Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
There is a tendency among entrepreneurs to chase money wherever they find it. The pressure to find the financial resources so necessary to build a business can be over-mastering. Most of the time the partnerships which form between founders and angel investors are productive but, in a few cases, I have seen it turn very destructive. Companies that should have realized success have been held back by investor partnerships that have severely limited their potential or, in some cases, doomed them to failure.
Look Beyond the Checkbook
It may be hard to be discriminating when you are in the heat of the ‘money hunt’ but the sins of omission you commit while chasing investors can return ten-fold to destroy any chance of success. The problem become acute because of the incredible range of circumstances, experience and interests that angel investors bring to the table. Their having money to invest in not enough. You need to understand their basic motivations and what is driving them to act as an angel investor. You also need to understand that all investment money is not the same. Some money will help you succeed while other investments will be a poisoned pill that will reduce your chances of building the business you envision. Here are some ‘sacred cows’ that you need to slaughter:
- Angel investors are in it for a return on their investment: Well, how can you argue with that? You would assume that the primary driver is always a return on investment. But, as you will read further on, that is not always the case. I know angel investors who are simply bored and looking for something to do and others who are frustrated CEO-wannabees. For some investors, it is all about a return but for others the return is secondary. You need to sort these two groups out. Do not listen just to what they say; it is what they do that is important.
- They have money they; must be smart: This is another fallacy. Some of the dumbest and most self-destructive people I have ever met are wealthy. I have found only a weak correlation between wealth and intelligence and a slimmer one between wealth and wisdom. Many a destructive hubris has been built on a fat bank account. Investors have an important role in start-ups but pretense, omnipotence or omniscience can warp an investor’s understanding of that role. Smart investors play their part in a highly professional and constructive manner. Seek them out; they are most likely the winners you want to associate with.
- They have been successful in business so they will know how we can be: Past success is not always a good indicator of wisdom going forward. In fact, great success can be counter-productive when they decide to work with start-up companies. I know one investor who continually regales his CEOs with stories of how he ran his company. Of course, the company was running over one hundred million annually when these stories took place. The CEOs, wanting to emulate his success, take steps that are entirely premature. The result is wasted resources and a dysfunctional corporate culture. Past business success is not a good indicator of professional performance as an investor. Remember, you are seeking an investor, not a shadow CEO.
- They will become my close personal friends and advisers: Not a good idea; the correct focus of investors should produce a tension in the relationship with management. If you want a friend, buy a dog.
The Bad and the Very Ugly
The problem with writing about angel investors is that they come in an amazing variety. I have met lots of them and there is always something different about each. The ease of entry into the field may have something to do with it. The only real entry requirement is wealth beyond current needs. That’s all it takes to become an angel investor. There are no educational requirements, courses to take or certifications to merit. Only a bank account and a decision to ‘invest’ are required to hang out a shingle and open up for business. Watch out for the following:
- The Shadow CEO: I have met investors who purposefully pick weak or inexperienced CEOs to work with. Their real agenda is to run your company from the back seat. These investors are very intrusive and will push you to make decisions and commit resources that will put your company at risk. They are mostly successful entrepreneurs who have built and sold a business. In the process, they have lost touch with the necessary energy levels and passion that is essential to building a start-up into a going business. Mostly they remember the later stages of their company and the extended staff they had. Then they turn the CEO into a kind of executive assistant and attempt to run the company by proxy. Most of the companies in the portfolio of this type of investor remain very small. They generally have very complex Excel spreadsheet projections and poor records in meeting them. Stay away from the Shadow CEO; they are very dangerous investors.
94 Responses to “Angel Investors – The Good, Bad and Very Ugly”
Sorry, the comment form is closed at this time.
Larry Jean-Baptiste wrote:
I just wanted to commend you on your article, I was actually approached by a broker that required $220,000 to fund us. It sounded quite rediculous but after reading your article it solidified my opinion. Thanks for the help.
MARCO Cardoso wrote:
Dear Earl,
You are a recognized authority in world of providing capital. I feel that your leadership role could incorporate that corrective action.
I am nothing the in the world of providing capital. Whenever in our little deals I have the pleasure of meeting persons that call themselves angels (or call others angels) I try to reason with them and so far all of them agree with the need to change the use of the word. Recently friends of mine that are establishing their vehicle to operate in providing capital industry are thinking to change de name of company as clear indication to the market that they are not what “angels” are.
If I would not understand you as reference in the providing capital industry I would not have share this humble though.
Have a great week.
Marco, Thanks for the comment and compliment. I am glad that you found the article useful. As for your observation about the use of the word ‘angel’, I have always thought that contradicting the established lexicon is akin to yelling at clouds. Early-stage investors are called angels; that is an established fact. I think we should be careful to observe the accepted terminology and make the issue the ideas we are trying to communicate rather than the words others use. I work to bring clarity in areas that I think are frequently misunderstood. I find that difficult enough without having to argue about terminology at the same time. Most entrepreneurs bollix the search for early-stage funding; some very badly. My articles have been an attempt to help them up their game. Dr. Smith
MARCO Cardoso wrote:
Dear Earl, congratulations for another important article! Thank you!
