Angel Investors from the Entrepreneur’s Eye: Structuring

In Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson I have made it to the sort of halfway point of the seven fundamentals. That lands us right at structuring.

Amis and Stevenson go into great depth about the different options that angel investors may seek in the structuring of deals… However, as always, I want to look at the concept in a way that helps the entrepreneur but that still provides enough information about the other side, the angel investors. Most importantly, I want to be able to give you the breakdown and facts in a quick, easy to read, and easy to absorb sort of fashion. In short, not convoluted.

According to Asheesh Advani of Entrepreneur, we should be sure when structuring a financial deal with angel investors that we are careful to not agree with terms that may put limitations or restrictions on our future ability to grow our companies or make our company unattractive to other angel investors.

Keep in mind that the terms that are set by the first investor during a financial round will remain for that entire round as well as have a heavy influence on the terms of future rounds. Structuring in a way that heavily benefits the investor without consideration of what is best for you and your company could leave things unbalanced could prove detrimental and harm your business.

Advani provides a few tips and things to keep in mind as an entrepreneur working on structuring a deal.

  • Remember, what you do for the first investor can greatly influence what you must do for future investors or what they may want in their deals as well. Advani says that you should avoid giving pro-rata rights to your first investors. These pro-rata rights say that the angel investor has the right to keep ownership in your business through future rounds. Other investors may also request these rights if you open up that door early on.
  • You must also be careful by avoiding giving up too much control. Giving too many rights to your first investor can be a major headache when it comes to your ability to make financial or managerial decisions later on.
  • Angel investors may attempt to instate limits on how much you can pay your management team. This may hinder your ability to make decisions to hire on senior management members with attractive compensation. Avoid allowing them to set these types of limits. Advani states that a solution to this potential roadblock would be agreeing with your investor to allow for a compensation committee and to consider salaries part of your overall budget.
  • You can also request a cure period. A cure period would allow you a certain amount of allotted time to review any covenants or representations that relate to legal agreements or to the compliance of any laws or state licensing and regulations. This would give you time to make sure that all of your ducks are in a row. Advani recommends this two to four week cushion.
  • Traditionally you would not have to worry about restricting your share restrictions. However, Advani says that angel investors and angel investor groups are now insisting on these restrictions. Unrestricted share though can be more attractive to future or potential investors.

Overall the most important takeaway is that you should certainly be educated and aware during the structuring stage of angel investing as an entrepreneur. The biggest awareness should be in ensuring that you and your business are not being given the short end of the stick, especially when it comes to the amount of control that remains when you are bringing angel investors into the equation. You especially want to make sure that the decisions that you make today will not harm your business’ growth and overall standing in the future.

Advani, A. (n.d.). Raising Money From Informal Investors. Retrieved from Entrepreneur: https://www.entrepreneur.com/article/168860

Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.

 

 

Angel Investors from the Entrepreneur’s Eye: Valuing

“Valuation is what you are willing to exchange for something else that you want.”

If you’ve been following along with my blogs, well that’s great. Thank you. If this is your first read then I’ll fill you in. I am currently reading Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson and a ton of different articles here and there on entrepreneurship and angel investing.

This post, in particular, is in response to the book’s section on valuation.

Here again, I want to be able to discuss what I took away from the reading in such a way that entrepreneurs can see angel investing and the many aspects of it from an angle that helps them grow.

Now, the introduction to the valuing section really caught my attention because when I think about the exchange in investing, I always think about money. However, Amis and Stevenson, make the point that it isn’t always money that is on table, or at least not always just money. Your venture is worth more and is more than just cash.

I really want you as the entrepreneur to look at valuing your venture before you ask any investor to place a value on it. What is your venture worth and not just in monetary terms? According to The Angel Investor Report the start-up valuation of your firm depends on a few different things.

Your team and you:

Do you and your team have experience and education that relates to your start-up, how much?

Do you and your team have important skills in a variety of areas?

Do you have the ability and the flexibility to make changes, grow as a person, or shift and adapt?

Do you have a solid business plan, is everyone seeing eye-to-eye when it comes to goals and where the venture is headed?

The product/service:

What is your product/service worth?

Can you grow your product/service, is it scaleable?

