By guest authors Irina Patterson and Candice Arnold
Irina: What do you think angel-backed founders could do to increase their chances of success?
Alan: Have a very rich father. No, seriously, there are a couple of very common errors that companies make that if they could avoid those, they’d really make – particularly the capital raising aspect – a whole lot easier.
One is to seek advice and counsel, possibly from an attorney. Certainly if it’s an attorney, it needs to be a securities attorney, concerning expected investment in terms of valuation. It is a tremendous problem in our industry when people just have no realistic basis to understand what kind of investment would interest an investor.
By that, I mean both valuation as well as structure. The second thing is that it is surprisingly common to find companies that approach you for capital investment and the founder is not personally invested in the company. That is a red flag for most of us who are investors. It’s not a matter of how much money they have invested, it’s a matter relative to the founder’s net worth.
If they’re not at financial risk in the company, substantially, like a second mortgage on the house and every other thing, if they don’t have that kind of risk in the company, they’re basically saying to us as investors, “This investment is too risky for me, but possibly Springboard would like to make it.” No, thank you. That is, unfortunately, fairly common.
The third item is to gain – sometimes an advisor or board member could help with this – but to gain a realistic understanding of the risks that the company faces. Again, it’s a too often thing when a company will sit here and say, “Well, our primary competitor is Microsoft but they don’t know what they’re doing.” No, I think Microsoft does know what they’re doing, thank you very much. But they have a very disparaging view of competition and other companies. That’s particularly bad. I’m sorry if I’m getting a little bit far afield, but it’s amazing how many times we’ll have somebody who comes in and says, “I have an insurance product.”
“Well, have you ever worked in the insurance industry?”
“Who’s going to be your competitor?”
“Well, it’ll be Nationwide Insurance, but they don’t know what they’re doing.”
Wait a minute, you’ve never been in the industry. You’re looking at them, you say they don’t know what they’re doing, and I ought to believe you? It’s amazing how many times in a given month that type of conversation will occur.
Sheer realism concerning how the company can fail and how we can all lose our money, because that’s a good likelihood of that happening.
Irina: What can angels do to improve their chances of success?
Alan: I think angels do do it and that is to stay involved with the company in sufficient detail to be able to allow their business experience – presumably there’s business experience there – to be brought to bear; to provide balance to the entrepreneurs, to educate them as they’re developing their companies as they run into problems. It may be things that the angel has seen many years before in his or her business career. That’s why it’s so important to be very cautious about picking an entrepreneur who is receptive.
Actually, the CEO I mentioned, whom we didn’t do due diligence on, it turned out he was totally bullheaded. He didn’t care what anybody said, he was going to do it his way. Well, the company failed.
I think providing advice and counsel – sometimes I think it’s more than advice and counsel – sometimes it’s just sheer support. When things go wrong, and they always do, to keep the founder charged up and pumped up and so forth. It’s an important thing.
Irina: Thank you, Alan. I appreciate your insights.