All entrepreneurs need to be good negotiators. Few are. Why? Because they usually have little experience at negotiating major matters and have no training in negotiation. Negotiation skill is not intuitive, it is learned. I teach Negotiation in the Rollins MBA program and hammer into my students that the key to successful negotiation is preparation. Although there are many aspects to preparation, the one that is most important, yet usually missing, is to develop a good alternative to whatever you are about to negotiate. That is, if you are preparing to raise capital from angel investors, know what angel investors want and the terms to expect. But, more importantly, court more than one angel or angel group at a time so you can turn down an unacceptable deal . The strongest way to negotiate is to let it be known that you have an alternative deal that may be better than the deal the other side is trying to negotiate with you. Otherwise, you are negotiating from weakness and the other side will spot that weakness immediately. OK. Why doesn't everyone do this? Because it is very difficult to develop the relationships necessary to have an angel or angel group take an interest in making an investment into your company. If you follow my advice, you have to develop at least two of these relationships in parallel and manage the process so that you have at least two potential investors or groups of investors with whom you will negotiate at the same time. But, you say, don't all investors or investor groups ask who else is considering an investment in your company and insist that you tell them their names? Yes, this is a common practice by investors, but you have to have the courage to say you won't disclose this information. An investor who walks away solely because you won't tell the investor the name of the investor's competition is an investor who will probably demand unacceptable terms anyway.
So, the best preparation for a heavy duty negotiation is to lay the groundwork to have an acceptable alternative to the deal you are about to negotiate. This takes planning and time.
Wednesday, July 6, 2011
Tuesday, June 28, 2011
All major corporations should be inspired by the story of the British Mustang
A story appeared in Slate Magazine several weeks ago that should inspire all large corporations to encourage entrepreneurial thinking in their organizations. Here's the link http://www.slate.com/id/2293662/
Sunday, March 6, 2011
More thoughts on raising capital from angel investors
Over the past few months, I've had the opportunity to speak to groups about the difficulty in raising capital from angel investors. I always emphasize the need to establish a relationship with several angel investors before asking them to invest. This takes more time than many companies have to raise capital before going out of business. Therefore, most companies have to bootstrap for up to a year while establishing relationships with credible angels and angel groups.
There is a trend toward angel investors forming angel groups. I think this will help companies that qualify to raise capital from angels, but companies need to recognize the time it takes to go through the process of getting money from an angel group. I hope the formation of angel groups results in better access to capital for entrepreneurial companies.
But, it still takes more time than most entrepreneurial companies can imagine to raise capital from angels. I often advise early stage companies that they need to "raise capital to raise capital." Otherwise, the company can't stay in business long enough to develop the relationships with angel investors necessary to raise a serious amount of capital.
There is a trend toward angel investors forming angel groups. I think this will help companies that qualify to raise capital from angels, but companies need to recognize the time it takes to go through the process of getting money from an angel group. I hope the formation of angel groups results in better access to capital for entrepreneurial companies.
But, it still takes more time than most entrepreneurial companies can imagine to raise capital from angels. I often advise early stage companies that they need to "raise capital to raise capital." Otherwise, the company can't stay in business long enough to develop the relationships with angel investors necessary to raise a serious amount of capital.
Raising capital from non-strangers, not angels
Over the years, I have counseled clients who set out to raise capital from angel investors that they need to focus on angels with whom they have relationships, directly or indirectly. The probability of raising capital from angels with whom the entrepreneur has no relationship is extremely low. Therefore, logically, the entrepreneur must start developing or pursuing relationships with potential angel investors from the get-go since these relationships are difficult and time consuming to develop.
I've decided to call angels with whom an entrepreneur has relationships Non-Strangers. This seems like an odd name, but it is descriptive of the angels who actually invest in most companies. Yet, most entrepreneurs don't get it. They think that they can simply find wealthy people, present a business plan and some of them will invest. This is usually a waste of time for both the entrepreneur and the wealthy person.
I've decided to call angels with whom an entrepreneur has relationships Non-Strangers. This seems like an odd name, but it is descriptive of the angels who actually invest in most companies. Yet, most entrepreneurs don't get it. They think that they can simply find wealthy people, present a business plan and some of them will invest. This is usually a waste of time for both the entrepreneur and the wealthy person.
