. Time Wasting Angel Investors
Raising investment is pressurised and often founders find themselves getting down to the ‘wire’ in terms of a deadline for securing funding. This was the situation one of our founders faced, and they believed it clouded their judgement with one angel investor who was on reflection wasting their time and never going to commit funds.
Any angel investor who’s seriously considering investing in your business will do due diligence in your investment opportunity, and ask questions about specific aspects of your business plan. One of our founders found that discussions were forever ongoing, with the angel investor frequently requesting to see one more forecast scenario, or reverting with more fresh questions. After a few months of back and forth in this way, this founder began to see the red flag and realised that the angel investor was never going to commit funds.They were, in short, kicking the tyres and wasting the founders time.
You should expect a certain amount of to and fro with angel investors, but if you are answering questions and providing the information they requested promptly, this too and fro shouldn’t last more than a few weeks at most. If however you find yourself in a situation similar to that outlined above, here are a few tips you can use to qualify the angel investor in (or out) of your investment opportunity:
- Push back – Don’t be afraid to say that you believe you have provided them enough information to assess if the investment opportunity is right for them.
- Ask to share a Term Sheet – Reviewing a term sheet is the next logical step after an angel investor has done their due diligence. Don’t be afraid to be intentional and ask them if they would like to see the term sheet. If it’s a yes, you know they are serious. If they push back, you know it may be better to spend time with other angel investors you’re also speaking with.
- Do your own due diligence – If there are concerns an angel investor may be wasting time, speak to other founders (which could include other founders this angel has invested in or people who know the angel investor) to gauge how the angel investor operates, and if they have provided value to their business. Their insights may well be illuminating and help you make up your mind whether to invest more time in conversations with the angel investor.
Although it may not sometimes feel like it, you are in the driving seat of your funding campaign, so try not to waste time and emotional energy with angel investors who are unwilling to make a decision – your energy and time may be better spent elsewhere.
2. Angel investors with questionable backgrounds and “murky money”
The second experience told by a member of our founder community highlighted how important it is to thoroughly vet potential investors, even if the temptation is to take the – often much-needed – cash that’s on the table.
The founder recounted their experience with an investor who, at first glance, they thought would be perfect. The angel investor had travelled from overseas to attend a well known angel pitch event in the UK, which is where they first met our founder. After an initial conversation at the pitch event and a subsequent meeting to review the financial forecast, the angel investor said that they were interested in investing a substantial sum of cash into the founders’ startup. Although the speed of the verbal commitment from the angel investors seemed fast, the founder brushed aside their concerns as, understandably, they were eager for funding.
As due diligence progressed though some information came to light about the investor that raised alarm bells for the founder. It came to light that the investor had made their money in overseas financial markets, and had received a trading ban for market manipulation. This was naturally a shock for the founder to discover, and caused them to question where the money the angel investor was committing had come from, and also raised some ethical concerns about accepting money from someone with such a background.
The founder decided to tackle the issue head on, and raised their concerns directly with the angel investor. After a frank discussion, a lot of the founders’ concerns were alleviated with the angel investor able to explain what had happened.
The founder ultimately decided to proceed with the investment, and they were glad they did – the investor proved supportive even when the startup ran into difficulties later in its journey. It’s a great example of how having difficult conversations early on can really help to build trust and confidence between founder and angel investor, and helps to set the tone for the rest of the partnership.
If you are in a similar situation and have concerns about an angel investors background, or where their money has come from we recommend:
- Doing due diligence on the angel investor – Do your research and trust your instincts, and speak to founders of their other investments.
- Have the awkward conversation – Don’t shy away from tackling the issue head on and ask your questions and voice your concerns directly with the angel investor.
- Ask for advice – If something feels “off” talk through your concerns with your co-founder(s), mentors, legal representatives or even friends and family to get their perspectives and advice.
It’s tempting when the desire to secure funding is strong to not listen to your instincts, but it’s important to remember to weigh up the benefits of the investment with any potential risks to your reputation and business’ reputation.
3. Misaligned goals and expectations
The third example a founder in our community recently shared, touches on why it’s just as important to find the right angel investor, as it is to secure the capital itself.
The founder explained that from doing cold outreach on LinkedIn, they had managed to receive a response from two angel investors who, at first glance, appeared to be their dream partners. The investors had sector expertise, and leadership roles at a major brand that aligned perfectly with their own startup. They had also had experience in turning around struggling companies, so on paper they seemed to align perfectly with the founder’s niche.
The founder explained that as discussions progressed though, several red flags emerged.
The angel investors were new to the world of startup investing, and they both came from corporate backgrounds. It meant that although experience was impressive, their understanding of the world of scrappy early-stage startups was limited and they had unrealistic expectations.
The biggest issue came when they started discussing terms. The angel investors proposed a deal that included a relatively small capital investment coupled with hands-on involvement. They proposed that their involvement would be translated into sweat equity at their equivalent day rate.
After evaluating the offer and asking the advice of our Funding Accelerator mentors, the founder realised that the deal structure wasn’t right. The business required capital more than hands-on involvement at its current stage, and the proposed equity stake was disproportionate to the proposed investment amount, which meant too much dilution and was unattractive to the founder.
The founder negotiated with the angel investors and suggested a different equity structure and vesting schedule that was better aligned with the current stage of their startup, and gave them more protection.
Unfortunately it didn’t work out, and despite multiple conversations between the founder and investors, it became clear that their goals and expectations weren’t aligned, so the investment didn’t take place that time. But, due to the open and honest way they communicated with the angel investors, the discussions ended amicably and they ended up collaborating with each other on a separate project.
If you suspect there is a misalignment between you and your potential angel investors’ goals and expectations, we recommend:
- Thoroughly vetting potential angel investors – Look beyond their industry experience, and get more of a feel for their investment philosophy, expectations, and levels of involvement after the round closes.
- Use a vesting schedule – If you are considering a mix of capital investment and sweat equity, be wary about giving up too much equity too soon, and use a vesting schedule to protect yourself
- Seek the expertise of mentors – Run proposals by your mentors to get their feedback and perspectives on your investment offers, and try not to let the excitement of a potential deal cloud your judgement about what’s best for your company in the long term.
- Be open and honest in your communications – Be professional and honest when speaking to potential angel investors, it will help develop and strengthen relationships and could lead to other opportunities in the future, even if the immediate investment deal doesn’t materialise.
- Don’t be afraid to walk away – Finding the right angel investor isn’t just about the money, they will be a partner so it’s important that your vision, expectations, and goals align. If they dont the wisest decision may be to walk away from a deal.
We hope you never find yourself in the position of having to turn down an angel investor, but it’s important to remember that as a founder that is always an option, you don’t have to take the investment that’s offered to you.
It’s worth remembering that accepting investment isn’t just about securing funds; it’s also creating a partnership with investors that can shape the future of your company. If something doesn’t feel right, trust your instincts – it’s often your subconscious picking up on red flags your conscious mind hasn’t fully processed yet. Saying “no” could potentially protect you from tricky situations down the road, and your startup’s long-term success.
Looking to find investors to pitch your business’ investment opportunity to? Read our 8 practical tips for finding investors.
Have some investors in your sights but looking for ways to get introduced to them? Read our guide on how to get the best introductions to Angel Investors.
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