I always wonder why a person would:
. be considered by others as an angel or
. be considering others as angels
Certain things go behind the pathologic… I think… I feel they are just ridiculous… I think those of us that are in the industry of providing capital could make a great favour to everybody if we would be more careful with the use of certain expressions… what do you think?
Daniel, That article would be entirely too long and general to be valuable. The search for investors is always specific to the founders, the value proposition and the interests of the investors. Finding investors is not like going to a supermarket and taking money off the shelf. There are two facts that are unavoidable. There is lots of money out there and that money is having a hard time finding investment worth opportunities. The hard truth is that most opportunities they see are simply not investment grade. Dr. Smith
Daniel Vinovitsch wrote:
Looking forward to your next article which hopefully will be titled: How to FIND angel investors…
regards
Daniel
Jared Turner wrote:
Great article! Lots of great and applicable advice. Thanks a bunch!
Dennis, I think you are referring to what I labeled the ‘broker’. One rule that everybody should follow is do not pay retainers to people who are going to help you raise money. You might hire a consultant to polish your business plan or presentation. But never pay anything but a success fee for raising money. Most of the people in this business are scammers. Earlier this year we helped to successfully sue one. Once the law suit was filed, all sorts of victims came forward. This particular scammer had made a living taking retainers and delivering nothing. He is now facing serious jail time. Dr. Smith
Dennis Meekins, CPA wrote:
Thank you Dr. Smith for a very accurate depiction of the field. Our recent experience exposed another player – the “Masked Angel” – claims to have money but really wants to be paid for consulting to introduce you to his “network” of potential investors. I put them below the Bottom Feeders. Thanks again.
Tom Mahoney wrote:
Being on both sides of the VC desk for 25 years, allow me to add some comments:
1. Learn early to distinguish between tire-kickers, passive investors, and lead investors. Tire-kickers will never say ‘no’, will always be interested in hearing from you, but never commit to invest. Passive investors are interested but will only commit after someone else steps forward. Lead investors are your most rare, but important investor, as they will take the time to put structure into the agreement.
2. Writen Agreements are fine, but my experience is that no Agreement can take into consideration every struggle and challenge. My usual prescription is to take the time to develop a good working relationship between investors and management. And make sure you have a board you can trust. A PPM is the best protection for both management and investor, but this is only the start.
3. Valuation must be reasonable, but expect it will be challenged. Management must have a basis as to why the company’s and investment valuation, but angel investors will try to drive a hard bargain. Price it too high and it will tell prospects that you don’t know what you are talking about; price it too low and it will send the message that the company will not survive.
4. Don’t give up, but remember to look into the mirror every day. Overcoming difficulties comes with the territory. The entrepreneur’s job is to interpret the angel investor’s rejection as to a serious problem with the business model, or the simple statement that the plan works and you need to continure looking for that angel investor that works.
Hope this helps.
Tom Mahoney
Hilldale Ventures, Inc.
Scott Gu wrote:
I like the article. Angel investment is a very exceptional practice, different from common sense in many aspects. It is extremely important for investors and entrepreneurs to understand the uniqueness of their business and reality.
Some early stage ideas are just like babies. I saw many baby trees are supported (actually also regulated) by a frame. The frames protect the trees without giving them too much pressure because pressure will break baby trees.
Strong support and regulation help the trees to grow, as long as not causing confusion, lost, and loss of energy.
Thanks, Earl.
Scott
Scott Gu wrote:
The difficulty is how to define performance metrics, they are case by case especially for early stage startups. So it is extremely important for investors and entrepreneurs to understand the specialties of their case.
Scott
Girish, Thanks for the comment. I mostly agree with you but the most effective angel investors also come with a sharp focus on performance. That means establishing performance metrics and tying the ownership of the management team to meeting those goals. The ones that do not tend to create a culture far too casual to be successful. Dr. Smith
Girish Bellalcheru wrote:
Very intersting article, I want to point out another new breed of angels out there who are probably testing waters with limited resources before floating a larger fund. These are the ones that will squeeze firms for maximum ROI and may sometimes leave a sour relationship. Like you mentioned there are a lot of good people who are in it for the thrill of being involved and long term returns and these are the one that are most helpful in the early days.
Robert Chautard Jensen wrote:
Dear Dr. Earl,
So easy to jump out of the frying pan into the fire!!!
Very interesting profile on investor types.
Thank you
Robert
Ali, Thanks for the comment – very sound advice indeed. Dr. Smith
cognisantassociates.co.ukcognisantassociates.co.ukcognisantassociates.co.uk
Ali Zartash-Lloyd wrote:
Hi Earl
Great article and perhaps a bit of the painful truth!
