In the SmartUp methodology, finding an Angel Investor is often described as a superior alternative to finding a co-founder just to alleviate loneliness or fear. Yonatan Stern advises that “the first co-founder you want is an investor.” While a co-founder is a fixed resource and expense, cash provided by an angel investor is extremely versatile. It can be used to hire specific talent or fire them if it does not work out, which is much harder to do with a co-founder.
From an equity perspective, raising a few hundred thousand dollars from an angel investor typically dilutes the founder by a reasonable percentage, such as 20–25%. In contrast, bringing on a co-founder immediately dilutes the founder by 50%.
Angel Investors are often better suited than Venture Capital firms for the SmartUp goal of building profitable, fast-growing companies with modest investment. Venture Capital funds require “unicorn” exits to return their fund, while Angel Investors can find smaller investments with relatively big equity and a much higher success rate attractive. The SmartUp approach also suggests alternative financing models for Angels, such as treating the investment as a loan. In this model, once the company becomes profitable, it uses a percentage of profits to pay back the Angel Investor, providing a return similar to real estate, while allowing the investor to retain equity.
When seeking an Angel Investor, it is not necessary to find someone from the same industry. It is often sufficient to find a “cold investor” with money who understands startup risk and believes in the founder’s vision. This type of funding allows the founder to retain control and focus on reaching profitability rather than being pushed into constant fundraising and dilution.
