Recruiting That Angel Investor: It’s About More Than Just Money
If you’re an entrepreneur with a good idea and no money, you probably spend time--maybe too much time--dreaming of angel investors. You know you need help to get your business idea up and running, and you say to yourself: Get me in front of an angel and my problems are over.
The dream, however, is not reality. More often than not, the search for angel financing doesn’t end the first time you find yourself in front of an angel--because you need to get yourself in front of the right angel if you want your idea to fly.
Why? Angels, like shoes, come in many sizes and styles, and the wrong one can pinch. At the moment there are angels aplenty in Southern California, and if you have a good idea for a start-up, you can find one to help you get your business up and running. But the first angel you meet--even one with an open checkbook--may not be the one you need.
“Entrepreneurs need to understand what they’re getting into,” says Peter Cowen, whose West Los Angeles consulting and advisory firm, Peter Cowen & Associates, helps early-stage technology companies raise outside capital. “Some angel investors believe in the idea so strongly that they just give the entrepreneur money and say: Do as you like because we trust you.
“But that’s not common. At the other extreme, some investors make their terms so onerous that they handcuff the business and discourage other investors from participating in later stages of financing.”
The interests of the entrepreneur and the angel investor need not conflict, Cowen says. But it takes concerted work to balance them out, and the entrepreneur who is desperate for financing courts real danger.
Cowen urges entrepreneurs to look out for these hazards in negotiating with angel investors:
* Don’t give your angels the run of your office. Instead, agree to report your doings on a reasonable basis--perhaps biweekly or monthly in the early going, quarterly later on.
* Before you do a deal, give your angels a thorough due-diligence scrubbing, even as they scrub you. Check with all entrepreneurs who have done business with your angels in the past, probing carefully for signs that the angels ran roughshod over them.
* Aim for the bonus that good angel investors bring to the party--that is, not just money but also sound management advice and the connections you will need when you prepare for additional rounds of financing.
* Hire expert legal and accounting help to ensure that your angel financing agreement contains no unreasonable “time bombs”--for example, terms giving your angels control of your enterprise if you don’t make your revenue goals or miss a benchmark date for hiring your marketing and sales teams.
* Above all, make sure that your arrangement with your angels positions you to go after additional rounds of financing. In plain English, your angels must allow you to make your enterprise a good bet for venture capitalists, for strategic partners, or for public stockholders.
“You’re always raising money with a start-up,” Cowen says, “so you always have to be in position for the next round. Entrepreneurs and angels have to understand that both parties are going to participate in everything that happens until the liquidity event--the sale, the merger, or the public offering. If your angel investor is difficult to work with, you can paint yourself into a corner and nobody will come out ahead.”
An excellent safeguard is to raise money from more than one angel investor, Cowen says. This takes more work, and you may end up with more than one headache if you don’t choose your investors carefully; the upside is that if you raise $1 million from 10 angels, none is likely to have a controlling interest in your enterprise.
“When you need angel money, you may have to stretch to accommodate the needs of your investors,” Cowen says. “But you don’t want your angels to be so demanding that they get in the way of getting your business up and running. Find out what other dealings your angels have had, and remember that you’re probably going to be dealing with your angels several years before you reach a liquidity event. There has to be a good fit.”
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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
