March 2007: Business Tools
ANGEL INVESTING
What does an investor want? The list starts with drive,
discipline
Angel investors in the United States provide about 90% of all
seed and early-stage private equity capital for startup
entrepreneurs. In effect, they are backing the jockey rather
than the horse, so they need to be confident an
entrepreneur/CEO can successfully bring a product to market and
sell it.
The importance of investors thoroughly investigating the
entrepreneur and key early hires was a recurring theme at a
recent seminar on angel investing in Portland presented by the
Ewing Marion Kauffman Foundation, the Oregon Entrepreneurs
Network and the Women’s Investment Network.
Sue Preston, an entrepreneur-in-residence at the foundation,
says that ideally investors are looking for entrepreneurs who
are “kind of schizophrenic — they need to be
passionate, outrageously enthusiastic about their venture but
also, and this is crucial, coachable.”
What an investor wants, she says, is a driven and decisive
leader who is more interested in the success of the company
than in being in control. Someone willing to share equity and
even hand over the reins to others, if necessary. She
acknowledges this can sometimes take tough negotiation.
Entrepreneurs are always optimistic when estimating revenues,
but Preston says they should be able to articulate a clear and
structured path to profitability, have a realistic assessment
of their potential market and a deep understanding of their
competition. “It’s a big red flag for investors
when someone says they have no competition,” says
Preston.
Once the investor feels she can work with the management team
and the business plan looks good, it’s then time for due
diligence — what Preston calls “the meat of
investing.” That’s when the investor needs to go
over key issues — the market, the business plan, the
money, the numbers, and of course, the management — with
a fine-tooth comb.
Angel and entrepreneur Kathy Long Holland of LongSherpa Design
in Lake Oswego points out some risks of ending up with the
wrong CEO. “There’s both market risk and
organizational risk. Often the CEO brings in key members from
his/her network to be on the team and, worst-case scenario,
investors may find themselves having to do a complete team
change-out. The company will be in a start-over phase when it
should be playing full court press.”
With the rise of angel investment groups, procedures for
assessing the management team have become more standardized;
gut sense is no longer the only guide. Due diligence checklists
now often call for resume review, reference checks and
third-party background checks.
In general, says Preston, the entrepreneur should be
forthright, and investors should be able to talk to customers
and be welcomed at site visits. Also, “The entrepreneur
should have some skin in the game. You want them to be as
committed as you are,” says Portland angel Spencer Brown.
Some investors say they will invest only if this is the
case.
Another investor, Sydney Joyner, of the Joyner Group of
Portland, says that integrity, toughness and the ability to
listen are all important. Are they comfortable with risk? Do
they have high endurance? Also, pay attention to how the
founding team treats money. “How creative and frugal are
they? Are they cavalier about investment money?”
Long Holland likes to be involved in putting the team together
from the start and recommends close questioning on a
company’s sales process. For example, she has salespeople
take a personality profile test to see if they really can
sell.
Long Holland says investors should at this stage be thinking,
“What’s the end game here?” She adds,
“It’s a good idea to design an exit strategy from
the beginning.” These days, that exit is far more likely
to be by merger or acquisition than by IPO. But whatever the
route, it’s essential the management team be open to
it.
Serial entrepreneur Mark Owen of Phoseon in Hillsboro cautions
that some entrepreneurs will turn down money rather than submit
to overzealous and time-consuming due-diligence investigations
that they think will hinder them from running their
businesses.
But, he adds, angel investors are also in a unique position to
add value to a startup by contributing industry knowledge and a
network of contacts. He says one of his angels took him to a
trade show and “gave me personal introductions to every
vendor on the floor.”
Successful entrepreneurs, says Owen, always will look for the
smart money — rather than just money.
— Rebecca
Koffman
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