Just a contribution to your excellent advice:
1. Ask for a reference! Strange you may say when you have the proverbial begging bawl out, but the reality is any business relationship is a two-way street. When you are being interviewed for a job (remember those days?), did you ever ask to talk to existing employees? Well may be you should have. You are giving up a piece of your business which you have worked your guts out for, so why should anyone think it is strange to ask for a reference? Talk to other companies they have invested in, get their views and without the person being involved if you want the truth told!
2. Make a watertight contract and as Earl suggests make sure everything is covered. It is better to have a fall out before the wedding than afterwards. Remember divorces cost 10 times more than any cancelled wedding (ask Paul McCartney!).
3. Take professional advice. This is one of those occasions you should not rely on your entrepreneurial skills alone. Angels, non-execs and investors do this for a living, so what makes you think you can match them or outsmart them? Pay someone who does this for a living to put together an agreement that protects both parties’ interests. Remember a good deal is only when everyone wins.
Finally, if you are looking for funds we have investors that are willing to support any sound business that is looking for extra cash to deliver growth or survive tight cash flow situation but their banks are being … eh… well bankers!
Check our website http://www.cognisantassociates.co.uk/consulting/business_grooming.html
Regards
Ali
Larry, Google and networking in your area. They are really not hard to find. Most of them have websites which list their investments. Dr. Smith
Larry Jean-Baptiste wrote:
Hi Earl, I’ ve had the chance to read your article and it is quite enlightening. I am a startup company looking for funding for our project and it is always nice to get advice on how to search for investors. One thing, it seems as if the angel investor community is a secret society. What are the best ways to find these angels and pitch a great idea?
Michael Hermens wrote:
Thanks a bunch, Dr. Smith, for the great article. I am just entering the entreprenurial arena, so a lot of this is new to me. Its good to see thought leadership, as opposed to the traditional self serving content on LinkedIn. This will be helpful as I take my next steps. Thanks again!
Chris, Great comment and a good metaphor. I would carry it a bit farther and mildly disagree with your statement, ‘The entrepreneur needs to have the exact same goals as the investor’. I think that you would agree that they should be aligned but will never be identical. Investors, particularly early-stage ones, foresee their exit long before the entrepreneurs. Your point on the cost of taking investment is one that many entrepreneurs do not come to understand until the closing table on the way out. Thanks for adding to the discussion.
Larry, Thanks for the comment. I am working on a book that will cover that question. See Chris’ very astute comment. The process needs to be two way – both sides have to meet criteria before things really work. Dr. Smith
Chris Maresca wrote:
@larry
Think of it as getting married. A similar sort of connection is needed with the investor, otherwise it will end in tears. Even then, all of the goals must me aligned. The entrepreneur needs to have the exact same goals as the investor, which is to sell the company at some point.
One of the topics that is often never discussed when people talk to investors is the exit. Understanding what everyone considers to be a good exit is absolutely critical.
It’s also worth point out that for most entrepreneurs, taking outside money will in fact lower their exit dollars. Yes, the overall exit might be higher, but the dollar amount the founders receive will often be the same as if they had not taken outside money, esp. if there are multiple and/or down rounds.
Chris.
Chris Maresca wrote:
@aderemi – re: convertible notes – yes and no. The terms are written into the note, which you can think of as an option to convert. Typically, the conversion is not that favorable, giving every incentive to avoid the conversion, e.g. it typical drives down valuation. In a cynical fashion, sometimes investors will try to make the company stumble, forcing a conversion so they can gain control….
That said, if the company goes bust before the note expires, it is possible that the note is also secured against the company’s IP. Even if it is not, having such a note would likely give the investor certain preference on remaining assets in bankruptcy.
I would also say that if you are not in the US, you should also ask your bank what kind of credit they would extend, particularly against receivables. I recently advised a CEO client of mine to look into this, and to his amazement his bank was willing to extend a $300k line of credit to his company. I would note that this was around 8x what an angel was offering for a rather large chunk of the company….
In the US, it was often possible to get a line of credit against receivables, particularly if the receivables are from large, stable companies (er, yeah) or government agencies. The interest was around 10%, but I am not sure if anyone is still doing this given the current credit crunch.
There are also a number of community lending institutions cropping up around the US which are dedicated to lending to SMBs and startups. That is also a good route as they tend to act like old community banks. NPR had a story about them on 12/22.
HTH,
Chris.
Sharon Weshler wrote:
Great stuff, for more on Israeli angels check out the “ISRAELI TECHNOLOGIES” group on Linkedin where over 1000 Israeli angels and entrepreneurs network
Aderemi Simmons wrote:
I must say this conversation is refreshing, I was tired of useless self promoting discussions. This is why I joined Linkedin to partake in informative discussions.
I found your article very useful as I am currently seeking funds for my next aggressive film production. I am aware of the need to perform proper due diligence on your investor, but your article gave me another perspective on forming the right agreement with the right investor. It made me double think some things. Thank you, I will pause and invest more into narrowing my investor options down.
