Funding Column

 

Understanding Angel Investors

 

By Jeff Barson

 

Utah considers itself an entrepreneurial state. Perhaps so. There seems to be no end of 20-somethings who have fallen in love with the two guys in a garage idea. But before Salt Lake turns into Boulder, Boston or the Bay Area, we'll need more entrepreneurs who don't quit after their first exit, and clean up the investment opportunities.

For entrepreneurs, this means more than a little self education. Startup entrepreneurs who have been around a while know how this works.

William Borghetti, the CEO of my startup, Sendside Networks, tumbled me to this saying that I use constantly with new entrepreneurs, "This is farming, not hunting." By this he means that in order to gain the trust that's necessary for an investor to give you money, time is one of the critical components. Unfortunately it's mostly overlooked by novices who are trying to get the money and everything else done right now. But time is necessary to understand from whom you do and don't want to take money.

Not all money is the same. I actually once heard an "angel" in a group discussion of a company comment about his plan to take advantage of an entrepreneur whom he considered unsophisticated. And he's not alone; there never seems to be a shortage of "mentors" who think that they spew wisdom with every breath, just want to be paid and then take credit for everything the company does in its future.

More importantly, entrepreneurs need to understand an investor's position. As an entrepreneur you're looking to accumulate wealth. If you're an investor, the first thing you're thinking of is protecting the wealth you already have. In addition to keeping wealth, investors are working with a limited amount of funds (all funds are limited) to invest and an unlimited opportunity to put that money to work.

So every entrepreneur is in the position of not only competing with all the investments open to an investor that are "safe" (stocks, savings accounts), but with every other entrepreneur's deal. The investor is not looking at your deal and determining if it is a good idea to put money into your company. An investor is looking at your deal to determine if there's any possible better place to put his or her money.

That's the disconnect that happens with so many novice entrepreneurs who are thinking that they have a good deal so it's worthy of investment. Entrepreneurs see this as investors being dismissive, aloof and slow. But what's really going on is that the investor is weighing his options and waiting in the hope that the next Google or Sendside is going to come along. Why? Because once that money is in a company, it's tough to get it out.

Another common problem with entrepreneurs who are looking for money is their naiveté. Some think getting funding is the end, the goal, the cash-out or the pay off. It's not. Getting funded is remarkably like getting a cash advance from a loan shark. Entrepreneurs who think they're going to take funding and give themselves back pay for sweat equity are not operating in any reality that I'm aware of.

I'll insert a note here that Utah's capital markets leave much to be desired. There are few resources open to entrepreneurs with the existing funding sources although this is changing. The angel groups and other investors are partly to blame for some of this with onerous preferences built into deals that actually work to the detriment of both the entrepreneur and investor. There will never be a way to raise additional outside rounds with some of the screwed up cap tables I've seen.

Utah's entrepreneurs need to get much smarter about trying to raise money. As an entrepreneur, you should be trying to get close to other entrepreneurs who are "in the know" rather than potential investors. Savvy entrepreneurs know who to look at, what an investor's reputation is, and where to go. Angels won't tell you this because they all know each other. It's the entrepreneurs that you need to look to for the straight talk.

Remember, just because someone has a high net worth does necessarily mean he or she is valuable.

 

Jeff Barson has started companies, invested in companies, lost money and made money. He is currently the managing partner of Surface Medical and marketing director for Sendside Networks. He also founded Fight Club, a networking group for entrepreneurs and the Park City Angel Group. Jeff blogs regularly at NimbleTheory.com.

 

Launch - Winter 2007

 

 

For the full "digital magazine" version of Winter 2007, visit: www.nxtbook.com/nxtbooks/growutah/launch_2007winter