Do Angels Exist? Deconstructing Some Myths:

Posted on September 1, 2010

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1) Angels’ motivation is to help you

Capitalism is a great way to shift money from those without ideas to those who need it to realize their ideas.  Money is worthless if not spent or put to work.  Angels have a lot of cash and they want to put it to work after having run out of ideas how to spend it.  The CAPM tells them (erroneously) that they should diversify to get a maximal return on their cash.  So they put some in the bank, buy some real estate, buy some index funds, and invest some in start-ups.  Their main goal is to achieve higher returns on their cash than the people who follow them on twitter.

2) Angels are somehow fundamentally different from Wall Street

No. Angels do exactly the same thing that Wall Street does all day. They take money and lend it out.  Wall Street does this by selling securities to the public, which means they collect Joe Schmo’s savings and give it to a corporation.

Angels also take money and give it to a corporation.  The corporation is just smaller and they don’t need to go through the pain of going to Joe Schmo first and complying with all those SEC regulations.

3) But Angels wear jeans and Wall Street bankers wear suits!  They must be different!

Angels offer advice left and right, whether asked for or not.  But if you talk to a Wall Street banker he will be your best friend as well!  Bankers offer advice all day long, and mainly for two reasons: Gain an edge over competitors and make sure the corporation acts in a way that increases the chances that the wall street banker gets his money back.  These are also the reasons why your angel is so nice to you.

4) Angels are good people (tautology?)

Angels’ particular path to success is to get a disproportionally big junk of other people’s businesses in exchange for their money.  They do this by appearing grandfather-like, by nurturing the myths I outline here and by specializing on dealing with unsophisticated counterparties.  If you are good at coding and at dreaming up new technologies, then chances are you don’t know much about finance.  Angels, on the other hand, are professional financiers.  They will intimidate you with phrases like “I am a sophisticated investor. I do this for a living. I can negotiate a fair price with an entrepreneur in five minutes and have done that for a seed/angel round many times.”  Why on earth do you think that the result of this five minute negotiation will be anywhere near fair?  Believe me, other professional investors would laugh out loud if they heard something like this from a counterparty.   These guys are angels because they would get crushed on Wall Street.  So they focus on 20-year-olds with zero experience.

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