Investors and entrepreneurs demand a lot from each other. Investors want good communication, “coachability,” and realistic expectations. Entrepreneurs need a similar list for their investors that goes beyond meeting an investment goal.
Topics for that list came out of a discussion between angel investors, serial entrepreneurs and venture capitalists at the Angel Venture Forum showcase in Washington, DC this week. They explained what entrepreneurs need to know about about anyone who gives them money as well as what to expect and how to work with them.
The advice came from a group that included Valerie Gaydos, the founder of the Angel Venture Forum; Doug Humphrey, a serial entrepreneur; Edward Barrientos, Brazen Careerist CEO; John Backus, New Atlantic Ventures founder and managing partner; Paul Silber, Blu Venture Investors founding member; and Tien Wong of Lore Systems, many of whom had run a company or two themselves. Here are the group’s 10 best tips.
1. Do your own due diligence. There has been big growth in the angel investor space, panelists noted, making it easier than ever before to raise early stage money in the technology space. But that’s made it even more important for entrepreneurs to do due diligence on potential investors. What is his investment track record? How has she spent money before?
2. How did an investor become an angel? To understand an angel investor, Gaydos said, you need to know how he made his money. That will tell you something about skillset. An angel investor’s background will also significantly influence advice to companies she invests in. A retired company executive? A child of wealth? An experienced entrepreneur? Is this the first investment in a startup? Ever worked with a small company? All these things could factor into the investor’s recommendations for your business, so make sure it’s a good match. You’ll be spending an awful lot of time together.
3. Getting investment is no guarantee of success. And yet companies that are able to benefit from a combination of bootstrapping and angel investment will have more leverage over venture capital firms than they did in the 1990s because the dynamics are changing.
4. Most companies don’t have competing offers for funding. When you raise money from an angel or venture capital investors, you will rarely have competing offers, one panelist noted. This goes against some other advice I’ve heard, especially when entrepreneurs are you’re trying to make a good match. But it’s an interesting point. On the other hand those that are in the admirable position of having multiple investors will have more leverage.
5. Make good, regular communication with investors your mantra. Try to schedule a meeting or phone conversation with your investor(s) on a quarterly basis. If there’s nothing to report, it will be a short call. But if they don’t hear from you, they’ll assume something is wrong. If something is wrong then it will be a lot better hearing it from you than discovering some other way. Investors not only like transparency, they tend expect it.
6. Focus on your customers, not raising money. It’s better to spend more time on your customers because everything else will flow from them.”Don’t get seduced by your own product,” Gaydos observed. “Lot of people underestimate their power to bootstrap or get money from friends and family. It’s all about the grind and sacrifice. But if you focus on customers it will solve a lot of other problems.”
7. Be confident and stay humble. Nothing is a bigger turn off to investors than arrogance. Be passionate about what you do, stay away from the jargon and the “buzzword blizzard” and talk to potential investors as if they know nothing about your technology.
8. Be able to explain how you will get to break even or profitability with this round. Know the financial model of your business and being able to articulate it to investors.
9. Know what your needs are. If you can identify your needs are before your potential investors do, they’ll be much more impressed.
10. Angel investors invest in non-linearity. Look at your value proposition. Find the place you have leverage.