Sunday, April 5, 2015

Raising Money Strangers: Some First Time Founder Tips From An Angel PART III

Raising Money Strangers: Some First Time Founder Tips From An Angel

PART III - Assets To Protect And To Use, Plus A Few Landmines

This is the third of a part of a three part post on tips for first time founders raising money from strangers. PART I can be found HERE and PART II HERE.

1. Protect your customers time and only open them to the most serious investors.
In a B2B context your most valuable assets can be your pilot/live customers. So the last thing you want to do is annoy them by opening them up to a multitude of intrusive investors. Also by doing that you expose the fact that you are a startup with no money! So guard access to your customer contacts very carefully. Only open them up to investors who you are convinced are serious and are likely to impress the client because they are thoughtful, ask smart questions etc (so no jerks!). If you have a number of clients who might be of interest to investors be selective and only facilitate access with the ones you have a strong relationship with. And don’t be afraid to prepare those clients - meaning briefing them on who they will be getting a call from, what their interest is and the sort of questions they are likely to get asked. Most obviously only open up clients who you are confident are big fans. The investors will assume you have been selective anyway. So if they speak to a client who comes across as lukewarm that will be a big negative signal to them.

2. Use your Board/advisors - they can be big advocates.
Your advisors (and existing fiduciary Board if you have one) can be big advocates and if they are relevant domain experts (as one hopes they are) they can be an impressive validation of you and your business. Obviously they are partial but what they say will carry weight because they know you and your space. But caution: If you have advisors listed on your website investors may contact them whether you want them to or not - they are “public domain information”. (Hence my own Rule 4 of Advisory Boards. ie don’t have a “vanity” Advisory Board … have one with people you actively engage with and who like and add value to your business! Personal example: I met recently with someone listed as an Advisor to company X. They didn’t know I was talking to company X and I casually said them. “I think you know Y the founder of X don’t you?” When I got the reply … “not really, I think I met them once at a conference or something” I knew founder Y was definitely running a vanity board!

3. For the more advanced startups … use your existing investors - with their permission.
if you already have stranger money on board esp from more active/visible investors they are great advertisements for you and your company. Like strong advisors provide an element of social validation but crucially, as I noted in Point 2 in the prior post, investors know investors so use that when you raise again. Some of your investors maybe be listed on Angellist, Crunchbase and/or your website/investment materials. But typically unlike advisors they are not all in the public domain. So, subject to their approval, make them part of the process. They a) are used to talking to other investors and b) should be very open, their time permitting, to support your next raise which is obviously in their own interests to do anyway.

4. Beware of competitor issues - know your own disclosure limits.
Whether they tell you so or not assume that investors are likely to check out your competitors (easy to find them even for the non expert because you will have listed them on a slide in your deck!) and possibly investors in those companies if they know any. So establish in your own mind a sense of what is information that you just don’t want to share. Forget about asking for an NDA by the way, investors in most cases will see that as a “rookie mistake”. They simply can’t sign NDAs because they see so many companies. Yet another reason for working out who your regard as trustworthy asap. Easy to say but don’t be too paranoid … there are plenty of good ideas out there inc people who might have ones similar to yours already. The key to your success most like will not be your idea per se … rather your execution. As Paul Singh, then a Partner at 500 StartUps put it a few years back: “Traction is the new Intellectual Property”.

5. Watch out for investors with potential conflicts of interest.
For any really active investor, angel or VC, you will be able to see on their website/angellist profile/crunchbase profile etc if their portfolio has any companies that are competitive to yours. But they might not have everything in the shop window … you can always ask for clarification. And don’t forget to check out the profiles of angels/players in a fund on linkedin/their site - it’s a red flag if you spot some connection to a competitor there, say on an Advisory Board even though they are not investors. Trust me it happens. Even then you can get caught out … for example when an investor is talking with you but, unbeknownst to you they are in due diligence with a competitor but haven’t closed anything yet. They could just be having a dialog with you to gather competitive/market intelligence. (Yep, that has happened to one of my investees too! Not much you can do about it and don’t be paranoid, but open the door of secrets slowly just in case.)

6. Beware investors who ask to be an advisor for equity or a retainer to get you "ready" for investment.
It happens (quite often actually). Said Angel (this is an angel thing) might say she/he sees potential in your business, but suggests say that your deck needs extensive changes or that you need other "training" and offers to help … for compensation. Each case is different but for me this is a big red flag! Why? Two reasons: 1. In my view, the investor needs to invest first and make a decision based on the merits of your business, before jumping into an advisory role. That should be at your request. You ask advisors to be advisors and the best advisor candidates will need persuading. 2. Whilst likely well intentioned, an investor who is not investing, but rather "helping for compensation" is more likely to be an awkward partner. They may feel they have a “right” to tell the entrepreneur what to do and unlike other non-investor advisors (who you should proactively select) stay on your cap table! In addition advisors who are not investors, but could be, are a negative signal for other investors. (“They know more about this company than I do but chose not to invest - so why should I!?”)