One of the biggest mistakes entrepreneurs make is thinking that procuring financing for their startup is a win if they get the money.
But securing the money can be disastrous if it’s not from the right people. Pick an investor like you’d pick a spouse.
Investors aren’t just about gaining access to money: They’re partners and, to some extent, they’re also bosses. And just like the wrong spouse can wreck your life, the wrong investors can wreck your business.
It can happen: You take the money, and in time problems arise.
What happens if you want to pivot with a zag and your investors want a zig instead.
Or what if investors want you to fire someone you wish to keep or prod you to hire somebody you’re not keen about? And so the world of startups is littered with stories of founders kicked out by their investors.
Yes, the right investors can pitch in, contribute and give you ideas and advice. But the wrong ones can pressure, object, obstruct and make your business life miserable. Even if they don’t have a majority vote on the company’s board of directors, investors are still part owners and have legal rights.
Discern what an incompatible investor looks like
“But how will I know an incompatible investor when I see one?” you might ask.
Investors aren’t good or bad. Compatibility comes from the match between your way and theirs and between what you want and they want. Perhaps you really want investors who leave you alone to run your business without interference. They are rare but they do exist.
I believe smart founders want investors who pitch in, help with strategy and tactics and introduce them to contacts. And probably most investors want to do that. But even when they do, if they have problem-solving styles and ways of helping that are different from yours, incompatibility can be a problem. Compatibility involves matching of people like in a marriage.
At the height of the dotcom boom, although I had grown my company, Palo Alto Software, to more than $5 million in annual sales without outside investors, I partnered with a Silicon Valley venture capital firm to build it faster.
Then the dotcom-bubble popped. Two years later, these investors were locked into holding a minority share and needed an exit. The venture capital business model required that the company be sold but I wanted to keep it and grow it.
I liked these investors. They were smart and honest and believed in the company and offered good ideas and suggestions. So I negotiated a buyback of their shares. That was hard, since I had spent the money to grow the company and it wasn’t liquid. But it was better than enduring a long-term relationship based on incompatible goals.
This scenario involved possibly the best kind of incompatibility. But that’s still a good illustration of why incompatible expectations of a business can lead to difficult problems.
As is the case with spouses in a marriage, the good intentions and good people involved in a venture-capital arrangement aren’t always enough. Incompatible goals can be really tough for both sides.
Avoid a bad match
To circumvent these problems, start with the investment equivalent of a dating profile. Investors have a history, existing relationships, websites and profiles on investment sites such as Gust, AngelList and TheFunded.com. Find out what your potential investors say they want, how they claim they work and what others assert about them.
Always talk to owners of other companies that a potential investor has already invested in. Call them and talk. Beware of any investors who won’t help you reach other companies they have worked with. The chance that your startup is really their first investment is very low.
And talk to your investors realistically. Be absolutely clear and transparent about who you are and what you want. Ask them straight out about their goals, history and way of working with startups.
Develop some questions that will help root out styles and approaches. Inquire what they would do about one kind or problem or another. Remind yourself why you’re doing business this way in the first place, what you’re about and where you’re going.
Getting from an incompatible place to somewhere else after the contracts are signed can be done but not without some cost and definitely not without risk. Even in my company’s case, which worked out well, I found it a scramble to deal with the problem when it arose. You don’t want to scramble.
Bootstrap your startup if you have to, rather than take funding from the wrong investors. You’re much better off with no investors at all than ones who don’t fit. Scale down your plans or temporarily push them forward. Do what you can to avoid being locked into a bad investment relationship.
This article was originally posted here on Entrepreneur.com.
A Comprehensive List Of Angel Investors That Fund South African Start-Ups
To get your start-up off the ground you’ll need money. An alternative is to ask an angel investor for that initial capital injection to give your start-up a better chance at success.
An angel investor is usually a high net-worth individual or group that provides capital to start-ups. They are referred to as angels because they are willing to invest their personal funds into a struggling higher risk business, when no one else will. Just like funds and incubators, some angel investors will focus on a specific industries.
What is an angel investor?
“Angel investors got their name 100 years ago in New York City when struggling playwrights – with limited financial means – had theatrical productions funded by a wealthy and visionary individual usually at the last minute,” explains David Newton, professor of entrepreneurial finance and author of four books on both entrepreneurship and finance investments.
He says that this generosity was associated to angels floating down from heaven with money so the show could go on. However, these angels were astute investors with keen eyes for investments that would achieve high profits. Angels fund a business to get in on the ground floor of an opportunity for financial gain.