Not clear on the convertible note does that mean if you were not able to deliver on the original terms of your agreement the investor has an option to convert repayment into shares? Help me understand, if this is correct why would an investor want shares of a company that can not repay its original loan…given things can happen that can delay repayment, but is this a pre-determined pitfall set by the investor?
Remi
Chris Maresca wrote:
@mike – if the directory is any indication, you should be able to find some good groups. I’m saying this because there are only about four serious angel groups here in Silicon Valley and two of them are in their members list.
At the very least it will a good place to start. That said, this may be a case where a lot of ‘angel groups’ are joining to get credibility with accredited investors.
Mike Snyder wrote:
Great stories… very eye-opening and useful for any and all entrepreneurs. Has anyone found good angels through the Angel Capital Association?
Chris Maresca wrote:
Just a quick note. In my experience, angels are usually worse than VCs. This seems to be because angels are investing their own money, whereas VCs are investing institutional money. However, in the end, they all want their money back and then some.
For most people, friends and family money, given because they believe in you and want to support you (with little expectation of return) is generally the best way to bootstrap if you need external dollars.
@lauri – you can give your client all the advice you want, the only thing the SEC will prevent you from doing is acting as their agent. The easy way around this is to be hired as an employee, then you can act as their agent.
However, I would guess that your problems lie elsewhere. I think you would do well to re-visit your VC target list and look for firms that are specifically targeting your vertical AND have active funds. Check VentureSource for that specific info.
Finally, keep in mind that funding deals are currently taking 6-9 months to close, so that’s also a factor.
André D. Henderson, Sr. wrote:
Dr. Smith,
Thank you for that article! I agree with Hal… this should be a must read for those seeking funding from Angel Investors.
Finding the right investor is more important than obtaining just financing!
Bill Joyce wrote:
This has indeed become a very solid and interesting conversation.
I, however, need to throw down the gauntlet. When did any American ever say that the SEC is to blame so we can’t do anything? When did we give in to our own government and give up?
I do not believe that this is America or our investment mentality. – Show me a mountain and I will climb it show me a challenge and I will step up to meet it. That is what has been ingrained into my America.
So we have obstacles.
• Are they defined – Yes we know who and what the SEC is.
• Are they measurable – I will have to ask you to answer that one…
• Can they be overcome – certainly!
We have something very deep inside our heritage that does not allow for this type of defeatist attitude. All that I ask is that we think past the issues to the new solution.
There are those who choose to listen to war stories and lament. I choose not to be one of them. The words and wisdom shared in this lead me to believe that neither are you. Anyone willing to look for the solution I would love to hear from you.
Bill
Lauri Biddick wrote:
Great discussionI I have found value in following it.
I have been consulting for a principle with a green, new tec project. The states are throwing grant $ to him right and left. His ROI is excellent, he will have no competition in the market, demand for the product is overwhelming and he is more than ready to execute. His tecnology has a patten and is proven. All his DD and paper work is in order and well compiled I have talked to VC/ groups, Angels, funds, and even some nut jobs!
If they are not pulling the trigger on this project, just what are they wanting? This is an incredible project, yet, its been so difficult to find the right funds. I just can not believe what I have experenced out there for funds! Its very disturbing to say the least. Your right about the securities option. Sometimes they do need to look at the options and structures with going that route, yet I can not help the client as I should with that because of the laws surrounding securities. I do send them on for those discussions. I am at a point that I just do not know where else to look for him. Do any of you have advise for me? I want to hear it!
laurib1958@yahoo.com
PS
This country and its greatness was built on some risk and investment? Have we lost that?
Chris Mcgourty wrote:
Excellent article – many thanks. I have had destructive experiences with a rich uncle and a bottom feeder. A point not immediately obvious is that these angels can skew the whole business plan/ team very early on in the process (it is difficult to stay true to your own course/ intellect) – I spent too much time tailoring my project to the wants/ whims of the investors (the rich uncle) and found it difficult to remove from the plan/ materials some of the junk suggested. I never trusted the bottom feeder (plus should have realised that at one point he and I stopped getting along) – he just ripped the project off and tried to steal some of my team.
Hal Spice wrote:
Dr. Smith,
Excellent article! Thanks for posting. Actually you have the foundation here of another book. Below is some of my observations regarding angel investors, based on 25+ years of experience.
1. When seeking money (from angels or VCs) ALWAYS remember that due diligence is a two-way street. You should ask potential investors as many questions as they ask you.
2. Dr. Smith correctly identifies the issue of an angel’s investment motivation. Resolve this issue first, to save time an grief, particularly in the current economic environment. The questions I always ask an investor first is (1) Are you liquid? (2) How many deals have you completed in the past 24 months? (3) What is the dollar amount of your typical deal? I have found these 3 questions quickly separate the pretenders from the contenders.
