The CEO’s Handbook - Volume Three
Getting Funded by Angel Investors
Dr. Earl R. Smith II
Published by Dr. Earl R. Smith II at Smashwords
Copyright 2011 Dr. Earl R. Smith II
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Raven Press
Getting Funded
There is no challenge that a founder faces that is quite like that of arranging the financial resources necessary to allow a company to grow. Most meet this test initially by accessing person resources. Next comes friends, family, grants and bank financing. But the time comes when those resources are no longer adequate. Once the limits have been reached, founders often turn to the hunt for investors. The first stop on this journey is often angle investors - those high net worth individuals who invest in early-stage companies.
For most founders - particularly first time entrepreneurs - this experience is much like traveling to a foreign country in which both the language and customs are radically different. Much time and effort can be lost in trying to navigate the reefs and shoals of obtaining angel investment. Many companies don’t make the journey out of early-stage simply because the founders don’t understand those difference and how to effectively navigate through them.
The purpose of this book is to give you a glimpse into the world of the angel investor. If you can manage to see the world through the eyes of potential investors in your company, your chances of successfully arranging needed financial resources increases substantially.
Other Books by Dr. Smith
The CEO's Handbook - Volume One: Notes For a Thinking Chief Executive
Leadership - Notes From a Successful Entrepreneur and Experienced Coach
Websites
Table of Contents
Introduction
I wrote this book to help CEOs better understand Angel Investors. Getting funded is one of the major challenges that they face. Without adequate financial resources, a company will be limited in what it can accomplish. The journey to funding is full of twists and turns - journeys into unfamiliar territories. CEOs are far more familiar with the business of their business than the world of the angel investor. But, if they are going to be successful in getting funded, they need to understand and accommodate the investor’s objectives. More companies fail because of this challenge that should. In this book I will draw from my experience and tell you of the good and bad that angel investors can bring to your company. I’ll give you a peek behind the curtain and let you in on their approaches to investment. My sincere hope is that, after reading this book, you will be better prepared for the journey and have a better chance of getting your company funded.
After a successful entrepreneurial career - I founded and built six companies and helped to launch two non-profit organizations - I took a break. Well, two breaks to be precise. The first took me to eastern Maryland. After leaving Manhattan - eighteen years in the big Apple - I wanted to take some time to slow down. I bought a farm, assembled a flock of sheep and trained Border Collies for five years. The flock got to about three hundred fifty head and I regularly wore out two braces of Collies each day - to their delight and mine. After five years, I sold the flock, farm and tractor (I still miss that tractor) and shipped the dogs to Scotland. I decided to pursue a PhD in political and social theory. Scotland seemed like the place - and the beer is better in the land of my ancestors. That took another four years and generated lots of wonderful experiences.
When the time came to return to the States, my wife and I opted for Washington, DC. There, so the theory went, I could pursue both interests. My love of political and social theory stayed with me and I found plenty of diversions. However, I found that my interests in entrepreneurial activity had changed - perhaps mellowed is a better word. The truth was that I no longer wanted to be the parent of a new company - being the grandparent seemed a more commodious role. I set about helping other CEOs build their businesses. That the experience was gratifying is pure understatement. I had always kept a finger or two in the teaching game but this was different. I could help others learn how to succeed and drastically steepen their learning curve.
At first, most of the people I worked with came to me through referrals from friends. However, soon an increasing number of them came through investors - mostly angel investors - who had taken a stake in a company and were experiencing results that were somewhat less than acceptable. Now three out of four companies that I work with come through angel investors.
My experience working with these companies, their CEOs and the investors who brought me in has taught me a series of important lesions about how to and how not to approach the process of investing in early-stage companies. I decided to put some of those lessons into an article and sent it out for comment. The responses were striking. Many accused me of highlighting their own mistakes - or worse, accused me of telling their story to the world. Most asked how to improve results. Angel Investing - Improving Results is a response to those requests. It is a handbook for angel investors. They can use it to master - or just plain avoid - some of the most difficult challenges - the ones that can turn investments into write-offs.
Nothing in this book is a criticism of any particular person or group. The experiences that it draws upon come from working with dozens of companies and investors. The difficulty in writing a book about common mistakes is that, if it is to be useful, it needs to focus on the human tendencies that lead to those mistakes. Writing about human foibles - messes that we all step in from time to time - can easily seem a criticism rather unconstructive. That is not my intent here. A writing mentor of mine was fond of saying “if you are going to write about something, make sure that that something is real”. As I subsequently discovered, writing about the real means writing about real people.
That brings me to the final comment I want to offer before getting down to the meat of the subject. I am indebted beyond saying to those angel investors that I have worked with. Their willingness to talk openly about their mistakes - the opportunities foregone - as well as their successes - has made this book possible. Without that, I would just be writing fictional accounts of a process that I viewed from a non-investor perspective. I dedicate this book to all of them. I am certain that they share my hope that it leads to improved results and happier times for all angels. They are, after all, angels.