The difference between an angel investor and a venture capitalist
Venture capital funding usually comes from a firm with people selected to help your business develop. Venture capital firms are comprised of professional investors. The capital is generated from a variety of sources such as corporations and individuals, private and public pension funds, and foundations.
A venture capital firm is looking for businesses with high growth potential. They will then buy shares and have a say in the future of a business, in exchange they expect a high return on investment.
The pros and cons of choosing an angel investor
The funding an angel investor can bring to the table could make all the difference in getting your start-up off the ground, but there are a few trade-offs you need to be aware off:
- Angel investors are usually entrepreneurs themselves, who understand the level of risk involved in investing with you, and so they won’t require you to jump through as many hoops as with a typical business loan.
- An angel investor will offer you capital in exchange for an ownership stake, which means you won’t have to repay their investment.
- Angel investors bring years of expertise and already understand the challenges your business will need to overcome before reaching success.
- The cons of an angel investor taking on high risk start-ups is they usually have high expectations. It isn’t unusual for an angel investor to expect a rate of return 10 times their original investment within the first 5-7 years.
- Offering up a portion of ownership to the angel investor can limit your start-up’s capability of realising a profit, if you don’t carefully assess the terms.
- The angel will want to take an active part in making decisions, or they’ll want you to explain the reasons behind some of your decisions.
Here is our comprehensive list of 43 angel investors interested in South African start-ups:
- Ernst Hertzog
- Brett Mason
- Avi Eyal
- Joel Gascoigne
- Brett Dawson
- Michael Leeman
- Lawrence T Levine
- Saul Klein
- Mohamed Nanabhay
- Sean Emery
- Vinny Lingham
- Bukola Jejeloye
- Kresten Buch
- Abu Cassim
- Pardon Makumbe
- Charles Lorenceau
- Justin Stanford
- Zachariah George
- Daniel Guasco
- Craig Raw
- Rob Stokes
- Mark Levitt
- Alvin Singh
- Dean Cannell
- Llew Claasen
- Ari Lustbader
- Tommy Chia
- Mark Pretorius
- Henk Kleynhans
- Michael Jordaan
- Dotun Olowoporoku
- Abrar Ahmad
- Michael Greve
- Wayne Gosling
- Jordan Wainer
- Paul Brown
- Dan Stephenson
- Malcolm Gray
- Richard Rose
- Mark Forrester
- Shlomi Podgaetz
- Jesse Hemson-Struthers
- Cassian Coquelle and Hendrik du Preez and Andre Bottger
- Angel Investor Networks
When Attracting Investors Go Ugly Early
When it comes to attracting an investor, use the same strategies in the boardroom as you would in the barroom.
If you want to make money from your idea, you must be unique in your ability to execute it. Sometimes you have a great idea – a game-changing idea; an idea that’s worth a billion dollars – so you start thinking about how to make it a reality and you quickly realise that you don’t have sufficient capital, technical expertise and/or time.
At this point you’re faced with two choices:
Option 1: Be paranoid
Start worrying someone will steal your genius idea. Insist on NDAs before sharing. Start fantasising about selling your idea to a giant corporation that is so lethargic it would never be able to come up with your idea.
Option 2: Share
Start telling everyone about your idea. Share it on Twitter or Facebook. Tell the world!
Option 1 is a dead-end filled with losers. Option 2 carries the small chance that you get ten people who validate your idea and you can take the next step.
Option 1 deprives the world of your idea and leads to you muttering: “I thought of Facebook long before Zuckerberg,” whilst sipping a late-harvest semi-sweet wine with ice. Option 2 gives you a small shot at being part of a bigger story, and at the very least, gives the world a chance to benefit from your idea, even if you enjoy no financial upside (or credit).
Get screwed early
If someone steals your idea and makes a success of it, tough luck. If your contribution is not critical to the realisation of the idea, then the idea is worthless. At the very least, you can identify crooks early on. The world is full of crooks. Giving people an opportunity to screw you early is a great way to filter bad people from your life.
Build a track record
Okay, so you’ve got the idea. Now you need funding — you need a shareholder. First, you need a network. Cold calls rarely work. Investors work on personal references. With luck, your parents or your friends or your colleagues can plug you into a capital network.
If you weren’t born lucky, you have to make your own luck. The shortcut is to marry rich, although that usually results in long-term unhappiness.
The long route is: Go work at a reputable company, build a track record and strong relationships that you can leverage when you are ready to start your own business.
Go ugly early
Once you have access to a network, you need to attract investors’ attention. Getting the attention of an investor is a bit like finding love at a bar. If you’re like me and you always struggled to attract good-looking members of the opposite sex, employ the ‘go ugly early’ strategy.
