Just one day later, I met in a private room at Mikunis over huge platters of sushi and sashimi to consider an investment in another company. This time the mood was different although I didn’t figure that out until I asked my first ‘professional Angel’ question. And realized that these entrepreneurs had no idea what I was talking about. “An exit strategy?” “Well, if an investor wants their money back, then the other investors could maybe pay them back,” they volunteered tentatively.

That’s when it really struck me. Angels come in many forms. Legally, an Angel, according to Regulation D of the Securities Act of 1933 must have a net worth in excess of $1 million, not including their primary residence. Alternatively, potential angels may have an income exceeding $200,000 in each of the two most recent years, or a joint income with a spouse exceeding $300,000 and a reasonable expectation of having the same income level in the current year. But how Angels decide what companies to invest in is much more complicated. Let’s look at two different types of many. I have termed these two the professional Angel and the affinity Angel.

The professional Angel, acting alone or as part of a group, has making money as a prime motivation, although helping an entrepreneur is an acceptable bi-product. They are serious about who they give their money to and believe in doing their research to lessen the risk level inherent in Angel investments. They act much more like venture capitalists in that they usually have a set of criteria they need companies to meet before an investment is considered. They weigh all this data to decide whether the company is capable of meeting certain milestones that will provide the Angel a satisfactory return within an acceptable time period.

The affinity Angel, who again may act alone or as part of group, has a prime motivation of helping entrepreneurs with making money a desired bi-product. They usually invest based on gut. They often invest in markets they don’t know much about, but have a gut feel it could be hot or huge, or both. They almost always invest because they know the entrepreneur and believe in him or her. They might know them professionally or personally, or have been introduced through a trusted acquaintance. This judgment often has nothing to do with the entrepreneur’s business skills or prior successes or failures. An affinity Angel just has a good sense of the person’s drive, character, honesty, or ethics. These investments are often in classically risky areas – movies, restaurants, and retail, for instance. Add this to the lack of sufficient inquiry into the business plan, and the risk just got higher.

Right now I have in front of me three very appealing high-risk investments that the affinity Angel in me thinks are ‘terrific’, mostly because I think the entrepreneurs are so talented and creative and ahead of their time. But my professional Angel reminds me of how many times we have been in this same position before and, just in case I might have forgotten, my professional Angel reminds me loudly just how many don’t seem so terrific now.

So, how can you tell which kind of investment opportunity is being presented to you? Look around the room where the entrepreneur is pitching. Is there one single person there who has had previous experience investing in this type of deal? For example, if this is a restaurant investment, I look to see if there is at least one person writing a check that has had experience investing in restaurants. Then I can persuade the professional Angel in me that this experienced investor has asked all the right questions to ensure this is a good investment. At that point I can feel better about indulging my affinity Angel. But having a room full of friends, family, patrons, and future accountant, lawyer, and landlord is not a good sign.

Affinity investors are often inexperienced investors. Although their money is helpful to an entrepreneur, and is often more forthcoming, in the long-term their participation may be harmful. Because they are inexperienced, they never imagine that they could lose their money. As they see the company doing poorly, they become more controlling, often hastening the demise of the company. And the loss will often ruin friendships, family and business relationships permanently. While professional Angels are not happy about losing their investment, they already expect that a large percentage of their investments will never flourish, but with a diverse enough portfolio, one winner will make up for a bunch of losers.

And some of us just keep looking for investments that make sense financially and also allow us to fuel our desire to back creative, high-energy entrepreneurs, especially those who are going to make Sacramento an even more exciting place to live and work. And, for goodness sake, they feed us sushi and sashimi at Mikuni’s and invite lots of ‘gut’ people to hang out with. It’s much more fun, even though it could be less lucrative.

And as far as I know, no one has tracked the returns of Angel investments based on the motivation behind them. Wouldn’t it be great if affinity Angels were getting as good a return as professional Angels and twice the fun!

Gillian Parrillo
Board Member
Sacramento Angels
The Sacramento Executive