Angel investors should be viewed as customers
When an entrepreneur comes to me for advice on raising capital from angel investors, I ask him or her "Do you know why angels make investments in early stage companies?" Inevitably, the answer reflects superficial thinking and deserves an "F." Most entrepreneurs do not have the foggiest idea about what it takes to raise capital from angel investors and make little effort to find out. They seem to think that if they have a good business plan and enthusiasm, angel investors will invest.
Any entrepreneur who decides to raise capital from angel investors should conduct as much research on why angels invest as they do on why customers buy their products or services. Few entrepreneurs even read a book on how to raise capital from angels when there are many books on the subject through Amazon. It's no wonder that most entrepreneurs who set out to raise capital from angels fail miserably.
Every angel investor is different, just like every customer is different. But, there are some characteristics that are common to most angel investors. If an entrepreneur would come to me for advice on raising capital and demonstrated the same degree of ignorance about his or her customers as the entrepreneur usually demonstrates about angel investors,I would tell the entrepreneur to find another occupation.
Why is it that entrepreneurs make little effort to find out the same type of information about angel investors, yet will work really hard to find out about the characteristics of potential customers? I attribute this to an underlying sense in most entrepreneurs that an angel investor is not a "buyer or customer" but is a "seller or supplier." An erroneous view is that an angel investor is "selling capital" to the entrepreneur and the price to be paid is an equity interest in the entrepreneur's company. Not true. The seller in this case is the company, selling an equity interest to the angel investor who is buying, not selling. If an entrepreneur would only take this view of angel investors, the entrepreneur would do extensive research into the characteristics of the angel investor market. How many angel investors will the entrepreneur have access to, what is the decision making process for an angel investor, who influences the angel investor to make the investment, what is the competition for the angel investor's funds, what will it take to get an angel investor to seriously consider the entrepreneur's opportunity, etc. These are the types of questions the entrepreneur would seek answers to for his or her customers; why not seek this information about angel investors?
Finding out the characteristics of the angel investor market is difficult, but not impossible. It is inexcusable for entrepreneurial companies who set out to raise capital from angel investors not to know as much about the angel investor market as they know about their potential customers.
Any entrepreneur who decides to raise capital from angel investors should conduct as much research on why angels invest as they do on why customers buy their products or services. Few entrepreneurs even read a book on how to raise capital from angels when there are many books on the subject through Amazon. It's no wonder that most entrepreneurs who set out to raise capital from angels fail miserably.
Every angel investor is different, just like every customer is different. But, there are some characteristics that are common to most angel investors. If an entrepreneur would come to me for advice on raising capital and demonstrated the same degree of ignorance about his or her customers as the entrepreneur usually demonstrates about angel investors,I would tell the entrepreneur to find another occupation.
Why is it that entrepreneurs make little effort to find out the same type of information about angel investors, yet will work really hard to find out about the characteristics of potential customers? I attribute this to an underlying sense in most entrepreneurs that an angel investor is not a "buyer or customer" but is a "seller or supplier." An erroneous view is that an angel investor is "selling capital" to the entrepreneur and the price to be paid is an equity interest in the entrepreneur's company. Not true. The seller in this case is the company, selling an equity interest to the angel investor who is buying, not selling. If an entrepreneur would only take this view of angel investors, the entrepreneur would do extensive research into the characteristics of the angel investor market. How many angel investors will the entrepreneur have access to, what is the decision making process for an angel investor, who influences the angel investor to make the investment, what is the competition for the angel investor's funds, what will it take to get an angel investor to seriously consider the entrepreneur's opportunity, etc. These are the types of questions the entrepreneur would seek answers to for his or her customers; why not seek this information about angel investors?
Finding out the characteristics of the angel investor market is difficult, but not impossible. It is inexcusable for entrepreneurial companies who set out to raise capital from angel investors not to know as much about the angel investor market as they know about their potential customers.
Sunday, May 23, 2010
Why don't angels invest in early stage or seed venture capital funds?
The vast majority of angel investors make investments on their own or follow other angels into deals. Few angel investors conduct due diligence on their own. Why? Because they don't have time and most don't have the needed expertise unless the investment opportunity is in the field of the angel's experience. Further, most angel investors don't have expertise in negotiating early stage investments. So, why do angels invest in early stage deals in such a haphazard way?
