Sunday, April 5, 2015

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

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

Part II - Herding The Cats (aka Investors)

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

1. VCs should be able to give you clarity on timing and process - so ask!
Rather bizarrely at the early stage the time demands on you by investors during due diligence can be inversely proportionate to investments dollars. So early stage/seed funds are typically experienced investors who know what they want, have a process they stick to and are likely to have some if not a lot of expertise in your space. Hence they can get to yes or know based on a small number of meetings and minimal additional materials over and above what you might have in a well populated data room. With these types of investors asking early about their process is important and usually productive. So they will have immediate answers for questions like: What do you need to see in terms of materials? How long does it take you to get decide to make a commitment? VCs after all are running a business. They have a specific amount of money to invest provided by their LPs and have committed to those LPs to make (roughly speaking) a certain number of investments in a certain period.

2. But with a VC be careful who you are talking to - decision maker or not?
You need to get an insight into the decision maker’s views asap: In the case of seed stage VC which is a one woman/man band if you are talking to that person you are talking to the decision maker. As soon as there is more than one person in the shop it gets more complicated. In particular you need to be wary about spending a lot of time with an enthusiastic analyst/associate at even a two person fund. Their job is to scope out potential investees, do market analysis etc. So they are typically always eager for more information - but that doesn’t mean anything in terms of the likelihood of the fund to invest until you get to “the” decision maker or decision makers. So find a way to do that asap and get a better gauge of where you stand. All too often you can go down that route, feel pretty good about things but then be told … “the partner(s) decided you are too early for us.” But … the partners pretty much knew that when your deck came in the door, they just didn’t tell you right away.

3. Angels and Angel Groups can be more problematic - the cats need herding!
In contrast to VCs individual angels maybe have no organized process, have no deadlines and can be all over the place in terms of what they want and what they think it is reasonable to ask for. And angel groups, while having process, can have too much (ie they go on for months and ask for a large amount of materials, in come cases more than VCs) and can be painful to deal with because typically, however well meaning the investors involved, many members are not domain experts so need to be educated (by you) on your business and can go down lines of inquiry which to you are a waste of time. Also 10 angels in a group or individually gets you only $250K if they are putting in $25K each … so that can be a lot of time invested if each has their own sub-agenda for little cash return for you. Hence the attraction of seeking out larger ticket (often domain expert) individuals if you can identify candidates and get yourself connected with them - see 2 above!)

But, whatever the context, finding out if an angel is serious upfront can save a lot of angst. And in terms of their process, whatever that is, you need to assess quickly if they are going to be too much of a time drain to merit your very constrained time and effort. So an angel group process going on too long/too deep is one you can walk away from. An individual investor who wants a third call on your model … is someone who probably is not a good use of your time. And remember that behaviors at this stage are a litmus test for post investment behaviors - the investors that are respectful of your time, ask limted but pointed questions and show they understand the limitations of dealing with a startup (no, we do not have a team in the finance department who have drawn up an extensive 10 year model) are also likely to be “better” behaved (and likely value added) members of your cap table. (Although all rules are there to be broken, you will do more for the serious investor who is serious for $250K … less so for the perfectly nice and friendly investor whose usual ticker size is $25K.)