Top 11 Things
NOT To Tell Angel Investors
not writing this to create a list of things not to say so people can
hide the facts or in any way mislead potential investors. On the
contrary I personally believe you must be 100% upfront with any
potential investors, and even volunteer some weaknesses to be
credible. I am writing it to help entrepreneurs and CEOs “design”
these issues out of their business so they never have to say them.
Although there are certainly many exceptions to these, as a general
rule there are many good reasons why all of these things should not
be part of your company if you are looking for outside investors. I
have discussed some of the logic why, but this should not be
considered a comprehensive discussion of the reasoning behind each
item. You should also realize some of the reasons are a function or
perception, or the market. I would never say they all make sense
all the time. Each situation is always different.
entrepreneurs greatly underestimate the difficultly and time
required to succeed at this task. They also underestimate the
opportunity cost to their business while they are “away” focusing on
something else. You only want to raise outside capital if you
really NEED to have capital to grow. I am recommending to many CEOs
I coach and mentor today that because it is so difficult to raise
money today, and valuations are not great, it would be a far
superior alternative to spend the same amount of time selling, or
adding value to your business in other ways, than to spend six to
twelve months chasing investors. In many cases spending the same
amount of time and effort selling your products, or service, could
generate just as much money and not dilute your ownership and
subject you to the whims, regulations and covenants of bringing in
outside capital. This does not however mean you should not develop
a complete business plan. This process will greatly increase your
chances of success whether you are raising outside capital or not.
I have not invested my own cash in the business,
but have only put in lots of sweat equity.
Experienced investors know that a start-up is a
roller coaster ride of both highs and lows. They want founders to
prove their commitment by investing their own money to the point
where it will REALLY hurt if they walk away during tough times.
Skin in the game is your vote of confidence, so don’t expect others
to invest if you don’t. This does certainly not have to be all your
personal net-worth, but it must be a significant portion. You can
take out a home equity loan, borrow or withdraw from retirement
funds, or just invest personal savings. In the end this will pay
off, if you do it right, because it will make you more efficient
with capital usage and allow you to bring in investors later, after
you have created some value and increased your company valuation.
Ultimately if you are successful you will likely own more of the
company as a result.
This (or that) market research firm said this
market will be a $2 billion market in five years, so all we need is
5% of that market to build a $100 million company.
Counter institutively this is basically saying you have NOT done
your homework, and do not really know who your customers will be.
This is “top-down”, not “bottom-up” market research. Besides most
of these analysts firms lost huge credibility when the bubble burst
and people realized some projected numbers beyond what the
population of the entire planet for Internet users. You need to
describe, if not actually list, the exact customers where you can
win in most cases and why. Research says that 32% of angels site
weak market analysis and analysis of the competition as the most
critical mistake entrepreneurs make in their business plan. You
must design your launch strategy around a particular customer
profile and offer something that that customer cannot get elsewhere.
Smart investors would prefer an unfair advantage in a smaller
focused market, because the marketing and selling costs will be
lower (concentrated) and the sales close rate higher. This also show
you know what you are out to accomplish and are focused on a smaller
market you understand well and can win.
My spouse/brother/uncle (or any immediate family) will be our
other senior officers. – Or we are going to use my father's company
for distribution (or anything else).
Investors do not like nepotism and also know that a divorce could
destroy the company. They are taking enough risk already, so why
should they add another layer of risk with the divorce rate at 50%?
Why should they believe out of all the management in the world your
brother is the best qualified? Not very likely really is it? Also there can be no conflict of
interest issues with “deals” that could be perceived as favored or
the result of nepotism. This allows for shifting of costs and
revenue in ways that are totally legal, but at the same time unfair
to the investor due to subjective factors. This is fine in a wholly
owned private company owned by a single individual (a lifestyle
company), but should not really ever happen with outside investors.
Enron, Adelphia, Worldcom and Tyco are perfect examples, and these
have made everyone more aware of how easy it is to abuse executive
positions. It is even possible that in the future institutional
investors who allowed this could be perceived as violating their
fiduciary responsibilities and have some liability. After the fact, if
something went wrong and the company shut down, the perception could
be that things were done improperly. The room for interpretation on
the dissolution of assets could easily be perceived as improper,
even when it is done right, due to the wide room for judgement on
the value of the remaining assets of any company that is closing.
Since this is effectively a fire sale, the prices will be well below
“fair market value”. In short, avoid any and all conflicts of
interest, whether real or perceived.
4. I am going to also be doing some consulting to
cover my expenses because of my low salary. Or I have other
businesses to run also. Or anything else I invent I will personally
own the rights to. These are all
variations of the same theme. You are not personally fully committed to the
business you want them to put their money in. This might work for
Donald Trump, but for anyone who has not made his or her first $25
million don’t expect that kind of latitude. Investors want and
deserve your full-time attention as soon as they invest. This
is OK while you are pulling together your plan and don’t have any outside investors yet, but investors are buying YOU lock, stock and
barrel and want your full-time attention and focus. This not only
means your time at the office, but as a CEO, or any senior executive
really, it also means they want to "own" your thinking in the car and
shower, and all your ideas that are a result of your work.
