The Insanity of Angel Investors

07-Jun-2013

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







From Schoolforstartups.co.uk/the-insanity-of-angel-investors,

The first outside money an entrepreneur gets usually comes from friends and friends of friends. Why? Because they know the entrepreneur personally and they know where he lives.  They are the father that buys a company a new computer system for video editing, the sister who gives a new developer enough to buy an IPAD, the long lost uncle who comes up with the first fifty thousand pounds for a new hair salon.  These first investors are crazy enough to take a risk on a business with no assets, no income, no customers, and no provable business model.  Properly put, your first “investments” should usually be called gifts.

After that first money in, your next request for money will probably go to an “angel investor”. They come in when your business needs a few hundred thousand pounds to a million pounds to grow.  By the time you approach angels, you usually have something to show for yourself.  Maybe it’s a patent. Maybe it’s a few customers.  Maybe its a few extra dollars in income every month.  Maybe you just have a great team and a great business plan. The important thing is that you can demonstrate you’re ready to launch what lots of people think will be a properly profitable business.

As you begin to approach angel investors, you need to know one thing about them.  They are crazy.  You need to know this so they don’t drive you crazy too.

Here’s a quick overview of just how and why most angel investors are insane.

  • Angel investors are often entrepreneurs in their own right, and often they believe this gives them the expertise to run your business as well as they ran theirs. They are mostly right, but the devil in any business is in the details.  Rules like “keep fixed costs down” are pretty universal. But the economics of the publishing industry are nothing like the economics of making aluminum cans. Angels understand this truth in the context of their own businesses, but not when it comes to discussing the merits of yours.  This means they will often give you stupid advice based on complete ignorance and they’ll be cross when you don’t take it.  Sometimes they’ll be right, and you should always hear them out, but don’t assume their advice has value just because they made money in some other business that’s nothing like yours.
  • Angel Investors often invest in industries they are not intimately familiar with. Why? Because if they wanted to invest in the kind of business they know how to run, they already have that kind of business.  Investing money in your business is part of their “diversification strategy”.  If you are very lucky, your investor will know your industry, and will have a rolodex that can bring you customers as well as cash.  If you meet that kind of investor, take their advice, and take their cash and connections as well.  Give them a good return on investment so they’ll work with you again.
  • Angel investors don’t believe in you either. If you’re so clever, why do you need their money to achieve your business objectives?  How do they know things will work out as you’ve described? They don’t.  They’re taking a risk on you. The majority of investment decisions they make are mistakes. This means if they invest in ten businesses, seven or eight will not generate a profit.  That means you have to promise them a return that will pay for those mistakes.  If you are offering them a 5% return on investment, they’ll laugh themselves sick.  They usually want something closer to 30% compounded annually which is a bar very few businesses can hit.
  • Angel investors almost always look for investments at the top of their range. Like most of us, when they go shopping they decide how much they can afford to spend and that is how much they spend.  So if an investor has five million pounds to invest, and you only need one million pounds, he’s probably not going to be interested, even if you can almost guarantee a great return on investment in a credible way.  Why? He’s looking for a “larger opportunity” even if it is not a better one.  Always start investment conversations with Angels with a question about the size of their “usual” investment. Work as hard as you can to tell them that’s how much you want.
  • Angel investors care more about the opinions of other investors than they do about the opinion of you, your experts or anything except your paying customers. Why?  Because angels often invest in groups in order to reduce individual risk.  So if they can’t get another investor to take part of their “action” with you, they feel like they are making an investment they’ll have to shoulder alone.  That makes them nervous.  Furthermore, they often owe one another favors.  Two investors rarely have a very strong liking for exactly the same business, so one is always going along with the investment choice of another and they often take turns choosing opportunities.  This means you can be hosed by coming along at the wrong time.
  • Not all angel investors have money and they won’t tell you when they don’t. Why?  If they are in any kind of a network, when they run out of money they need to get more investors to join in order to continue making investments.  This is harder to do if people know they don’t have any cash to invest.  So, this means Angels may make up reasons why they can’t or won’t invest in your business and if you take them to heart the bad information will harm you.  If you can’t determine, for a fact, that an angel has money to invest in your business, you might do well to assume they don’t.
  • The valuation of your business really doesn’t matter to Angel investors as much as the terms of the investment do. This is completely counter intuitive, but if you think for a moment, it makes sense.  Whatever your business is currently worth, their investment, if successful, is going to make it worth more. The purpose of the investment is to increase the business’s income.  Once the increased income arrives, investors want to know that income will be going to them or back into the business to scale it’s value.  They care about those details because they care about your future income and your future value.  Your present value is academic and uninteresting.
  • Almost all deals with angel investors fall through before completion. You’ll be  happier negotiating with angels if you assume any given deal will fall through, but one sometime in the next five years, will work.
  • Angels will almost never admit they aren’t going to invest in your enterprise. They will waste your time instead. Why?  Because it’s barely possible you’re worth investing in.  So, if you bring them a business and tell them you’re expecting a big contract next month, they’ll decide to wait to see if that comes through.  If you tell them nothing new is on the horizon, they’ll say your business is stagnant.  Delay always favors the angel investor, so they will seek to delay an investment decision as long as possible.
  • Angels who don’t know each other will collude against you. Negotiation of terms for an angel investment start the second you meet.  Remember that angel investors are not friends, they are not family, they are not mentors or bosses.  They always have their own interests at heart.  That means if you tell one investor that another is interested, they will call one another. If they decide to invest as a team it will be for less money at worse terms. Why? Because that best serves their economic interests. Never tell one investor the name of another investor or the terms being offered.  You don’t owe them that and it weakens your position and reduces your value to them.

Having described all these common flaws, it is worth noting that Angel investors can and should be the best friend your business ever had.

The best Angels help the businesses they invest in immeasurably.  They recognize good teams when they see them. They offer mentoring, advice, encouragement and occasionally a harsh word that keeps an entrepreneur focused, effective and motivated.  Good angels are few and far between, but they are entirely worth looking for.

Every angel, like every entrepreneur, will have their own weaknesses, misconceptions and moments of irrationality, but like good entrepreneurs they will be able to surmount those on the way to building a strong business.


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