The same strategy works when it comes to chasing funding. Instead of chasing the most attractive person in the room, head straight for the hunchback. This will save you time. Also, it will gain the attention of the most attractive person in the room. “That’s weird, why is that guy not talking to me? Everyone always talks to me!”
Here’s the thing: The key to the ‘go ugly early’ strategy is to be noticed. It’s no good chatting up the hunchback if Leonardo Dicaprio can’t see you doing it.
Close the deal
Okay, assuming you can attract interest, you need to close the deal. Get the basics right. Dress smart, have your forecasts on hand, be clear that you’re in it for the money (not to save the world). Most importantly, show your passion. People don’t invest in excel spreadsheets — people invest in dreams. Sell the dream.
If you don’t close the deal, don’t sweat it. Move to the next girl (or guy) at the bar. Remember, the best investors are hard to get. If someone seems too eager to give you cash, think twice. Easy cash is like easy sex. It normally comes with STDs…
Raising money is all about people. Be yourself and the right person will choose you. If you try to be someone that you’re not, you may find yourself in bed with the wrong person. And shareholding relationships are like the mafia: It’s hard getting in, but it’s much harder getting out.
Read ‘Be A Hero’ today
How To Fund Your Business By Taking On New Shareholders
Here are four practical things to consider and implement to do just that.
There comes a time when your business needs an injection of capital to get over that hump. The hump might be the viability test for your product; the road to earning revenue; or the boost to take your business to that next milestone. Whatever it is for your specific company, finding the best way to raise the needed cash is an important and often challenging task.
A conventional way to do this is to bring on a new shareholder. Here are four practical things to consider and implement to do just that:
First up, how do you practically raise funds by bringing a new shareholder on board? It’s important to understand that your company is raising funding. This is done by offering ownership to the funders in the form of shares. The ownership and value of the company is split into fractions (shares) – a new owner puts money into the company, and gets shares in the ownership of the company in return.
2Measuring your company’s value
The natural next question is: how much ownership does the new shareholder get in return for their contribution? Does a R 1 million investment get the new shareholder 50% or 5% of the ownership of the company? As you can expect, this depends on the value of the company before the investment.
How do you measure the value? Luckily, there are whole industries dedicated to doing this – with the essence being: Your company’s value depends on its ability to earn profits for its shareholders.
There are many ways to measure that, but you will essentially need to show a compelling argument of why the company can earn profits for its shareholders.
3The start-up challenge
This is where the early stage start-up company faces a real challenge. The start-up will often have little or no actual revenue – making it hard or even impossible to show a track record of earning profits for its shareholders. The challenge here is to show its potential to earn revenue.
Typically, this comes down to showing a great product, a great management team, reliable research into the size of the market or potential market, and how the start-up’s value offering can crack that market wide open.
4The investor’s risk
Once you’ve convinced an investor to buy 5% of your company for let’s say R1million rand, and you’ve given them a 5% shareholding in your company, what’s the next step? What risk does your investor take?
The starting point is that your investor is now a shareholder, so they take all the risks that you do. If the company fails despite your best efforts, the investor takes that risk and has no claim against you or the other shareholders.
It is common for sophisticated investors (think Venture Capital, Private Equity or Angel Investment Funds) to try and limit that risk. Common tools here include liquidity preference – which is a fancy way of saying that they get their investment back before you do, should the company become insolvent (that is if there is any cash back).
But what do you personally owe that investor in return? This is important – you as a director of the company will owe a duty to that investor to spend their money wisely, in the interests of all the shareholders. You owe them a duty to manage the affairs of the company prudently. You are now the custodian of someone else’s money and your goal is to build the value of the company so that you give all the shareholders a return on their assets. If you breach this duty, you can be held personally responsible for the shareholder’s loss.
Again, sophisticated investors can also require more from you – especially if you and your start up management team are essential to the growth and viability of the business. They can “lock up” your shares in such a way that you can’t sell for a specified period of time. They can also require your shares to “vest” over time so that if you leave before then, the company can take back your shares.
These and other tools are specifically intended to minimise the investor’s risk by motivating you as the founder and director of the company to stay and grow the company’s value.
Planning ‘life after the investment’
It seems obvious that you should prepare carefully for fund raising. It can be a time consuming exercise – but one you’ll never regret. It’s important to know what your potential investors want to see in order to agree to the value of your company.
Also, it’s vital to be very clear on what your obligations will be to the new shareholders once they come on board. Discuss both their expectations of you, as well as your expectations of them. Build the “life after investment” picture very clearly so that you know what your position will be afterwards.
In a nutshell – lay strong foundations with investors for a long term relationship in advance, and your company’s long term prospects will be much healthier.