Monday, March 17, 2014

How entrepreneurs can extract maximum value from angel investors

Let’s start of by looking at the world from the angel investor’s perspective. What do angels want from entrepreneurs ? The simple answer is that they expect them to make a lot of money for them  ! After all, angel investors are not in the business of doing philanthropy . They are investing their hard earned money and expect a return on their investment.  However, most angel investors are also mature enough to know that most startups will fail off . They understand that backing a startup is a risky venture , and that most startups will go belly up, giving them a zero return on investment . Even though they know this, then why do they continue to invest in startups ?

Is it because they have too much money to burn ? Or that they are not smart enough to realize what they're doing ? Or that they get carried away by the passion of the entrepreneur ?  Or that they think they are smarter than everyone else and can identify the winners ?

I think just like entrepreneurs want more from investors than just money , similarly investors expect more from entrepreneurs than just a financial return on investment ( though this never hurts !) After all, if you’re just looking for a place to invest, then  investing in listed shares is a far better and safer option – even though it may not be as glamorous !

Entrepreneurs are looking for strategic investors , who will give them more than just funding . While the money never hurts, they also expect mentorship ; and will want to leverage the ability of the investor to open doors and introduce them to customers, partners and VCs.

Similarly, when we invest in an entrepreneur, we hope that as a result of engaging with the entrepreneur, we will learn a lot - about the business, the market and the industry. This is why we invest in smart , passionate entrepreneurs , who are domain experts, who know a lot about their business and are happy to teach us about it.  We also want to invest in entrepreneurs , who are willing to listen to their investors. After all, we do have a bit of experience , because we have seen more of life; and have experienced the life cycle of other startups. Most investors are a little more mature than first time entrepreneurs, and do have wisdom which is worth sharing.

Sadly, a lot of investors find that entrepreneurs are very happy to take their money ; and once they've done so , they seem to disappear . They fail to provide regular updates – and this is especially true when the company is not doing well . Ironically , this is the time when the entrepreneur needs the most help – and this is the time when a wise investor can make a world of a difference ! However, because an entrepreneur maybe ashamed, he often tries to sugar coat the truth and hide the grim reality, until the company has gone belly up. This ends up causing conflict – and many investors who have burnt their fingers once will refuse to trust another entrepreneur.

Entrepreneurs need to be disciplined , and since they've taken money from an investor , they owe him the courtesy of engaging with him on an ongoing basis , to keep him in the loop. While some entrepreneurs are fearful that this will mean that the investor will want to start running the company, the truth is that investors are busy enough leading their own life, and the last thing they want to do is interfere with the entrepreneur’s autonomy.  Being willing to listen doesn't mean that you have to passively accept everything the investor says or advises. Investors understand that the company is owned by the entrepreneur , and that it's his job to run it properly. However , when they do provide advice , the least they expect it some kind of acknowledgment , and reasons why the entrepreneur chose not to follow the advise.

In order to ensure the startup remains on track, they should remember the TRACK acronym. This is just the application of good manners , from which both entrepreneurs and investors can benefit .

 Transparency and openness. It’s far better to be upfront about problems, so that these can be nipped in the bud, before they snowball out of control. Entrepreneurs are understandably reluctant to share bad news, because they don’t want to appear to be losers. Some are over confident that they can tackle any problem by themselves – while others are arrogant, and feel there is little value anyone can add to their own insights. However, two heads are better than one – and an outside perspective can help to put the company back on track before it starts floundering.
Respect. While it’s true that the entrepreneur knows a lot more about his domain than the investor ever will, it’s a good idea to share the learning. Respect helps to build mutual trust – which can be invaluable if things go wrong later on.
Accountability. The entrepreneur needs to understand that the buck stops with him and should be willing to accept responsibility. While entrepreneurs are happy to take credit for all the successes, they are often only too happy to pass the buck when they encounter failure.
Continuity. It takes time to build trust , and the entrepreneur needs to take the responsibility to proactively engage with the investor on an ongoing basis – during good times and bad !
Kindness. This is the missing ingredient in business relationships, which is why they often go sour. Entrepreneurs need to remember that the investors have staked their hard earned money in them – and they need to reciprocate this trust by treating their entrepreneurs with kindness !

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