3. The fallacy described by Dr. Smith that money = smart is dead on correct. Remember, even a broken watch is correct twice a day.
4. Dr. Smith’s comment that “Past success is not always a good indicator of wisdom going forward.” reminds me of my days at UBS as a Wealth Manager when we were always required to advice clients that “past performance is not an indication of future returns.”
5. Again, Dr. Smith is absolutely correct about “Insistence on Performance Metrics”. If an investor is not obsessed with performance metrics, I wonder about how much intellectual value add he brings to your venture.
All the other comments about “good angels” should be in the forefront of your mind while you are seeking capital.
This article should be required reading for anyone seeking angel investment. Dr. Smith, I look forward to Rev 2.0 of your article.
best regards,
Hal
James Wallis Martin wrote:
Good article. One area to consider expanding is the start-ups within large organizations or funded by large organizations. Divisional start-up face many of the same issues, as independent start-ups and start-ups being funded by “Big Brother” with the intent of being acquired have same issue.
A perfect example I saw happen (with friends working there) was Xing Technologies Corp which had a “Big Brother” angel investor (which turned out to be Sony, Japan). Xing developed a music compression technology which made the file size of audio files a fraction of uncompressed .wav files. It was commonly known as mp3. Sony, once the development was completed and market acceptance was on a huge uptake, Sony pulled its funding through its investment strawman (who posed as the angel investor) and with the company suddenly strapped for cash, Sony formally came in to make a buyout offer for Xing. Sony thought this was a clever way to grab the IP, however, it was the developers at Xing who had the last laugh as they had made the source code for mp3 compression open-source. Where Sony had hoped to be able to capitalize on the mp3 technology and sell licenses much like Dolby to its competitors, it wound up killing a perfectly innovative startup and gained nothing since they underestimated the impact of open-source development.
I guess the mantra should be “Know thy investor”
J Roberge wrote:
Good comment Bill. Over the last 24 months more sources of capital – Angel and seed VC – have pulled away from the early stage investments leaving a void. From there Series A VCs have also focused on portfolio investments. This is at a time when the economy, and entrepreneurs need more investment capital into innovative and creative companies (thankfully there are a lot of problems in the world that need solving… Go entrepreneurs!!).
Dr. Smith – On my earlier comment I was referring to a convertible note for the angels, which converts at a discount to the Series A. The Series A negotiations the financing, and the entrepreneurs will earn-out from that point (75%-85%) over the next 2-3 years. The Series A and Angel are fully vested at the Series A round.
This is one possible approach that has been used successfully, but not always the most appropriate. Obviously such a solution depends on the Angel and their requirements, level of sophistication etc. (all the personalities you outlined in your original post). Many are adverse to convertible notes and want to be fully invested. That’s fine and it is merely a process of negotiation.
Mark Montgomery wrote:
Bill,
I’ve been working on national and international reform for decades. One major problem in the U.S. is with the current securities law which essentially makes criminal activities in finding investors necessary to grow a strong economy.
As Earl touches on in this piece, one cannot understand the risk without fully understanding the technology and markets, and that’s only one of the essential ingredients, so the numbers one needs in matchmaking is huge in order to meet the needs of parties– much greater when accounting for the other essential issues, not to mention willingness to invest in those who are well matched.
Some software oriented firms have attempted to address this issue in the U.S., but my interpretation of the law suggests that they are stepping over the SEC regs, so I won’t engage. Another attempt I was close to by the SBA years ago failed precisely because they followed the regs….
So we have a serious challenge. From my recent exposure, the U.S. is no longer competitive just in the capital formation process, which is only one issue entrepreneurs must deal with, and frankly often not even the most important depending on the model. We are working on one important part of the problem in IP in large orgs and their partners, which today dominates life on earth for new ventures, and have solved that aspect of it functionally. Culturally and adoption wise is of course a much different story — again the U.S. is falling fast relative to the world, sadly. .02- MM
Bill Joyce wrote:
OK I am a believer. You have properly painted the landscape we find ourselves in and it is the truth. There is good, bad and ugly.
What is not there is a transparent process that will help both the investor and the “newco” build solid viable relationship. And until this is put in place all we will be able to do is tell war stories and pat each other on the back sadly.
You came so very close to the solution – a relationship founded in milestones and measurement that has identified RISK as a measurable variable and provided resources accordingly..
I have told friends I could invest in ANY Project. It is just that one will required a 20% internal rate of return and the other will require a 380% internal rate of return… I just buy the risk security to protect my investment and include that in the cost.
Now we must rebuild the investment paradigm. We need to have an open process that lets good projects find resources. Most good small projects fail because the investment community demands $1M plus investment thresholds when a few 100K would bring the product to market and prove it properly.
Thank you for your insightful words. If you would like I would be happy to join the team that wants to find the new solution to an old problem.
