Price of Money Part 3 - What Angel Investing & 1 Night Stands Have In Common

09/11/09

By Doug Richard

A friend of mine asks, “How do you know whether the angel investor has any money to invest? It’s all fine and good that they aren’t asking you for money to pitch; but that doesn’t mean they’re in the money. Do you ask for proof of funds from a bank, references from previous businesses they've invested in, or a public credit rating for them or for their business?

The best recommendation is obviously a public record of funding successful enterprises, but even that doesn't guarantee that someone is currently solvent or negotiating in good faith. Or is all of this a little like asking for the pedigree of someone you've already slept with. Should you have these answers before you even agree to pitch? That seems seriously impractical.”

Nothing quite like a timely question. Let’s take the Angel’s point of view for a moment. As an angel investor you almost certainly receive more proposals for investment than you are ever likely to back. More to the point, most seed stage and early stage opportunities aren’t very good. They tend to be bad either because the entrepreneur isn’t ready for investment or the idea will never be ready for investment. The latter case is easy. Like Nancy Reagan used to say, just say no. In the former case, when the entrepreneur or the startup needs help, the issue is much more difficult.

My first temptation is always to just wade in and sort the problem but of course this is simply not practical. And it’s a stereotypically entrepreneurial response. More to the point, I am supposed to be the investor not the CEO. If I’m solving the problems before the investment, what’s going to happen afterwards?

Having said that, all young entrepreneurs need help and guidance. There are always issues with young businesses. And when I began angel investing again this year I made sure that if a company wanted my money then they could at least sit through one of my School for Startups events. I reasoned that they would know my philosophy of starting a company and they would get an eight hour dose of what I am like. If they weren’t tired of my voice at the end of eight hours then maybe they wouldn’t be tired after eight months.
Of course, everything went differently than that. The few companies I was interested in I began to help right away. And for most of them I’ve continued to help them for months. In the process though we have gotten to know each other. And inevitably the amount of capital they have needed has changed and how it was going to be deployed has changed as well.

I of course have benefited enormously. I have gotten to know them in a way that no amount of due diligence would ever reveal and it has helped me decide whether I really wanted to invest, and I have a much more finely tuned sense of whether the investment is likely to deliver a return.
In short, it is in my self-interest as an angel investor to mentor a start-up before I invest, sometimes for months. The startup also values me far more at the end of the process than at the beginning. When I tell them at the beginning that my real value is in the advice I can give, in helping them avoid making silly mistakes, and in my list of contacts they always pay lip service to me but I can tell that they think that its my money that will really make the difference.

Six months on their views invariably have changed. This is great for both parties. And in those instances where at the end of a mentoring period I haven’t invested, we usually leave on fine terms. They feel like I have been generous with my time and I feel like either I missed a bullet or I have come to realize that the investment just isn’t for me.
So to answer my friend’s question the long way around, I suggest she look for angels that are willing to spend some time mentoring beforehand. It’s pretty much like dating before falling in bed. There’s nothing wrong with a one night stand, but it’s not the most likely way to get to a lasting relationship.

In my next post I am going to move on…After all the price of money isn’t merely expensive at the angel level.
And of course, all of this is leading up to our next School for Startups event. For the first time we are having a full 8 hour bootcamp on raising investment. I shall cover every scam in the book, every means by which people will try to lead you astray and also focus on success and what it takes to raise money. If you are interested it is on Nov 18th at the Royal Institution in London. You can sign up here.

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