Past articles

In 2005 through 2007, I wrote a series of articles for the Orlando Business Journal. Recently I searched for one of my articles and found a complete list of these articles on the Orlando Business Journal Website.  After reading them again, I concluded that nothing has changed and all of the articles are still relevant for advanced entrepreneurs.  So, below is a list of the articles with the links to the Orlando Business Journal.  

• 4/09/2007

• Government action can't stimulate venture capital funding

  The state of Florida, first through its Commerce Department and then through Enterprise Florida, the Legislature and the governor's office, has tried to …
• 8/14/2006
  

  Failure to focus on strategy may mean murky future

• Professor Howard Stevenson of Harvard University once observed that entrepreneurs are driven by perceived opportunities. They hotly pursue the opportunity …
• 4/10/2006
  

  Board members who micromanage can stir up trouble for a CEO

  Plenty of unpleasant surprises can await a CEO, and a micromanaging board member often is one of them. It's not unusual for a CEO to invite a current or …
• 2/20/2006
  

  Raising capital? Then make sure to mind the GAAP

  There's a reason for the "GA" in Generally Accepted Accounting Principles (GAAP). And, generally speaking, the sooner an entrepreneur accepts it, the better …
• 10/31/2005
  

  Fiscal fiction: The CFO as a company sales rep

  another Grimm Truth pop quiz: The degree most commonly held by chief financial officers of publicly held companies is: A) CPA B) MBA or C) divinity. If you said "C," give yourself a detention. The obvious …
• 8/15/2005
  

  Tough love

  As tempting as it might be for an entrepreneur to stack a board of directors with compliant friends and family, the lively debate of an independent board …
• 6/27/2005
  

  Ethics aren't negotiable

  ORLANDO -- Ever get the feeling that you're being watched? Well, if your title begins with "chief" anything, you're probably not imagining things. My …
• 5/16/2005
  

  Business intelligence: It's not an oxymoron

  It never ceases to amaze me how some entrepreneurs are so eager to boldly go where they have absolutely no business going and how much money they are willing …
• 3/21/2005
  

  Setting up the new CEO to fail

  Business would be so much easier if people would just play nice. But that's rarely the case when a company funded with venture capital outgrows its founder …

 

Scaling a business is harder than starting a business - mindmap

I've prepared a new mindmap using The Brain.  The link to the Brain is
https://webbrain.com/brainpage/brain/1570D08C-2B19-DA79-A992-AA010A150300

Copy the above link and paste it into the web address block on your browser, then press the enter key.  You will have to set up a free account to open the Brain.  This is easy and will not require you to open a free trial of TheBrain.

You can open the elements of the Brain by clicking on the colored dots on the various blocks.  You can reduce the bottom panel by clicking on the down arrow in the middle of the top of the bottom panel.

PowerPoint in higher education is ruining teaching.

Great slideshow on how not to use PowerPoint or any other presentation software.

PowerPoint in higher education is ruining teaching

Is it technology looking for a market or a market looking for technology?

Whenever I hear a company CEO say, "We have great technology and we're looking for new applications for the technology," I know this company is heading for trouble.  When I hear a CEO say, "We know this market and we're looking for new technology to solve problems that exist with users in this market," I'm interested.  So are investors!

It is so tempting for those who have developed a technology to think that there must be a market that can use this technology, that the technology developers lose objectivity and try to start a company to find the market that can use the technology.  This company is about 90% of the time doomed to failure. So, why don't the owners/developers get it?  Businesses succeed because there is demand (a market) for their products and services not because they have great technology.  OK, the most successful companies have great technology AND demand for their products or services.

But, you say, what about a market that will develop in the future and the entrepreneur who has a vision that the market will develop in the future?  Well, you've heard that timing is everything.  Most entrepreneurs who have a vision of a future market can't imagine how long it takes for a market to develop and exhaust their resources before there is a viable market.  Those that enter this nascent market just at the inflection point when a viable market is developing succeed while those who enter too soon fail.  This is particularly true for companies that have a new technology.

Don't get caught in the trap of having an interesting technology and believing you can start a company to find a market for the technology.  Knowledgeable investors know this is a formula for failure.