Bill
Mark Montgomery wrote:
Exceptional Earl — I tweeted and will share with our NM Entrepreneurs group — small, but going well. Also have a couple of entrepreneurs seeking angel capital locally will point your way.
We’ve apparently run into many of the same people as I have experienced all of these, and would extend quite a few to VCs.
A good example of self posting articles that isn’t spam — something one group I belonged to yesterday accused me of as well as attempting to profit from the deaths in the tragedy of Fort Hood, when in fact nothing is further from the truth — as the piece clearly points out we are attempting to prevent future crises. Nothing new, but more evidence of cultural dysfunction and the very high cost at times.
Depending on randomness on the Web has never worked well — targeted information and education works, and that often requires one to post one’s own work in order to have a positive impact. Good work — MM
J Roberge wrote:
Interesting article. Focusing on the investment agreement you touch on a very important point. The “earn-in” by entrepreneurs. Another common angel agreement is the “convertible note” whereby the angel round converts to shares at a negotiated discount to the Series A round.
Melinda Sorensson wrote:
As always, your article is full of wisdom. Thank you, Dr. Smith.
It is very timely for me.
Kind regards,
Melinda
Scott Morgan wrote:
Dr Smith,
I have read and it is very enlightening. I am looking at various sources for a new venture I am launching and although I am in an enviable position of just looking for $100K to launch and potential 3rd year net profit of $3m I am not overly happy with the Angels and their motivations. Having sold a business revcently for £12m only to be shafted by the Angels and left with worthless Loan Notes.
Have a great day and once again a great take on the Angels.
Well written article, loads of good advice. I agree with good planning, but if I had to go to the level of a secretary, then none of the Telco startups where I was involved would have been able to start at all…. you can also have death by planning. -
Consider doing a USD 2 Billion startup – taking 5-9 months to launch a greenfield Mobile telco operator. – and having to detail 700+ people (launch time only)’ metrics like that – forget it – you will never launch. You work out the business metrics, and growth metrics and start to fly, with a cripple technology (not fully implemented), most of the people (at launch time) joined the business during the month before launch – i.e. absolutely on a minimilastic basis, barebones, flacky technology and most of the team that does not have a clue what to do, and a handfull of experienced startup people (technologists through the business skills), and some investment money – all used to launch with…. and in all cases very successfully.
Initial startup planning beforehand, with next level planning during pre-launch phase, followed by a 18 month stablisation and eventually the transformation from a startup (entrepreneurial) towards a corporate business. All along measuring and planning the enxt phase of growth and stablisation in accordance to the initial (or adapted – usually for high growth rate) targets (3-7 year targets).
Clarity about the various phases and relationships changes during such is all important, as is the planning of the various investment phases, and the changes of roles during those.
Dr. Kok
My hat is off to you in recognition of your wisdom and experience. Every story has a different twist and mine may not seem unusual to you, but it brims over with blood, sweat and tears yet the dream persists. I had a successful career as C.E.O. and President of one of the South’s largest independent advertising/p.r/marketing agencies which we sold to Saatchi and Saatchi on a Friday many years ago.
The following Monday, the D.E.A. called and asked me to start a drug prevention program which I was delighted to do and spoke to three schools a day for close to seven rewarding years.
In 1982, I saw people using palm devices and there were no wires behind them and the proverbial light bulb went off. It switched on my lifetime dream to answer the major problems of worldwide advertising (1)virtually reduce the 50% waste of the advertising investment, (2) eliminate clutter of too much media exposure, (3) impossible to actually measure results, (4) ability to change advertising content in real time, (5) capability to influence the buying decision in the final 8 seconds of 80% of the consumers (6) be interactive between the consumer/advertiser/retailer(7) GUARANTEE absolute results of the advertising investment
I was 81 years young, and many of my peers had retired or passed on, but the challenge was too great to ignore, so in early ’83 my wife and I took $500,000 out of our retirement fund, and we ignorantly thought that in one year we would out Google Google. Between the corporate and patent attornies, creating the logo and website, acquiring technology “expertise” to develop the idea into a workable prototype product the money was soon gone. So I went in search of “angel” support. It wasn’t easy, but friends and family rallied around my cause, and put in $2,400,000 with investments ranging from $25,000 to $400,000. It was enough to allow travel to get clients such as Coca-Cola, General Mills, Kraft, Pepsi, Colgate, Bimbo Bread, Rotel, Tyson Chicken, EverReady, etc. to paricipate in one supermarket chain with our prototype model. The people who we had hired as the “technology experts” mislead us and we quickly learned that our concept/idea was greatly accepted, but our system was a flop, a failure, a flat-out-bomb. I had to apologize to our advertising clients and all five of my associates quit walking out-the-door leaving me alone to heal my wounds, and cry at night.