Dr. Earl R. Smith II
Georgetown
Washington, DC
April 2011
Red-Teaming: Improve Your Chances of Getting Funded
This is a proven method for improving the chances of success. Not rocket science – nothing very difficult – just a straightforward and logical approach to a recurring challenge. If you are out to win – this has to be one of the tools in your toolbox.
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The beginnings of a good idea
Recently I sat in on a presentation that two founders of a technology start-up made to a front-line venture capitalist. What was most striking about the experience was that, from one point of view, the founders seemed very well prepared. Their presentation was polished and contained all the usual sections, their slide show was professional quality, and they spoke with passion and deep knowledge about their space. The materials which they provided were all neatly and professionally packaged.
But early in the meeting it became apparent that the team was not prepared for what they were encountering. Their pitch was clearly more appropriate for a group of fellow technologists. They had not taken into consideration the predictable concerns and perspective of the person to whom they were presenting. The VC had interrupted the flow of their pitch with a couple of completely normal threshold questions and it went downhill from there.
After the session I asked the investor how frequently this kind of thing happens. He shook his head and responded “More often than I would like and far more often than needs be. The tragedy is that it doesn’t have to.” When I asked what he meant he replied “I’m probably the first outsider that they have ever given this presentation to. As a result their pitch comes to me without any real critical review. But what is most discouraging is that their entire presentation was not focused on my concerns as an investor but on a ‘preaching to the choir’ gathering of their peers. And what they don’t seem to realize is that mine is a very tight community and we talk to each other on a regular basis. What these guys did today was not only establish a negative brand with me but with any others that I end up talking to about them.”
I immediately understood what he meant. One of the services I provide to clients is the establishment of an advisory board designed as a high level, business development engine. I had built such a board for a company that is in the enterprise level software business. One of the company’s proudest achievements was that they had earned a high level of certification for their software development process. This certification was prominently mentioned in all of their promotional materials and on their website.
The senior management team was presenting during the first ever gathering of the board. The advisory board consisted of five very high-level individuals with an average of three to four decades of experience. Most had built businesses or run very large organizations. All of them had risen to the top of their profession. This first meeting was designed to bring the board members up to speed.
The software certification was prominently displayed on one of the earliest slides that the chief operating officer presented. One of the board members interrupted the pitch with a question, “OK, I’m one of your customers. Other than making your software more expensive, what is the value of this certification to me?” It quickly became clear that any answer which the team could offer was focused on the ‘choir’ – those individuals who had already bought in to the value of the certification process. They were not able to provide an answer from a client’s perspective. As a result, they lost the confidence of the board and had to work hard to get it back.
As I related the story my friend nodded and ruefully smiled. “I’m glad to see that this happens to other people. I had taken to thinking that mine was the only profession that encountered this kind of thing.”
As we talked and told war stories, a conversation with a former partner in the movie business came back to mind. Sy had been talking about how much more difficult it was for new talent to get experience since the demise of a vast network of performance venues that used to serve as incubators. Again, there was the pattern. People need a space where they can knock off the rough edges and focus their presentation.
What came out of this was a vision for a kind of ‘presentation boot camp’ – a space where founders could refine and focus their pitch without incurring the liability of having to learn under fire – and avoid establishing a negative branding in front of potential investors to boot.
Borrowing from another space
I first came across the idea of red-teaming years and years ago when I was working in the government contracting space. I subsequently learned that it is also widely used in the commercial sector. A proposal team will subject the results of its efforts to a panel of outside experts well prior to submission to the client. The process is designed to make sure 1) that the proposal correctly addresses the RFP; 2) that the solutions offered are ones that would likely be accepted by the client; 3) that the costing of the proposal has been done correctly and does not contain any extraneous expenditures and 4) that the team can present and defend the proposal in a highly professional and effective manner.
This process is standard procedure – in fact, widely considered an essential part of best practices – in the government contracting space. The danger of not following these best practices is severe. I know companies which, in the re-bidding process, failed to adequately challenge the proposal team and lost contracts that they should have won.
When you prepare a presentation for funding you run the considerable risk of becoming so close to the trees that you grow less and less capable of assessing the forest. A professional, independent review of your funding request, well before you present it to the first VC, could make the difference between being funded or wasting a lot of time – yours and the VC’s. With our knowledge of the investor’s decision making process and wide range of contacts within the VC and private equity communities, I can organize and facilitate a red team review that can significantly improve your chances of being funded.
Red teaming can be applied with considerable benefit to testing and refining presentations to venture capitalists. This process can assure that it meets the needs; adequately address is the concerns; is clearly and professionally delivered and definitively answers the threshold questions that the investor is likely to have.
Red Teaming a Request for Funding
The best way (in fact, the only reliable way) to make sure your presentation is well focused and provides what a VC requires is to have it reviewed by an objective panel that sees it through the eyes of a potential investor. A red team looks at the presentation exactly that way. They evaluate the request for funding, projected use of proceeds, business plan, value proposition and management team as if they are being asked to invest in the company; looking for weaknesses and strengths and checking to make sure threshold questions are addressed in a way which will lead to the next level of discussions.