Is the cost of complying with SOX worth it?

When I team-teach a portion of our Business Ethics class in the Rollins MBA program, one of the presentations by a team in the class is on the pros and cons of SOX.   The side that discusses the cons always questions the cost/benefit of compliance with SOX.   After the presentation, I ask the class to determine the percentage of stock traded, as a percentage of the shares outstanding, in a publicly traded company on the New York Stock Exchange in a given week.   I'll suggest a large company and tell them to go to Yahoo or some other site for this information.  They usually find that the number of shares traded in a given week for that company is 2-3% of the outstanding shares in the company.

Then, I ask the class to tell me the market cap for that company based on the quoted price per share at that time and most of the class gets the answer right - the share price times the number of shares outstanding.

Then, I ask them to predict the effect on the price per share if the New York Times or the Wall Street Journal has a headline that the SEC is accusing one of more executives of that company of wrongdoing.  The students are usually at a loss at predicting the price decline that will occur, but some find a few companies where that has happened recently and excitedly announce that the price per share went down 10-30% in one day resulting in a decline in the market cap by several billion dollars.  So, the alleged wrongful (unethical by definition) conduct may have reduced the wealth of the shareholders in that company by several billion dollars.  How could this be?

Because stock prices are set by transactions at the margin (only 2-3% of the outstanding shares per week) in normal trading.  But, when a public relations disaster hits, it would not be unusual for more than 5% of the outstanding shares to be traded in one day driven by institutional sellers.  So, what is the lesson in my Business Ethics class?

Unethical conduct by one or more executives in a publicly held company can result in a reduction in shareholder wealth by hundreds of millions (or billions) of dollars when the wrongdoing may only have benefited the executives by a few million dollars or less.  So, the value of the increased oversight by the board of directors and the audit committee caused by compliance with SOX should by measured by avoiding the reduction in shareholder value if wrongdoing is prevented.  But, how can shareholders know if wrongdoing is prevented?  They can't; but, in my experience, the invisible hand on the executives of the company due to SOX is a form of insurance against wrongdoing and the premium paid is the cost of complying with SOX.  Based on the public relations disasters many companies have faced when wrongdoing is discovered, the premium for reducing the likelihood of wrongdoing by complying with SOX is well worth it.

"Vapor" Opportunities

I often tell my students to be very careful when considering a new business opportunity if you are on the outside looking in with a solution to a problem you perceive to exist.  An example would be for someone with software development experience in, say, customer service software who decides to develop software to automate some aspect of medical records in doctor's offices.  He or she talks to a few office managers for doctor's offices and develops a set of features for this software based on this very limited information.

Our entrepreneur then induces a doctor's office to be a beta site for the software and, with a great deal of hand holding, decides that the beta site was a success.  This is a disaster about to happen.  Usually, the doctor's office in the beta test has not paid money to use the software and, therefore, didn't have to consider the value versus the cost of the software product.

Inevitably, the software needs many bells and whistles to handle all the variations "required" by different doctor's offices making it impossible to charge a price that the doctor's offices are willing to pay that will cover the actual cost of delivering the product.  The entrepreneur deceives him or herself into believing the "value-added" by using the product exceeds the price the entrepreneur must charge and the entrepreneur runs out of cash chasing a "vapor" opportunity.

Compare this to a person with some knowledge of software who works as an administrator  in a large doctors' office who sees the need for a similar product, but with a simplified set of features that will meet the need.  He or she sees that the product can be developed, from the beginning, to have flexibility to handle additional features, if a doctors' office is willing to pay for them.  This person decides to team with a software developer and designs the software to meet the real needs of a doctor's office that have subtle, but very important, differences from the needs perceived by our first entrepreneur.  The bells and whistles (that often cost more to develop than the basic product and often cause more problems for the customer) are offered only as add-ons.  This entrepreneur has a real chance of succeeding.