5. We have it all figured out.
The fact of the matter is that the only guarantee you can make is
the plan will evolve and change and the business plan is pretty much
guaranteed NOT to happen. Only naive investors would think you are
going to do everything that the plan says and not make changes as
you go. If they really believe this you probably do not want them
as investors anyway. If you say this you are basically saying you
are wet behind the ears or unrealistic. Besides if you really had
it all figured out and proven, you probably would not even need
their money, you would be “bankable” and pay prime rate instead of
twenty to fifty percent per year to get equity dollars.
6. We have everyone we need on board in management
to be successful. If this were true
you are either spending WAY too much money on staff, or you do not
understand the skills you will need to bring on as the business
grows and evolves. Companies need to grow and morph, adding
people with different experience as they go through the five levels
of development. This is never true and saying it is like waving
a red flag saying "I am an amateur". All investors assume you will need
to hire other key players and set aside a stock option pool for that
7. We are going to sell this product to everyone
(even in a single industry), because everyone can use it.
This worked during the bubble for a while
when $30 million was being dropped (most often foolishly) at a pop to fund some
broad horizontal plays. Today the smart money is mostly
funding companies going after niches, and maybe some verticals (with
top management teams, ideas and markets). Virtually every company
today needs a market entry strategy that is narrow and focused to
establish them as the “go to company” for a particular problem or
solution. You NEED to be the big fish in a small pond first because
small fish in the ocean get eaten alive more often than not. In
fact, today your market entry strategy MUST be
different than you end game by definition. If you do not understand
this statement then you do not have a complete business plan and
need to revisit it with some expert help. You
can add niches, products or expand to an entire vertical later, but
proving every element of your business in a single, focused niche. By the
time you get there so much can change it is usually even a waste of
time figuring out what that order will be in advance. Markets and
technology are far too dynamic today.
8. We have no competition.
This is virtually never true, as people are doing something to deal
with the problem you solve today. If you are a restaurant then the
grocery store across the street is your competition. You can almost
never view a market that narrowly unless you just got the patent on
nuclear fusion, even then coal, oil, hydroelectric and solar are
Only our management team is qualified to develop
and execute this business. This is
about as false, naive and arrogant a statement as anyone can make,
so don’t even come close. To say you are the only people in the
world who can do this is not only terribly unlikely, it is in FACT
something you can not possibly know for sure, because you don’t
actually know everybody else do you? So it is always a false
statement and shows overconfidence. It is better to err on the side
of saying something like: “we know there will be competition and
here is how we will be cheaper, different, better and/or faster and
maintain our market lead."
10. Our projections are very conservative.
This is the most overused expression of the lot and I would guess it
gets said in the vast majority of investor presentations.
The fact is that entrepreneurs are always optimistic; they wouldn’t
be entrepreneurs if they were not, as they are certainly fighting
the odds. Any good investor is going to make their own judgements
on the ramp rate of sales and expenses anyway, so this is better
left unsaid. The fact is you never know because you never know if
there are fifty other companies working in stealth mode on the same
idea. According to research 32% of angels site “unrealistic
financial projections” as the number one mistake made by
11. We don’t know how much money we need.
Or we can
do it on anything between $500K and $10MM.
Investors want to know you have a solid plan. They also all have a
certain amount they want to invest. Do your homework and understand
exactly who you are talking to. You should know exactly what you
are asking for before you go in and have a business plan with a
financial plan that matches this. Asking for the wrong amount is as
good as blowing the presentation entirely. Although you may be able
to execute a business plan more slowly, yet successfully on less
capital, and you may have a couple of scenarios figured out (you
should), you should generally only show one plan to any particular
Management Team Needed
Getting investors today requires a strong team, idea and market. What level of team do you need to have a good
likelihood of obtaining angel financing? Here is a chart of the
level of management team you will likely need, and you can
interpolate between these levels. Today you will likely need to
reach level five to bring in any angel investors, and probably a
level 8 to get any money from VCs. This also assumes you have an
attractive, and large, potential market, some barriers to entry and
a good head start or some patent protection.
In this environment you need to pull out all
the stops today to obtain angel financing. This means getting
further on less money than ever before. Which in turn means better
focus and using virtual company techniques to get much further on
your OWN personal resources, And/or friends and family money. It
also means pulling together a team of people that address all the
major risks in the business. This requires creative deals to bring
people in and probably not be paying them, certainly not full-time,
while you are creating real value in your business. Investors want
to invest in something that already has value built in, not just an idea
or business plan with a “one-man show” today.
The most common mistake
made today by entrepreneurs is going out looking for money
before they are ready. The competition is fierce out there, so
don’t burn your best personal contacts by approaching them with an
incomplete or undeveloped business plan or company. If you have not
successfully raised money before then you must get help from someone who has.
C-Level Enterprises offers a complete financing readiness review and critique
that is guaranteed to greatly improve your chance of obtaining financing.
for further information.
Here To For Information On Our Complete Two Hour Angel Financing Course
Including a Slide
Book and Two Audio CDs