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For Angel Investors
In our current financial environment, many startup companies are looking for startup funds. Angel investors are looking for large returns on their seed capital or venture capital investments.
Most of us who qualify as accredited investors or qualified investors know, that most of these venture investments will fail. How do you choose the next big angel investment?
Here are a few things to look for:
You want people who are totally dedicated to their business, not those who are trying to make a fast buck on the latest fad. If they have the company logo secretly tattooed on their arm, they are for you. If they say things like ?If this tech thing doesn?t work, I can always go back to truck driving? then run! Your team must be willing to take those strong pains that are the growing pains of a small business.
Smart investors always avoid unfair deals. Let?s face it, in almost all startups seeking seed money, the proposition boils down to ?With our brains and your money, what have we got to lose?? The investors should get a big enough piece of the company that if it wins, they win big, because most startups seeking see money will fail.
Granted, deals that favor the investor de-motivate the entrepreneurial team and are also to be avoided. The company should give the investors a chance to take over if the company fails. Most investors won?t want to, and even if they do, there is likely to be nothing to salvage, but give them a prayer.
The company must offer a fair deal. It is hard to put a value on startups and venture companies and impossible to give an exact value without the benefit of hindsight. However, it is easy to see that you should get an expert to tell you what the investor expects.
Seed money investors are looking for character in management. There are several indicators of this. The first is a successful track record.
The next is that the handling of investor funds is transparent. If you cannot check the inventory, it isn?t there.
Another sign of character is a scrupulous adherence to the securities laws. Anyone who invests in a deal where the principals are ignorant of the regulations, are making unlawful sales of unregistered securities, and who are paying illegal finders? fee and commissions to unlicensed securities ?brokers? deserves everything they inevitably get. We know that the securities laws are almost impossible to understand and comply with, but there must be a scrupulous effort. If the promoters do not bother to hire expert counsel, they do not care and should be avoided.
As most startups fail, let?s take a look at why. Probably the largest cause of failure is management. While managers need a living wage so they do not have to worry about their own finances while building their company, managers who pay themselves lavish salaries and perks should be shot. Beware lavish spending of any kind. The watchword for a venture company is frugality. Only the cheapskates will survive the hammer and pound of the business world.
Next, although this could be called incompetent management, having a faulty business model is probably the next most serious cause of failure. Volumes can be written here, but the worst crime in this category is failing to do many customer surveys and make them thorough.
Sadly, the next cause of failure is fraudulent conduct. Some ?entrepreneurs? want to do nothing more than milk unsuspecting investors. The worst of them lie to get the money. No matter how much due diligence you do, you may be up against professional scam artists who make a career of doing this. As this is their career, they are good at it. Or you may be lulled into a feeling of confidence by the stellar reputation of the promoters. It is at this point where the investor must be a suspicious swine. As guilty as he may feel about it, it is his only hope.
The last risk is not that of failure. The risk is that of dilution. The company succeeds but the business is soaking up much more cash than expected and the new stock that is sold dilutes your equity.
As all of us in this industry know, you will spend several times more than you expect and take twice as long as you expect to do anything.
As many venture investors will tell you, the way to really do due diligence is to invest and be inside the company for a year. Then you will really know what you have.
I believe that venture companies are our real hope for the future. They will fuel growth and competitiveness. I have a soft spot for the brave entrepreneur who wants to sacrifice his life for his goals. Let?s give him the resources he needs to succeed and do it fast. Then, a year or two from now, we can all look back on this as the start of a great deal for all concerned. That is what we all want, isn?t it?
About the Author
The author is a former OTC market maker, trader, attorney, security analysts and investment banker. He currently is a principal in several venture companies and private equity funds. There is more for you at http://www.asklux.com or email me at lux.investor @ gmail.com