What I've described above happens very often.  The first entrepreneur conducted a superficial analysis of the problem he or she perceived to exist and developed a product without knowing the subtle aspects of the customer's problem that will be the difference between success and failure of the product.  This often happens because of an arrogance on the part of the first type of entrepreneur who thinks he or she can understand the customer's need and thinks he or she knows the decision making process the potential customer will use in deciding whether or not to pay money for the product.

In reviewing a business plan, I always look for a section that walks the reader through the thinking process of a potential customer in deciding to purchase the product.  I very seldom find this analysis and, when I ask the entrepreneur to verbally tell me, the entrepreneur can only give me generalities that are useless.  Yet, when I ask someone like the second entrepreneur described above who has had personal experience in dealing with the problem, he or she can usually give a very good explanation of the customer's decision making process.  Which of these entrepreneurs is likely to raise capital from investors? 

The lesson - team up with a person with real experience at dealing with the problem you think you can solve with your product; not by simply interviewing the person, but  by making the person a part of your team!

The best way to prepare for a major negotiation

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.

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/

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.

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.

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.

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.

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.

Are advanced entrepreneurs good negotiators?

Not ususally. But, they don't realize they are poor negotiators. So what?

In order to capture the attention of advanced entrepreneurs, I often point out that entrepreneurial businesses make life or death decisions several times per year (sometimes per month), while a large company may make a life and death decision once every five years. Therefore, the liklihood of making a mistake that leads to the entrepreneurial business feeling compelled to be acquired or worse, going out of business, is very high.

Many of the mistakes result from a failure to successfuly negotiate a strategically important transaction or relationship. Why is this? First, most entrepreneurs, like most executives, believe the ability to negotiate effectively is a natural talent (which is not true). As a result, they fail to take courses to develop negotiating skills. Second, the entrepreneur fails to follow the number one rule in negotiation - be better prepared than the other side!

Every entrepreneur will be involved in heavy duty negotiations with people on the other side who are more skilled at negotiating than the entrepreneur. Yet, the entrepreneur believes his or her common sense will be enough to do well in the negotiation. Not even close!

Hiring a lawyer or other expert to negotiate for you is expensive and, often, not very helpful since the lawyer or other expert probably does not fully understand the context in which the negotiation is taking place. Only you have a keen appreciation of the trade offs you may make to get the deal or transaction done. It is easier for you to learn how to negotiate than it is to bring the lawyer or expert up to speed about your business.

Every entrepreneur should take a mini-course in negotiation from the local university or one of the firms that advertise in the airline magazines offering weekend programs on negotiation. This will be one of the best investments of time and money an entrepreneur can make.

Economic gardening is a good thing, but ......

Many state and local governments are promoting "economic gardening" as a means of stimulating growth in their economies and employment. This is a good thing. But, a key ingredient is missing - access to capital for growing entrepreneurial companies. Capital is in short supply by definition. Only those businesses that can convince investors and lenders that they can produce increased value for investors or meet their debt obligations for lenders deserve to obtain capital. The programs for economic gardening seem to focus on helping the growth stage companies deal with growth issues in order to make them more attractive to investors and lenders. This is a good thing also, but needs to have an added dimension.

How can governmental entities make capital more available to deserving growth companies in their geographic areas? Not by promoting venture capital firms to focus on a their geographic areas and not by trying to educate angel investors on investing in entrepreneurial companies. I urge all governmental decision makers to read a new book by Josh Lerner, a Harvard professor, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed--and What to Do About It, The Kauffman Foundation.

So, what can be done? Can angel investors be induced to make more investments in these companies? Probably not. Can growth companies be educated on how to raise capital from angel investors, resulting in more capital being invested in these companies? Perhaps. Can founding entrepreneurs of growth companies be convinced they need to make changes in order to be much more attractive to angel investors? This is the biggest impediment to attracting capital from angel investors. Yet, most entrepreneurs running growth companies cannot accept the realities of valuations of their companies, management changes needed, giving the investors some degree of control (through veto powers, not the power to force the company to take certain actions) and having boards of directors that are not rubber stamps for the entrepreneurs.

