Angel investing is a two-way street

Entrepreneur and angel investor James Baker outlines what founders and angel investors should really be asking each other

 

It’s easy to think of investment as a one-sided conversation. The choice lies with the investor because they’re in control of the money, and if the business wasn’t in need of capital to further product development, team expansion, or customer acquisition, they wouldn’t be cap-in-hand. Capital is king, the enabler of progress. But money is nothing if it isn’t used wisely and given ethically, and while seeking outside investment is frequently the only way for startups and small businesses to achieve viability, capital at any cost isn’t a risk worth taking.

 

It’s time to start viewing angel investing as a two-way street that acknowledges that both parties have a choice and responsibilities. That way, you can build business relationships that are open, transparent, fully aligned, and full of trust.

 

 

It begins with mutual due diligence

Working with the wrong investor is the biggest mistake that any founder can make. Not just costly, it can be highly stressful, acrimonious, and in the worst cases, lead to the breakdown of a business. Because while cash is unavoidably crucial to the building of any startup, it has to come from the right place, with a foundation of shared values and strategic alignment, if it’s not going to result in conflict, miscommunication, misunderstanding, and generalised acrimony. And too many founders find themselves in this situation because the investment industry drills it into them that they can’t do without investment and that any investment is inherently good. The thing is, some gift horses need to be examined more closely, because they are not what they seem.

 

If founders vet potential investors just as thoroughly as investors vet them, they can start out on an even footing. Mutual due diligence ensures that the relationship begins from a place of understanding. This means that founders need to ask questions, and angel investors need to look way beyond the pitch deck.

 

 

Why it’s OK for founders to be choosy

Founders are coached into thinking that they don’t have a choice where investment is concerned. Consequently, they rarely feel in control of the fundraising process. They feel that if they try to set boundaries, they’re going to be viewed as difficult and deter otherwise interested investors. But setting boundaries, asking questions, and taking time to consider every prospective investment offer as they would a prospective employee is a sound strategic approach because investment is rarely only about money. While the right investor can become a door opener, a strategic advisor, a sounding board and mentor, the wrong one can destabilise the company’s culture, growth, and trajectory. They can put the brakes on decision-making and bring tension into every juncture. So, failing to do your own due diligence and jumping at the first offer of money is setting yourself up for long-term problems.

 

So, what should you be looking for? As an angel investor, I only ever work with founders who have a vision and mission I can understand and buy into, because that’s when I know that I can do the most good. So, look for an angel investor who understands and supports what you’re trying to achieve. Someone who accepts your timelines and is willing to work with your growth expectations. Look for someone with experience that is relevant to your current situation, and who can potentially support you with industry connections, or operational insight. And although every investor has to start somewhere,

 

I’d usually recommend choosing an angel investor who has a good track record of startup investment. If someone is known for micromanagement or conflict, they’re not going to give you the stress-free support that will enable your business to thrive.

 

I also make it a priority to discuss my views on any potential future involvement or interest in any roles post-investment. Just so that everyone knows where they stand from the start. Because the ultimate goal is a mutually beneficial partnership, and you’re only ever going to achieve that if you start out openly, honestly, and completely informed. So, ask questions, apply for references from portfolio founders, and set clear expectations early.

 

 

What angel investors should be seeking from founders

If there’s one truth I’ve learnt from years of angel investing, it’s that ideas are great, but founders matter more. It doesn’t matter how impressive a pitch or a product seems to be, or the problem it’s intended to solve; if a founder doesn’t have the vision, leadership, and resilience necessary to steer the company through the endless obstacles of business development and to come out stronger, the business isn’t going to succeed. So, I always base my investments on people rather than products.

 

But as well as leadership skills, the most successful founders are the ones who understand that there’s always more to learn. A willingness to develop and learn more, to take guidance and accept coaching, demonstrates the flexibility, adaptability, and open-mindedness necessary to help a business thrive in sometimes challenging conditions.

 

Then there’s obviously the matter of metrics. Financial clarity is integral at all stages of a business’s development, particularly if a founder is asking you for investment. They must be able to fully understand their financials and to clearly demonstrate that understanding, which means not just explaining how they plan to use their funds or discussing forecasting, but explaining what those forecasts are based upon, dissecting their revenue model and diving into their burn rate. It’s this knowledge and clarity of vision that can help to ensure that a business has a future. However, even if all of those boxes are checked, it’s still wise for any investor to double-check that any investment prospect has a scalable market, because without that, the value of even the most compelling product is limited.

 

The traditional investment model has given all of the power to the person with the money, but that has to change. As an investor, I want to know that the startups I support can gain value from my input. That we can share a conviction in the value of the business, rather than simply sharing capital. I want them to look into my credentials and come into the agreement with their eyes open and a willingness to grow. But most of all, I want trust and transparency from both sides of the table.

 

It’s time for startups to take a more active role in the investment process. And it’s time for investors to let them.

 

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James Baker is a Jersey-based award-winning entrepreneur and angel investor

 

Main image courtesy of iStockPhoto.com and Jirapong Manustrong