Conversations with Investors – Chapter Two

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The 25% Remaining

“So, JS, let’s focus on the roughly 25% that make it through your initial screening. What do you look for and what reasons cause you to discard them?”

“I look at the product or service that they plan to offer. My first question is does it work? You’d be surprised how many deals I see where the answer is negative or not yet. This investment round will get us there.” JS doesn’t like to invest in science projects and isn’t likely to fund product or service development. He expects the team to come with a fully developed value proposition. That’s the case with most angel investors I know. There are those who will fund development; but a team needs to know ahead of time if the investor they are approaching is likely to make such an investment.

His second screen dealt with the path to revenue. “I am fairly impatient with a team that has generated no customers. The proposition ‘give us the money and we will generate revenue’ does not impress me much”, he offered. JS believes that good teams are compulsive implementers. “The good teams are always selling – always working to generate revenues. The less impressive teams are always tweaking and fine-tuning their technology and avoiding the process of generating revenue as long as possible.”

JS likes to drill down deeper into the business plan and value propositions which underlie it. He sometimes finds himself pushing teams to consider details that they may have ignored. But his motive is far broader than testing the business model. “I want to see how the team operates under pressure. I look for weak links – team members who are not up to playing their role. I drill down into the team, beginning with the CEO, and their capabilities as a team at the same time I am stress testing the business model and value proposition.” He is likely to request one-on-one meetings with individual team members in order to come to an assessment of how their personalities and roles mesh. Gaps in the team are particularly serious negatives to JS that need to be recognized and resolved. He sees such team capability gaps and the plans to resolve them as a reflection on the judgment of the founders.

In his view the quality of the team is central to the chances of success. He explained. “Most angel investors focus on the CEO – and the CEO is definitely important. However, I try to go beyond just the CEO to judge the larger Team skills, ID any gaps – for example. sales or business development – and try to judge how well the personalities/skills complement each other to make for a more effective Team. Some gaps are common and don’t necessarily bother me. Companies can outgrow a Team member’s capabilities; or, conversely, Cos. can grow into the skill ‘sweet spot’ of an experienced Team member. What can bother me is the CEO’s recognition/non-recognition of the gaps and their clear or non-existent plans to resolve the gaps.”

This approach allows JS to gather information on a critical area – is the team willing to listen to alternative assessment, do they stay obsessively with their initial perspective or do they grow their understanding with detailed discussions and new viewpoints?

The 5% of the 25%

“OK JS, let’s start with a hundred deals. You say that only twenty-five of them get any attention at all. What percentage of those get a detailed analysis and now many are you likely to seriously consider for investment.”

Every investor that I interviewed paused when asked this question. I suspect that was because the process has become so natural for them that they don’t keep track of such things. Their interest is to find investment opportunities that are sufficient to satisfy their need to invest funds. That is a key to understanding how and why investors go through the process – often a frustrating one that can go on for long periods without surfacing a good investment opportunity. They have decided to invest part of their wealth in early-stage companies. Most founders do not grasp this dynamic sufficiently.

“I may take a closer look at about 20% of the ones that pass my initial screening”, JS estimated. So, to run the numbers, out of every hundred deals that come to JS, he discards seventy-five out of hand. Of the remaining twenty-five, roughly five get a more extended consideration.

“And how do you go about making decisions about these few,” I asked. “I am working to satisfy my appetite for investment, balance my portfolio, manage the overall risk and make good investment decisions which will provide a hefty return,” he replied. This response is important and every founder should work to understand what it means. Investors are working to balance a complex set of criteria, needs and objectives. Their decision is unlikely to be limited to whether or not they should invest in your company. In other words, you may be turned down for reasons that do not directly relate to your company.

We had enjoyed a couple of very nice bourbons and I a good cigar. Time and other obligations were tapping us both on the shoulder. But I could not resist one additional question. “JS, I am getting the feeling that you see your role as extending substantially beyond that of an investor. Would it be fair to say that you see yourself more as a venture partner who happens to be providing funding?”

“I think that is more than fair. Sure I see the companies as investments. But I am a proactive investor and have confidence that I can bring much more than funding to the table. I am more likely to invest in a situation which calls for that involvement than in one which opposes it.”

© Dr. Earl R. Smith II

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Related Articles:

• Conversations with Investors – Chapter One

• The Money Chase: Oil and Water

• The Money Chase: Should You

• The Money Chase: One Way to Avoid Being ‘Avoided’

• The Money Chase: Who They Do Not Invest In

• Funding Strategies for New Businesses

• Angel Investors to Avoid

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