Europe needs to embrace operator angel investors

This article was originally published on Sifted on July 9th, 2021.

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It’s never been a better time to be an angel investor in Europe given the incredible quality of companies and talent here. In the first half of this year alone, European startups have already raised more than the total figure for 2020. Not a day goes by when you don’t see an announcement from another young company that has raised from successful European founders, or startup execs who have picked up angel investing.

But it’s the people you don’t see in those announcements that matter: former or current startup employees with hands-on experience. The ecosystem — and some unfortunate regulation — shuts these aspiring angels out.

Most of these ‘operator angels’ can’t write big cheques, but they do have knowledge about the nitty-gritty of day-to-day startup life. They can bring value that far outweighs the administrative hassle of bringing on a small investor. So why are founders saying no to their cash?

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What operator angels bring to the (cap) table

Operator angels can play an instrumental role in helping founders build a successful startup. Operator angels know their function and relevant industry inside out — often far better than an angel with a generalist background as a founder. If you’re building an API-based product, someone who built the go-to-market towards developers — such as Romain Huet, who led developer relations at Stripe and Twitter — will be a far more valuable resource than a founder in the same space.

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Operator angels know their function and relevant industry inside out — often far better than an angel with a generalist background as a founder.

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Operator angels are also not as busy as full-time founders who also angel invest. Their portfolios are often smaller too; making it more likely they’ll sit down with you and provide guidance.

Erika Batista is one of the most successful operators known for building close-knit yet massive communities (at The Family, on Clubhouse and now as VP international at On Deck), and is recognised for having facilitated several top-tier funding rounds for entrepreneurs.

Amaury Sepulchre has coached and helped a dozen successful B2B SaaS emerge from pre-product market fit to Series D, inside and outside eFounders.

Alison Eastaway has been instrumental in building Sqreen (acquired by Datadog earlier this year) and has supported many founding teams in scaling the people function throughout different stages of development, namely for Point 9, Y Combinator and Greylock portfolio.

Operator angels are independent and invest their own money. Unfortunately, this can’t be said of many angels out there nowadays. I can’t count the number of times that I’ve taken a meeting with an operator-turned-angel only to find out that they’re a VC scout. This is a serious breach of trust; there are conversations that I can have with operators that I don’t want to get back to VCs. While they do see a cut of a good deal, VC scouts are not investing their own pennies.

Finally, skilled operators from underrepresented backgrounds often don’t have the cash to write big cheques — especially if they haven’t had a successful exit under their belt yet. But inviting them to participate in a round can be a great way to diversify your investor base, giving you access to more diverse networks of talent and, potentially, investment.

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No country for operator angels

If operator angels are so great, why are they scarce in Europe?

Often, operator angels don’t have the capital to invest five-digit cheques. That means founders don’t approach them because there is an entrenched mindset among founders that a ‘clean’ cap table, with fewer investors owning a share of the company, is a good cap table.

In addition, the European admin hurdle is real. Syndicating — or grouping together — small cheques to make them easier to manage on the cap table takes time, money and lawyers. Regulations are not totally harmonised across countries. In the US, AngelList makes it seamless, fast and affordable to syndicate cheques — but Europe is lacking its equivalent.

There are some partial solutions to the admin problem. AngelSquare makes it easier to create special purpose vehicles (legal entities set up to do just one investment) and to manage deal clubs. eFounders, a SaaS startup studio behind some successful SaaS companies like Aircall and Front, recently announced AngelX, ‘the European AngelList’ in the making. The platform claims it will take administrative hassles off angels’ plates and make investing as a group of angels easier.

It’s also worth mentioning that some European angel investing admin might be annoying, but in most European countries literally anyone can angel invest. In the US, becoming an accredited investor is compulsory for angel investment, which means having a significant level of wealth.

Instead of aiming for ‘clean’ cap tables, we should be aiming for ‘healthy’ cap tables filled with investors who can actually add value. The key to doing that is opening the door to smaller cheques from independent operator angels.