Let me get back to the “angels.” Once we acquired the money, one of the key investors insisted that I assign our patent application over to him and his group of fellow investors. I refused, but compromised by drawing up an agreement that only P.O.P. Broadcasting had the exclusive rights to use the technology and that neither party could sell the patent without prior written approval from the other. That individual investor, along with his group, became bitter opponents and continue to be obstructive until this day. However, in hind-sight my decision to control ownership of the patent was correct and totally defensible. We have two members of the angel group on our Board of 5 people. I serve as Chairman and the other represents our manufacturer.
When it looked like the game was over and the fat lady was about to sing I received a phone call from the manufacturer we were using. They explained because our independent “technology company” was their client they professionally were not able to call us and warn us that the product would not work, however now that we had severed relationships, they would like to redesign and develop a sure-fire cellular system that would accomplish our goals. I immediately hopped on a plane and we signed a contract that they would put $3.6 M in-kind to develop a marketable product. They are the world’s second largest contract electonic manufacturing company with $12B in revenue, 50,000 employees and 80 plants in 21 countries.
I thought our angel investors would be supportive, and knowing we had spent our last dime might come to our rescue. With just one or two helping, we raised enough mony to keep on going for about 3 months more. We have debt and work from hand-to-mouth so the V.C.’s ignore our pleas, and other angels laugh in my face since it has taken so much time to get where we are today. You might ask, well where are you?
From experience, we have rewritten our Business Plan and have made some very calculated changes.
We decided (our Board and management team which consists of myself and one other gentleman who is a serial entrepreneur with a technical background) to not sell our wireless system, but to Lease it on a three year term, with a monthly charge for hosting and servicing which is actually more profitable and takes less direct manpower. Plus, we are concentrating our sales efforts internationally outside the USA because we have learned the hard way that other nations are more open to unique ideas and are more risk assumptive.
As we enter into 2010, which is going to be OUR year, we currently have representation in Trinidad and the Caribbean with proven sales lift tests with Coca-Cola, General Mills, Nestle and Caribbe Beer; plus we have developed representations in Brazil, Mexico, U.K., France, and Europe who have gotten the interest of Carrefour, Ahold, Marks and Spencer, H-E-B, 7-Eleven. Pao deAcucar, Benavides, Bi Happy and other major retailers plus Coca-Cola, Nestle, General Mills, Unilever, and a host of other major advertisers.
Confidentially we are still absolutely broke and I steal money out of my personal checking account without my wife’s approval, fly on points whenever possible and eat in fast food restaurants when on the road. Over the last four years neither I or Chris, our President, have taken a penny out of the business… but, we have not lost faith. We understand how long, and how difficult it was for Philo Farnsworth who invented TV when he was 12 years old to finally bring it to the marketplace many, many years later when he was old and a frustrated alcoholic. Maybe Earl, I was conditioned for this long journey. When I got out of the Navy after WW II, I finished college and graduated in 1948. My first job was at an advertising agency on the 34th floor of the Empire State Building. My first assignment was to try to sell a ONE MINUTE TV spot in N.Y.C. for $50. I was totally unsuccessful, but not alone. All the ad pundits were saying; ” TV is a passing fad. ” Today a THIRTY SECOND TV spot in the Super Bowl will cost $2.5 M, and clients like Budweiser will purchase five or more. What a passing fad?
Vindication will come for P.O.P. Broadcasting and our prayer is that it might start with this New Year.
We continue to work diligently to reward our advertising clients with increased sales and market share; to give our investors a generous return on their investment for their patience and confidence in our management, and to fulfill our corporate responsibility and duty to not only earn a profit, but to share that return with supporting non-profit charities which we enumerate in our Business Plan and share with our worldwide representatives and clients.
O.K. you may be asking yourself why is a guy who will be 82 years this January 29th hanging on and spending his waking hours working himself to the point of exhaustion? What kind of fun is it to be rejected by investors, despised by your angels, and have prospective clents show you the door rather than signing a contract? If I were 28 the answer might be “for the money rewards, or the recognition of a Michael Dell or Bill Gates.” Neither motivates me today, as I have a professional career that I can be proud of and am the only advertising agency person from Houston ever elected into the Advertising Hall of Fame. My wife and I live in our dream home and we eat three meals a day without worry or bill collectors knocking on our door.
I honsetly want to see the advertising profession revolutionized around the world where there is true accountablity and there is a Return On the Investment which is why we have a created and brought to market a proven product, with an irresistible claim:
P.O.P. ShelfAds(r)
GUARANTEES to LIFT SALES or it is FREE!
(for as little as 0.01 cent per BUYER)
Can any other advertising media, in-store or mass, match or beat what P.O.P.Broadcastng has to offer the whole wide world?
My apologies for taking so much of your time, but believe me Earl, I have had to skip some of the more juicy parts of this narrative which in many ways might remind you of a horror story thrown into a blender to be mixed with triumphs and joy, and more importantly the will to continue to reach for the moon and the stars beyond.
Happy New Year with good health, success and prosperity…mostly with peace around the world.
Earl Littman Founder & Chairman
P.O.P. Broadcasting Co., Inc.
