an investment process is part of developing a business and should not be viewed as a target by itself
Being an early stage entrepreneur we are often caught up with the words ‘investment’ and ‘looking for an investment/investor’ as part of our everyday vocabulary. If you find that you are using these words constantly, and moreover, if you feel that your life’s main focus is investment chasing, then stop! The reason is mainly because an investment process is part of developing a business and should not be viewed as a target by itself. You may find yourself so caught up in chasing an investment that it may lead you to miss out on facing the real issues at stake. And the issues are: building the right infrastructure for your company right from the start; not chasing a first investment.
A few months of chasing money may leave you exhausted and depleted. On some of my fundraising trips to Silicon Valley I found myself feeling just like a door-to-door vacuum salesperson. I had to learn the specifics: the strategy, the politics and the methodology. Every place has its own. Today, I would like to share with you my most valued lesson.
In early stage investments, I often hear entrepreneurs use the word ‘investor’ as a third party person that needs to be targeted. Please understand that investors are humans with families, hobbies, and (usually) lots of wisdom. When investing, they share the same agenda as we do: making the business succeed. Thus, if you are approaching an investor as a bank or as an ATM machine, take into consideration that he/she will normally be deterred. Even if you don’t say so up front, they can still feel it in the vibe you give off. Change your approach. Treat looking for the right investor at an early stage of the company the same way you would treat finding the right co-founder. In your mind look for a partner, let’s call him Mr. Angel, rather than ‘an investor’. You should do this primarily for 3 reasons:
You will most likely need to work very closely with your early stage Angel. That means that you are gaining a partner, not just a source of cash.
Mr. Angel’s input will reflect on the company; that means that you should find an investing person that adds value (i.e. smart money) to your company. Bringing money from an Angel who does not understand your field of business may only get your as far as the money itself. In the long term, not only will he/she not help your move forward, but you will find yourself battling with with them as they inadvertently holding you back.
Understanding your Angel’s agenda will help to maintain a symbiotic relationship.
Mr. Angel’s motivations
As peculiar as it may sound, for early stage Angel investments, economic gain is not usually a primary reason to invest. Here is a simple logical explanation: statistically speaking, only one out of 10 startups succeed. In order for their investment alone to justify their position in the company, the Angel would have to continue investing at a rate of hundreds of thousands of dollars for a 1 to 10 ration of success. The odds for a real ROI would be far better in other fields. Therefore, it is imperative to understand other possible motivations behind early stage investment – a stage whereby the idea is still in its conception.
Here are some other reasons (other than economic) that may motivate Mr. Angel:
A fetish. Many businessmen have a hobby or love towards something specific. It could range from wishing for a greener world (via using green energy) to sports (making athletes perform better). Finding the right person with a fetish for your field will secure a shared energy and interest.
Being first in the field. Some Angels wish to be the first to invest (just like early adopters in the market). If the startup succeeds, not only does that give them the edge of being a primary player in the field, but also the terms of the initial investment will usually be the best in a dollars to shares ratio.
Political and geopolitical agendas. Some investments are geared toward the economic growth of certain economies. Conscientious investors might see the fostering of a healthy startup environment as a means of promoting job growth and higher standards of living for a local population. The outcome of the individual startup itself is secondary. In Israel, for example, other than government funds and tax incentives, there are hi-profile investors that are interested in developing the outlying areas of the north and south and creating jobs for certain populations. This is a very strong platform to work off of as the stress for fast track success is not the focus. Rather, investors here are looking to obtain a whole greater than the sum of its parts; i.e. the motivation here is simply an active startup market. The benefit is overall economic growth.
Tax benefits – In some countries and states (such as NY for example) there are tax incentives for investments. In Israel, there are also some tax incentives for investments. Here is an interesting link: http://www.investinisrael.gov.il/NR/exeres/08348DA2-83D3-47B1-B043-ED418D9AA846.htm
Getting into the hi-tech arena. Some Angels have the itch to break into hi-tech and are willing to take these first risky steps for the opportunity to get acquainted with the hi-tech industry. If you are meeting such individuals, make sure that you are on the same page in terms of understanding the company’s strategies. Additionally, it is imperative in such a situation to bring in external board members that have true expertise in your business field.
Your startup may bring an added value and/or completes to an investor’s personal portfolio. Some Angels diversify their portfolio and investments in multiple companies. By conducting the proper research you may find that your specific technology/business may complete or be suitable to a certain investor’s portfolio. In doing this same analysis, you may also find that rather the opposite is true and Mr. Angel has already a competing company to yours. In that case you should think twice before approaching them.
The bottom line is that you should find a personal connection to Mr. Angel. Bare in mind though, this is in no way a substitute for thoroughly preparing and knowing your business.