Entrepreneurs who have the courage to accept these realities have a much better chance to raise capital from angel investors. Those companies that raise capital from angel investors and make significant progress in developing their companies can become candidates for venture capital financing. Creating the environment where companies can raise more capital from angel investors is the best way to promote investments by venture capital firms in the future. My conclusion - economic gardening can make a difference if the economic gardening programs can help the entrepreneurs running these companies deal psychologically with these realities .

Entrepreneurial Finance is not about capital raising

I'm teaching Entrepreneurial Finance in the Rollins College MBA program this term. The obvious approach to this class is to focus on different means of obtaining capital. But that is not what Entrepreneurial Finance is about. Let's refer to Entrepreneurial Finance as EntFin to shorten this blog. EntFin is about mobilizing resources to take advantage of an opportunity identified by an entrepreneurial company.

For a product, the basic resources to take advantage of the opportunity are marketing and sales resources, working capital and capital equipment. One way to obtain these resources is to raise capital and buy them. But, there are many other ways to mobilize these resources. Since it is usually very hard to raise capital, entrepreneurial companies must be very creative in getting others to provide these resources.

As an example, a start-up company making widgets that use a new technology that has been patented can license others to use the technology to make the widgets relying on the licensees to find the marketing and sales resources, the working capital needed and the capital equipment necessary. Or, the company could make only the component of the widget that uses the company's proprietary technology and sell the component to OEMs who make the widget. The OEMs have to find the marketing and sales resources, the working capital and the major capital equipment to make the widgets (the company may have to purchase some capital equipment to make the components and must acquire the working capital to fund a small inventory and accounts receivable from the OEM).

Or, the company could joint venture with a large company interested in making the widgets by contributing the company's technology to the venture for a share of the profits. The joint venture partner would provide the marketing and sales resources, the working capital and the capital equipment to make the widgets. There are other ways to use other peoples money to provide the necessary resources to take advantage of the opportunity.

So, EntFin is the study of ways to mobilize resources, not just ways of raising capital. Each of these ways have advantages and disadvantages and some of the ways may not be doable. My goal in teaching EntFin is to open the eyes of the students to ways of mobilizing resources that includes, but is not limited to, raising capital.

Is an entrepreneur who failed an "advanced entrepreneur?"

We all know the saying, "We learn from our mistakes." Most people claim they learn more from mistakes than they do from successes. I don't believe this is true. Instead, I believe this is usually a way for a person to "psych" him or herself up after making a mistake that is very costly. Too often, an entrepreneur who started a business that failed blames the failure on outside circumstances or forces, not on mistakes made by the entrepreneur.

On the other hand, most entrepreneurs who have a successful business can readily state the decisions or actions taken by the entrepreneur that caused the success. An entrepreneur who has the courage to face up to mistakes made that caused a failure is likely to be a success the next time around.

For this reason, knowledgeable investors appreciate an entrepreneur who admits mistakes he or she made in the past and states clearly what was learned from these mistakes. Further, an entrepreneur who suffered through a business failure and has the courage to try again is my kind of entrepreneur. This entrepreneur is an "advanced entrepreneur" just as much as one who succeeded the first time.

Are entrepreneurs really risk takers?

I've often said that, in my experience, entrepreneurs are not risk takers. Instead, they don't know most of the risks they are taking. There is a disconnect between the risks that experienced entrepreneurs, looking back on their careers, realize they took versus the risks that new entrepreneurs think they are taking. Why is this?

First, newbie entrepreneurs don't know what they don't know. When I ask a new entrepreneur to list the risks he or she is taking while in the start-up mode, the entrepreneur is often hard pressed to list more than two or three risks. This list is not even close to the kind and number of risks the entrepreneur is taking. This explains the frequent comment experienced entrepreneurs make that, "If I really knew what I was getting into, I probably would not have started my company."

Even when I or others point out risks that the entrepreneur is taking, the entrepreneur usually denies the existence of the risks or assumes the risks can be easily managed. It takes courage to admit that there are major risks that are being taken and that some of the risks, if they come true, may cause the business to fail.

I often remind my students that no one "knows what they don't know." If an entrepreneur knows what he or she doesn't know, then the entrepreneur can research the matters and come up with answers. But, when they don't know what they don't know, they are operating blindly and will usually be surprised by challenges that jump up and threaten the survival of their businesses.