Houston, Texas USA
Mobile: 713 206 6677
e the USA
Bravo, Dr. Smith. One of my investors sent me this link with the comment that it reads as though I could have written it myself. Your assertion that, “They have money, they must be smart,” resonates like a cannon.
We have been through the nightmare of what we call Bottom Feeders. Only ours have included every one–or a combination of–ALL of your archetypes: Shadow CEOs, Crazy, Rich Uncles, Gaggles and Lead Brokers.
I have come to the conclusion that when it comes to startups (especially in the consumer products sector) that VC/Angel funding is a myth on the level of the Unicorn. Submitting an exec sum to Angel websites is like chum to OPM brokers and other Bottom Feeders.
I am what you could call an inexperienced CEO. Yet I do have a solid business backgound and a helluvan idea supported by a practical, detailed business plan with painstaking support materials that provides for the hiring of the appropriate people to address the shortfalls. Yet I feel like a wounded Zebra on the Serengeti. One beauty (let’s call him The Broker) enjoyed referring to me as “El Cid”–the Castilian military leader who led his army into battle propped up dead on his horse. Apparently this was fitting because I sold my home and put all of my assets into my vision, only to fall short before breaking out. Therefore I must be a sap. A moron. And therefore unfit to run the company.
One VC told me they didn’t see my company doing much more than $500 Million, so it wasn’t worth the $500 Thousand I was asking for. Apparently the real sin is not being born with trust fund. So unless one is a sociopathic huckster like Mr. Madoff, the reality is that most startup entrepreneurs are like wounded zebras.
In my experience the majority of angels/VCs are just independent bankers–they only want to provide capital to those that don’t really need it. So we are forced to act ‘As If.’ Find ways to ‘hype’ the business any way we can in order to drum up sufficient short money to try to get to a level where most, if not all the risks are alleviated. Where’s the ‘vision’ in that?
Madoff pulled off the biggest Ponzi scam in history because he was able to get allegedly “smart, rich people” to hand over their entire life savings by leading them to believe he didn’t need them. “They have money, they must be smart”, indeed.
Entrepreneurs are led to believe Angels are capable of assessing and recognizing opportunities. Sadly, as you say, there are no educational requirements. I exhaustively researched this genre before throwing my own “skin” in the game. Now I’m fighting to avoid ending up as El Cid for real. Because of a myth.
You don’t need investors to be hard on you–unless you give them reason to be. It’s hard enough as it is.
Great piece of writing, many of the issues mentioned is happens in the Israeli VC hood too.
Looking forward to your next pearls Earl
Sharon Weshler
שרון ושלר
An excellent article, both from the perspective of potential entrepreneurs and investors. Hope, in urge to have quick seed money, the prospective entrepreneurs shall also be selective about angle investors.
This is a very succinct synopsis of points usually well learned by the time entrepreneurs have been through the mill a few times. While I agree that you should be wary of poison pill investors, I would take issue with the notion that there is a variety of choices of angel investors and we, the entrepreneurs, get to choose from many offers and have the luxury of applying the metrics described. That’s not how it works. Usually you are stuck with a couple of choices, most of them mediocre at best.
I also don’t agree that you want investors who drive the performance metrics. In 9 out of 10 cases the entrepreneur is better equipped to make those choices and to drive the company strategy.
There is enough evidence that most company failures are the result of investor interference, not founder failure.
So the article envisions the perfect partnership between a prescient visionary angel and a not very effective entrepreneur who needs to be disciplined or it’s “just a roll of the dice”. My experience is that you spend a lot of time keeping investors informed about industry trends and realities and keeping them from forcing you down dead ends.
Jack, I would make a number of points in reply to your very perceptive comment. The first is that there are two sets of performance metrics in play. As I wrote in the article, every entrepreneur should set them for each member of the team. That is one set. The second set is the performance that the investors require from the team. that set of metrics is driven by the investors expectations. third, in the DC area, where I live, entrepreneurs have a wide range of choices. there are lots of angel investors and angel investor groups. Many entrepreneurs make the mistake of treating them all the same. The smart ones rifle shoot and target the investors who have shown a preference for their space. Fourth, I find no data supporting your claim that “There is enough evidence that most company failures are the result of investor interference, not founder failure”. Most of my experience tells me that failures come from the inability of the management team to monetize the value proposition. I have seen cases where investor interference has contributed to poor outcomes, but they are much rarer than ones driven by management shortcomings. Finally, you need to re-read the section of the article that defines a good partnership. the good partnership is between investors who know and are committed to the space and entrepreneurs who can understand the need for both sets of metrics. thanks again for a great comment. Dr. Smith
Dr. Smith;
Another thought out article. Hope people learn from these articles. In our own private placement offering we have seen some of this control and have backed away. The old greed seed…:)
My best,
Allen
A very well written post…full of fantastic wisdom for entrepreneurs.