I'm not aware of any studies on why angels invest in this way, but I've represented many companies in their capital raising efforts at the early stage and have observed how angel investors typically behave. Most angel investors base their decisions to invest in early stage companies on the charisma of the founders, not on a thorough analysis of the products, markets and management skills of the founders. Yet. some early stage investments by angels pay off handsomely. How can this be? Frankly, I believe it is mostly luck.
I have a rule of thumb for seed stage investing - invest in 10 companies because 8 will fail (or you will lose all of your investment when later investors squeeze you out), one will make a 2-3 times return and, if you're lucky, one will make a 5 - 10 times return (maybe higher). Of course, the losses will occur in the first few years and the winners will take 5-7 years to achieve success for their investors. Most angels lose patience after five years.
In my experience, most angel investors do not invest in at least 10 early stage deals because they do not have sources for qualified deal flow. As a result, most angel investors get discouraged after investing in deals for three to four years and stop investing, almost assuring a loss on their investments.
If angel investors knew this pattern, why would they invest in a 3-4 deals expecting each one of them to be a 10X winner? In my experience, investors who are new to angel investing don't know about these odds or about the probability they will be wiped out by later investors when their companies have to have "down-rounds" with more sophisticated investors to stay alive.
I've blogged before about why angel invest (based on my experience). They invest for the "fun-of-it," not because they need to increase their net worth. Yet, they hate to lose money. If this is the motivation of most angel investors, it's understandable why they don't do due diligence, don't structure deals smartly and don't cultivate quality deal flow. It also explains why they don't invest in early stage or seed venture capital funds. A fund like this results in little or no contact by the investors with the investment opportunities and with other investors in the fund. In other words, the "fun" is taken out of the hunt for seed investment opportunities.
If angel investors wanted professionals to find the early stage investment opportunities, do thorough due diligence, negotiate favorable deals and offer guidance to each company after the investments are made, early stage/seed venture capital funds would spring up to meet the demand by angel investors to invest in these funds.
As an alternative, angels might band together to form angel investor groups hoping the group could engage a professional to do the due diligence and deal making for them with an approval process that would involve the angels in the decision making. These groups have been formed and some are purportedly successful in their investing missions, but my observation is that most angel groups fall apart after short periods of time due to the need for volunteers to do most of the work.
If angel investors were primarily motivated to invest in early stage companies based on potential returns, they should invest in early stage/seed venture capital funds. Commentators have recently been reporting that the smaller, early stage venture capital funds have provided greater returns to the investors. But, if an angel investor is primarily motivated to invest in early stage deals for the fun-of-it, that angel won't be interested in an early stage/seed venture capital fund because the fun is taken out of the equation and the investor will basically be a passive investor.
If a new, early stage/seed venture capital fund could offer some way to make it fun for angel investors to invest, that fund should succeed in raising capital from angels. Otherwise, a new, early stage fund will have to raise capital from institutional investors who are not into having fun, but into achieving the highest possible returns.
I'm not aware of any studies on why angels invest in this way, but I've represented many companies in their capital raising efforts at the early stage and have observed how angel investors typically behave. Most angel investors base their decisions to invest in early stage companies on the charisma of the founders, not on a thorough analysis of the products, markets and management skills of the founders. Yet. some early stage investments by angels pay off handsomely. How can this be? Frankly, I believe it is mostly luck.
I have a rule of thumb for seed stage investing - invest in 10 companies because 8 will fail (or you will lose all of your investment when later investors squeeze you out), one will make a 2-3 times return and, if you're lucky, one will make a 5 - 10 times return (maybe higher). Of course, the losses will occur in the first few years and the winners will take 5-7 years to achieve success for their investors. Most angels lose patience after five years.
In my experience, most angel investors do not invest in at least 10 early stage deals because they do not have sources for qualified deal flow. As a result, most angel investors get discouraged after investing in deals for three to four years and stop investing, almost assuring a loss on their investments.
If angel investors knew this pattern, why would they invest in a 3-4 deals expecting each one of them to be a 10X winner? In my experience, investors who are new to angel investing don't know about these odds or about the probability they will be wiped out by later investors when their companies have to have "down-rounds" with more sophisticated investors to stay alive.
I've blogged before about why angel invest (based on my experience). They invest for the "fun-of-it," not because they need to increase their net worth. Yet, they hate to lose money. If this is the motivation of most angel investors, it's understandable why they don't do due diligence, don't structure deals smartly and don't cultivate quality deal flow. It also explains why they don't invest in early stage or seed venture capital funds. A fund like this results in little or no contact by the investors with the investment opportunities and with other investors in the fund. In other words, the "fun" is taken out of the hunt for seed investment opportunities.