Most entrepreneurs don't know the risks they are taking. The best way to know is to ask questions of those who have "been there, done that."

More myths about angel investors and venture capital firms

Myth - Entrepreneurs generally succeed in raising capital from angels who have no prior relationships with their companies based on the merits of their business plans. Mostly wrong. An angel investor invests primarily based on a prior relationship the angel investor has with the entrepreneur or with another angel who represents he or she will invest because of the merits of the deal and his or her established relationship with the company. The key for a company in raising capital from angel investors is to establish relationships with potential angel investors long before asking them to invest in your company. In other words, a precondition to starting a company which will need angel investment to get past the first year is to "prime the pump" so to speak in order to have a lead angel investor when the time comes to raise capital. Almost all entrepreneurial companies start with family and friends money, hoping to achieve a few milestones that will make the company attractive to angel investors for "just in time" capital from these investors. Inevitably, it takes much longer than contemplated to raise capital from angel investors and the company runs out of money. The reason for this is that entrepreneurs almost always underestimate how long it takes to raise capital from angel investors who are strangers. They wait too long to begin the process of establishing relationships with potential investors.

Myths about Angel and Venture Capital Investors

Most entrepreneurs have been exposed to myths about angel investors and venture capital investors. Let me dispell some of these myths:

• Myth - Venture capital investors invest in technology, not the people. Wrong. Venture capital investors invest in the management team far ahead of the technology that is the basis for the company. Their experience is that a highly qualified management team will engage the market, react and change the product or service the company offers as needed to succeed. Since most companies don't succeed with the first version of its product or service, a management team that can assess the market and make changes will more likely succeed.
• Myth - Angel investor groups act quickly when presented with an investment opportunity. Wrong. There is a trend toward angels forming groups to evaluate investment opportunities, select from the many opportunities they see, negotiate the terms of investment and make the investment. However, in most groups, this takes an inordinate length of time, especially if the angel group does not have a paid managing director to keep things moving. Most angel groups don't have a paid managing director. The reasons for the slow moving process is that the group often only meets once per month, a single naysayer in the group often causes the process to stop until others in the group override the negative opinion and the group has a preferred set of terms that may not be acceptable to advanced entrepreneurs, slowing the process down to get the group to accept other terms. It's not unusual for a company to make a presentation to an angel group one month, come back the next month to answer questions, begin negotiations lasting 30 days, then waiting another 30 days for the legal documentation to be completed before a closing occurs. Is it any wonder advanced entrepreneurs don't want to deal with angel investor groups? On the other hand, early stage entrepreneurs often have no choice but to raise capital from angel groups and don't realize how long the process will take.
• Myth - Venture capital investors want to control your company from the start. Wrong. Professional venture capital firms do not want to take control of companies when they make their first investment. First, they aren't staffed to exercise that degree of control over the companies. Second, if they have to have control in order to make the investment, they have concluded the management team is incapable of running the company which should lead to the decision not to invest. On the other hand, there are individuals and groups out there who hold themselves out as venture capitalists, but who will only invest if they obtain control. These individuals and groups are not true venture capitalists and advanced entrepreneurs should usually avoid them.
• Myth - Angel investors invest to make money. Usually wrong. Most angel investors are successful entrepreneurs who have cashed out. They invest to "be in the hunt" or to join with other angels who they want to be associated with or to have the opportunity to watch an entrepreneurial company go through the growing pains and, hopefully, succeed. Since, by definition, angel investors are wealthy, they don't have to make highly risky investments to increase their net worth. But, they HATE to lose money. Yet, angels will lose their entire investment in most of the investments they make in young companies. How do angel investors reconcile the risk-taking with hating to lose money? It's a mystery.
• Myth - Angel investors bring good advice to the table for the entrepreneur in addition to money. Usually wrong. The best thing an angel investor can bring to the table other than money is relationships, i.e relationships with potential investors, relationships with investment bankers, relationships with potentially large customers, relationships with law firms, accounting firms and banks, etc.

I've run out of time today. I'll continue this another day.