Revenue:

Do you have strong and reasonable projections?

Is there profit potential along with growth potential?

Is there existing cash flow?

Do you have a strong understanding of your numbers and data? Can you extrapolate what that data means?

Customers:

Are you creating a solution for a problem?

Is there a market for your product/service?

Is that market sustainable?

What differentiates your product/service in the eyes of customer?

The industry and the kind of market you are functioning in:

Do you understand your market or industry?

Are there limitations to growth within your market?

What are the industry or market projections?

Competition:

Who is your competition?

What is your competitive advantage?

What does a future scan of your market or industry reveal?

What are other similar ventures valued at in your industry?

Is the market in your industry saturated?

Geography:

Is your venture appropriate for its location?

Is there a potential for a geographic infiltration by competitors or start-ups like yours, and can your venture survive it?

With growth, can you expand into other geographic locations?

The ability to understand your responses to these questions, in depth of course, can help you as an entrepreneur place a value on your venture. Learning and understanding these aspects can really help you to be realistic and even avoid potential pitfalls like overvaluing your venture and not being able to deliver. All in all, it will help you to be prepared for angel investors so that you can be on the same page about the value of your startup.

Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.

(2010). Retrieved from Angel Investor Report: http://www.angelinvestorreport.com/start-up-valuation.php

 

Angel Investors from the Entrepreneur’s Eye: Evaluating

“In both entrepreneurship and angel investing, there is nothing like doing it.”

To be completely and utterly honest, Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson has been a hard read for me. I have personally found it to be very hard to get into. However, I am all about trying to stay positive and take something away from a journey, even if it’s not something I am 100% interested in. I also want to make sure that any current entrepreneur, future entrepreneur, or student reading my blog can still gain some sort of benefit from reading my posts. That being said there are also some points and takeaways that I think are very read-worthy and interesting.

This blog post is in response to the book’s second fundamental on early-stage investing. Evaluating.

In my reading of articles on angel investing, there is an overwhelming consensus that one cannot, with great certainty, tell whether a venture will be successful or a total flop. Well, of course not. However, with experience and attention to certain pertinent elements, investors can make educated decisions and moves. What does that mean for us, the entrepreneurs looking for capital? As I mentioned before, it is so important for us to understand both sides of the coin so that we can be ready and set to display and provide what it is that successful and willing angel investors are looking for in the evaluation phase.

“It is extremely important to do your own due diligence…there are a lot of people who can write a $100k check without thinking twice.”

According to Entrepreneur VIP Contributor, Murray Newlands, there are five things that an investor wants to know before signing a check.

1. They want to know your numbers, your business’ financial performance. Entrepreneurs should be prepared to not only present and provide numbers, but also be able to explain them and answer questions on the data.

2. They want to see that you have background and experience in your industry. They are interested in the You, the entrepreneur and the important figures in your organization. Emeritus Professor William Sahlman of the Harvard Business School developed a framework, The Harvard Framework, that focuses on a few different elements that angel investors should focus on in the evaluation phase. He argued that most business plans spend a ton of time on the numbers but did not spend enough time on what really is important to investors, the people.” He said, “When I receive a business plan, I always read the resume section first. Not because the people part of the new venture is the most important, but because without the right team, none of the other parts really matters.”

The “people” part of the evaluation step, is what really caught my interest. It is so important for us as entrepreneurs to understand our strong points, what we have to offer, and also where we need to grow to be the very best. The entrepreneur’s personality is just as important as the product, in my opinion. In many cases consumers fall in love with a brand or a company because of the people behind it. Being able to connect with others is very important as an entrepreneur. We should also be able to express and articulate our ideas, show our passion, and be both kind and honest. If you don’t believe me about personality being important to investors, just watch a couple of episodes of Shark Tank on ABC. The “sharks” get really disgusted by entrepreneurs who have a horrible way of dealing with others or who are rude during the presentations or Q&A. If people do not like you, it may not matter how AMAZING your product is, they will not want to deal with you or invest in your plans and ideas.

“An A-quality man with a B-quality project, but not the other way around.” -General Georges Doriot

3. Your company and your ideas should be unique. By being able to prove that your products and business have concepts that set them apart, that you have differentiators and competitive advantages, you can help an investor see the value in signing that check and taking that chance on you over someone else.