If angel investors wanted professionals to find the early stage investment opportunities, do thorough due diligence, negotiate favorable deals and offer guidance to each company after the investments are made, early stage/seed venture capital funds would spring up to meet the demand by angel investors to invest in these funds.
As an alternative, angels might band together to form angel investor groups hoping the group could engage a professional to do the due diligence and deal making for them with an approval process that would involve the angels in the decision making. These groups have been formed and some are purportedly successful in their investing missions, but my observation is that most angel groups fall apart after short periods of time due to the need for volunteers to do most of the work.
If angel investors were primarily motivated to invest in early stage companies based on potential returns, they should invest in early stage/seed venture capital funds. Commentators have recently been reporting that the smaller, early stage venture capital funds have provided greater returns to the investors. But, if an angel investor is primarily motivated to invest in early stage deals for the fun-of-it, that angel won't be interested in an early stage/seed venture capital fund because the fun is taken out of the equation and the investor will basically be a passive investor.
If a new, early stage/seed venture capital fund could offer some way to make it fun for angel investors to invest, that fund should succeed in raising capital from angels. Otherwise, a new, early stage fund will have to raise capital from institutional investors who are not into having fun, but into achieving the highest possible returns.
Friday, March 26, 2010
The key to attracting angel investors
As a corporate and securities lawyer for 35 years, now as a professor of entrepreneurship and negotiation, I've worked with many young, technology companies in their efforts to raise capital from angel investors. Almost all of these companies initially thought they could simply present a good business plan to several potential angel investor who they've never met before and get a commitment from each of them to invest several hundred thousand dollars. Those that ultimately raised capital learned the hard way that they had to establish a relationship with potential angel investors before they would invest.
A few of my clients followed my advice and the advice of others and started a year in advance to establish relationships with potential angel investors before attempting to raise capital from them. This took planning and perseverance since most young companies can't wait for a year to raise capital unless they can bootstrap for that period of time.
But, think about it, doesn't common sense tell you that angel investors are not stupid and won't invest unless they have direct or indirect relationships with the companies they will invest in? Every angel investor has many, many investment opportunities. The smart angel investor invests in companies the angel investor knows more about than he or she learns from a business plan. Or, he or she has a friend (usually another angel investor) who has a relationship with the company and intends to make an investment. This is what I mean by a direct or an indirect relationship.
I can't remember a client who raised capital from angel investors who were total strangers. Usually, one of the angel investors had a relationship with the company for a period of time. This investor acted as a lead investor and brought in friends to the deal. The friends trusted the lead investor's judgment because of the relationship he or she had with the company.
So, the key to raising capital from angel investors is to establish a relationship with one or more angel investors so the angel investor can become a champion with other angel investors he or she knows. I know this is easy for me to say and very hard to do when a young company is trying to survive for up to a year while establishing these relationships. But, those who are able to do this, who have dynamite business opportunities, management with experience and business plans that are believable can raise capital from angel investors.
A few of my clients followed my advice and the advice of others and started a year in advance to establish relationships with potential angel investors before attempting to raise capital from them. This took planning and perseverance since most young companies can't wait for a year to raise capital unless they can bootstrap for that period of time.
But, think about it, doesn't common sense tell you that angel investors are not stupid and won't invest unless they have direct or indirect relationships with the companies they will invest in? Every angel investor has many, many investment opportunities. The smart angel investor invests in companies the angel investor knows more about than he or she learns from a business plan. Or, he or she has a friend (usually another angel investor) who has a relationship with the company and intends to make an investment. This is what I mean by a direct or an indirect relationship.
I can't remember a client who raised capital from angel investors who were total strangers. Usually, one of the angel investors had a relationship with the company for a period of time. This investor acted as a lead investor and brought in friends to the deal. The friends trusted the lead investor's judgment because of the relationship he or she had with the company.
So, the key to raising capital from angel investors is to establish a relationship with one or more angel investors so the angel investor can become a champion with other angel investors he or she knows. I know this is easy for me to say and very hard to do when a young company is trying to survive for up to a year while establishing these relationships. But, those who are able to do this, who have dynamite business opportunities, management with experience and business plans that are believable can raise capital from angel investors.
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