Invested Investor Thoughts: Which investor is the best match for me?
My apologies in advance for probably taking an analogy past its limits, but I have often said that the founder/funder relationship (i.e. money exchanged for a share certificate) is a stronger contract than a marriage.
I suspect that each of us could form a multi-decade emotional relationship with one of several hundred thousand, maybe several million people on earth. Of course, I have absolutely no proof for this theory!
And although the number of potential founder/funder financial relationships is orders of magnitude less, it is still very important for an entrepreneurial team to find the ‘right’ investors. And, vice versa, for funders to select the ‘right’ founders.
In this blog, I will attempt to describe the characteristics of the right investor.
The form of ‘investment’ varies depending on the stage of the start-up, so initially the entrepreneurs will be investing purely their own time, possibly with some of their savings if they have stopped or reduced paid employment. Hence it could be said that, at the start the entrepreneur is his or her ‘right’ investor.
The next stage, when perhaps a professional (patent agent, solicitor etc) or a freelance developer needs paying, server costs are incurred or a hot desk is needed, is to approach Family, Friends and ‘Fools’ (FFF) who may provide cash in return for equity. What they won’t necessarily provide is useful, experienced help (the first 2 ‘F’s would have done that without equity anyway), and there is a danger that the valuation at this stage is too high, if further capital is needed. I am guilty of being the middle ‘F’ (maybe also the last ‘F’?) in at least two of my currently surviving start-ups.
Equity Crowdfunding (ECF) investors commonly fit in here, and often later (in some cases at the so-called ‘Unicorn’ stage), where the capital is available at a valuation fixed by the entrepreneur, and commonly with no independent directors on the board, providing guidance and external shareholder protection. Time will tell whether ECF investment is less, or more, successful than capital raised from angels.
This leads on to another source of equity capital, angels. Found by approaching individuals, angel groups or accelerators. Angels generally do much more due diligence than FFF and the Crowd, but, if the start-up is early stage (i.e. pre-repeatable revenue/profit), they are still primarily investing in the entrepreneurial team and their forecast ability to execute on their vision. Humans investing in humans.
The sum invested per angel is generally higher than FFF or ECF, and although there is nothing wrong with passive (sometimes unfairly called ‘dumb’) money, if possible, the entrepreneur should choose angels who can add some value, whether this is a board seat or mentoring, connections, advice etc.
And, as many of you know, I call those angels who go out of their way to help their angel portfolio, ‘invested Investors’. These are people who invest time as well as money into their investments.
Clearly then, my view is that these are the ‘right’ investors at this stage of the start-up journey. But as I often say, the entrepreneur must do as much due diligence on the potential investors as they can and be prepared to turn down angels if they discover something that worries them.
At a later stage, larger sums of money are available from Venture Capitalists (VCs) who manage other peoples’ and organisations’ money, aiming to provide a return greater than most other asset classes, albeit with higher risk. Again, if the entrepreneur has a choice, there will be some ‘right’ VCs, and others who will be less relevant and whose behaviour may not suit the entrepreneurs.
All entrepreneurial journeys are littered with misjudgements, mistakes and bad luck, and reducing these will lead to a better outcome. Choosing the right investor, who will add more value than money (and unfortunately from bitter experience some investors detract value), behave well and has an open and honest relationship with the entrepreneurs, is critical to success.
So how do entrepreneurs choose the ‘right’ investor. Research, taking references, spending time together pre-investment building trust, selling the vision (active angels have many possible opportunities). My statistics show that my average time from initial contact to investment close is 5.2 months, and as the legals generally take about 2 months, then this means 3 months of the founder and funders getting to know each other. I believe those 3 months are critical for both parties to embark on a potentially successful journey.
To conclude, raising capital from the ‘right’ investor, who or which is hopefully an invested investor, is more likely to lead to a better outcome.
Peter Cowley
This month, the Invested Investor series three drew to an end. We hope you'll agree that we finished in style with UK IT legend Hermann Hauser. He amused us with his truly amazing journey from Acorn to Amadeus Capital.
Ian Tracey, Head of Access to Funding at the Knowledge Transfer Network, shared the aims of his role in our latest Start-up Spotlight publication.
Iris Barcia surprised us with her strategy as an innovative technologist and explained how her personal curiosity led her into telecommunications.
Raymond Luk the Canadian serial entrepreneur and seasoned invested investor showed us his passion behind his numerous ventures.
And our co-founder Peter Cowley gave us his insight into the importance of timing in his latest Invested Investor Thoughts..
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