4. You should have an effective business model that makes sense and is feasible. Your business plan should be a solid one that answers the important questions. It should address market specific topics and show business opportunity. Is your business scalable, is there growth potential?

5. It is not unusual for angel investors to go after ventures that provide solutions for problems in larger target markets, according to Newlands. This is where having a competitive advantage and solid branding comes in. If the market is large and you can have a big significant impact in the market, then investors will see the value proposition at hand.

With these thoughts in mind, where can you grow to help people want to invest in you, your product, and your future?

Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.

Newland, M. (2014, June 5). 5 Things Investors Want to Know Before Signing a Check. Retrieved from Entrepreneur: https://www.entrepreneur.com/article/234536

Torres, N. (2015, 06 August). What Angel Investors Value Most When Choosing What to Fund. Retrieved from Harvard Business Review: https://hbr.org/2015/08/what-angel-investors-value-most-when-choosing-what-to-fund

 

Angel Investors from the Entrepreneur’s Eye: Sourcing

“Sourcing is evaluation”

This is my first blog in this series about angel investing. I’ll be honest, I just began reading Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson. When I ordered the book, my first thoughts were, “Investing? How will I apply this?” and “What am I about to dive into?” However, as I read the first few pages and moved onto the section about sourcing, I quickly realized, “Hey, if I am going to be an entrepreneur and possibly even look to investors at some point, it might be a good idea to understand how the other side works and thinks.” If anything, it can be highly valuable to understand how things work from more than just one perspective.

As someone who just started a business, the question of where to get additional money if and when we need it has undoubtedly been something that has crossed my mind. To start, my business partner and I put our financial capital alongside money borrowed (with interest). While we do not need massive amounts of money at this stage, we cannot be sure where this journey will take us. Perhaps one day we will need to expand beyond our space, maybe we will have to look for a new building, or hopefully we are so successful that we want to open new stores in different locations.

“It’s okay to be stupid, just don’t be uninformed.”

I am finding that there are several recommendations made in the book that even those who are not considering investing, can find applicable. In this particular section, there are several suggestions given to potential angel investors about how to get their name out there as well as lots of public relations pointers. Some of these I want to apply in my entrepreneurial life. One thing is for sure: whichever way one looks at it, good things take lots of networking, effort, time, and knowledge. I believe it is essential for us as entrepreneurs to understand what it is that angel investors are looking for in the person behind the startup.

Angel investing in itself is a very interesting multi-layered concept and process. For now though, I will focus on sourcing and entrepreneurial self-awareness. According to Winning Angels, sourcing is the first step in the process of making early stage investments. Sourcing, simply put, is the way that investors can find which start-ups they want to involve in their investments. Research, digging for information, and gaining knowledge of what they are diving into is a massive part of this portion of the process. They want to know if the entrepreneur’s startup is a reasonable investment, but they also want to understand the person behind the venture (Amis & Stevenson, 2001).

“The entrepreneur is the first key to a winning early-stage investment”

What do we as entrepreneurs need to know? As an entrepreneur, it is critical to have what potential investors are looking for in an investment. They want to feel that they can work with you, that you will listen and want to learn, and that you are honest, hardworking, and have an attractive personality. Unsurprisingly, having a reputable network can really help an entrepreneur get a look from potential investors. Entrepreneurs should also have a solid business plan and a clear understanding of their business and their industry. It is also essential that you understand what role the angel investor will play and what amounts they are typically looking to invest in startups. Forbes contributor, Richard Harroch, wrote an excellent piece on The 20 Things All Entrepreneurs Should Know About Angel Investors. I would certainly recommend you click on over and get a feel for the points that he discusses. He states that entrepreneurs can be optimistic when it comes to raising capital from angel investors as more and more individuals are interested in the concept and in supporting early-stage startups (Harroch, 2015).

Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.

Harroch, R. (2015, February 5). 20 Things All Entrepreneurs Should Know About Angel Investors. Retrieved from Forbes: https://www.forbes.com/sites/allbusiness/2015/02/05/20-things-all-entrepreneurs-should-know-about-angel-investors/#4343a0abc1aa