Angel and devil investors: How to know who’s funding your startup

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A friend called me. She was heartbroken and crying. She had spent months looking for investors to fund her fledgling startup and now she had a big problem. Someone was ready to give her the money.

The trouble, however, was that the cash came with a catch. The only investor willing to pony up was someone she didn’t like. She also got the feeling he did not like her much either and yet, he wanted to invest. “If he was involved, I have the feeling I would quit my company down the road,” she told me over the phone.

Time was running out. She needed the funds and, with no other investor ready to commit, she feared she’d have to take the money from someone she couldn’t stand. The very thought made her sick in the stomach.

I felt for her and her dilemma piqued my curiosity. What differentiates a great early-stage investor from someone no entrepreneur wants to take money from unless they absolutely have to?

I wanted to know what separated angel investors ( those who add value to a company )  from devil investors  (those who destroy it).

The set-up-to-fail syndrome

Last month, famed investor and Sun Microsystems co-founder Vinod Khosla shocked the audience at a tech conference, claiming, “Ninety-five percent of VCs add zero value. I would bet that 70 to 80 percent add negative value to a startup in their advising.” Can Khosla be right? Can investors be a liability rather than an asset?

“I don’t know of a startup that hasn’t been through tough times,” Khosla said, and it is during these rough patches that he believes many investors fail their companies. But there are more ways an investor can screw a company than giving crummy advice.

A classic Harvard Business Review article explained how investors can negatively impact the psyche of startup founders—often with toxic, long-lasting repercussions.

The paper’s authors, Manzoni and Barsoux, described a disorder they call the “set-up-to-fail syndrome.” Though they focused on how this affects the manager-to-employee relationship, I believe the affliction can also manifest in the context of an investor-to-founder partnership, particularly when a first-time entrepreneur is involved.

What is this sabotaging syndrome? It begins innocently enough.

The chain reaction usually begins with the “tough times” Khosla said are part of every company’s life cycle. Sometimes, the investor has preexisting doubts about the CEO’s abilities, but the infection usually starts when the company misses a minor target or isn’t progressing as quickly as anticipated.

Fearful of further disappointing his or her patron, the CEO may unintentionally paint a rosier view of the company or stop asking for critical feedback.

Curing the syndrome

Perception matters

Real angel investors

Here’s the gist: