During economic crises, it’s tempting to grasp at any line one is thrown. This is especially true of business owners and prospective business owners who might not find banks and traditional finance options very tractable in regards to their specific business. Please see my blog entry on banks, Big Banks Ignore Bailout Promises for more of my opinions on that. However, as a result they tend to fall for the same things any other consumer does on a regular basis: clever marketing and a sales pitch. I refer here to so-called “angel investors.”
I do consider myself a bit of a moderate, perhaps even a peacekeeper, so I’ll hedge myself by saying that not all angel investors are this way. However, there are enough that take advantage of the visceral reaction that people have to the word “angel” to make it seem as if they are somehow doing a company a favor by investing in them, meanwhile requiring that monetary goals be met that tend to lead to negative amortization. It’s really no different than the sub-prime lending practices that seem to have been at the root of the global economic crisis to begin with, only instead of making home foreclosure an inevitability, this makes business closure, sale, or takeover a likelihood.
The trick to avoiding getting involved with one of these criminals is first to not panic. The moment you begin to believe that your business is going under is about the same time that any loan shark (another loaded word that more accurately describes some of these rogues) can come in and offer you terms that will still leave you ruined in the end. The next step is to carefully consider all aspects of any potential loan, be it from a bank, venture capitalist, or angel investor. Have your lawyer and financial advisor look over the paperwork before you sign. Most importantly, do some research on your angel, make sure they are who they say they are and talk to some of the other people they’ve invested with. If most of the businesses they’ve invested in are no longer around, there’s a good chance they pulled their support when it was crucial or took over the company and sold it off as part of the deal.
Not everyone who is willing to loan you capital is your friend. It’s easy to believe that the way things are now, but it’s desperation that so many people like this feed on. Fortunately, you’re too smart to fall for that, and will be sure that the angel who comes to the aid of your company is not really a demon looking for a 20x-30x return on their investment in five years or control of the company.
