7 Investor Raising vs. Money Raising
Some people talk about “smart money” versus “dumb money.” I don’t think those terms are particularly helpful. I much prefer thinking about the issue in terms of “investor raising” versus “money raising.”
It’s tempting for founders to grab whatever funding from whatever source they can. And I understand the limited choices some founders face. Money is money, they say, so grab it—and as much of it as you can. But smart founders gravitate toward smart investors. Money may be fungible, but that doesn’t mean that all investors are the same.
Think about it this way. It’s not the money that really helps you. It’s your choice about the investors who will provide the money, as well as everything else a smart investor offers a startup over the course of its development. Money comes and goes (usually goes), but smart investors tend to stick around. It’s the source of the money who can provide counsel, contacts, and other benefits that in long-term value will dwarf the initial monetary investment.
Investor raising is an ongoing process that persists beyond the funding event. Once you have angels on board, you have this incredible opportunity to harvest their knowledge, experience, and network of contacts. I encourage you to start off by making it clear that you are into investor raising, that you want to take advantage of all that they have to offer.
Most angels welcome such an appeal. Many have relevant experience, and most have large networks of people who can be very useful to your startup, both pre- and post-launch.
I know it’s tough for startups. It looks like a buyer’s market, and you often feel desperate to say yes to anyone who waves dollar bills in front of you. But desperation rarely leads to good outcomes. Angels never want to see your neediness. In fact, the more we are persuaded that you really don’t need our money, the more eager some of us are to give it to you.
You ever see the film Broadcast News? There’s a great line from the hapless TV anchor played by Albert Brooks, whose selfdoubt turns him into a flop-sweat basket case when he’s on air. He says, “Wouldn’t this be a great world if insecurity and desperation made us more attractive? If ‘needy’ were a turn-on?”
But it isn’t, not if you want your investors to put out.
Investor raising means setting up the conditions for a true partnership. The relationship between a founder and an angel is like a professional marriage. Like a marriage, the partners share assets. The investor owns a piece of your company. To the extent you envision your company as an extension of yourself, you are selling a portion of yourself to the investor, who will be your partner, for better or for worse, for richer or for poorer. Ideally, that’s what sharing equity means. You’re in it together for the long run.
You both hope the long run looks good. If the equity in the union grows, both parties get to share in the bounty. If it doesn’t, you both lose. It’s when things aren’t going so well that you really need each other, and you know that the angels will be there for you. Think about this. Can you see yourself figuratively being in bed with your investor for the next nine years? That’s the length of time before the average startup gets a liquidity event. And that’s why it’s important for you to decide what kind of partner you are willing to accept.
Investor raising is worth its weight in gold. “It’s true that money itself isn’t dumb or smart,” says Dan Kador, CTO of Keen IO. “The judgments attach to the investors behind the money.” It’s not a question of intelligence, he says, but the ability of investors to materially help advance the startup above and beyond the capital. “Although Keen IO has some investors who haven’t shown a desire to actively participate in the startup, they are people we can go to with specific questions and be blown away by the quality of their responses,” Kador says. Every Keen IO investor was selected on the basis of his or her unique ability to assist the startup in its growth and evolution. “That’s what we call smart money,” Kador says.
When you meet with me or any angel investor, I want you to remember that you are on a sales call. You are selling your startup. And like every sales call, you have to know that a close is possible, that the angel has the ability to write you a check. This is a question of using your time wisely. You have to know that these are serious investors.
The most important thing you should look for in angels is their historical ability to actually write checks. So at a suitable point in the conversation, ask the question: “Do you write checks?”
That’s how to keep it real. You’re in control. It’s remarkable how many angels are tire kickers or dilettantes with a liquidity problem. They will meet with you and ask a hundred questions but never quite get around to closing the deal. So you have to ask the closing question.
Yes, some angels will be taken aback by that. But it’s an appropriate closing question; many angels will be impressed by your salesmanship, a skill that predicts success for the startup. They will respect your time management, too.
“If they’re not going to write a check, then you are wasting your time, and time is really the only thing of value a startup has,” says angel investor Linda Holliday. She believes that in a perfect world, angels should volunteer that they are not interested the minute they determine they are not going to invest. Moreover, she believes that investors owe entrepreneurs a reason why they are not going to invest. I respect the hell out of Linda for this position. You can hear more about Linda’s values in Chapter 14.
But let’s assume the angels are taken aback by the question. So what? It’s likely they don’t have checkbooks in their back pockets. Tick tock. Time to move on.
If the angel says yes, the next question follows: “Tell me about the investments you have personally made in the past three months.”
When you can muster the confidence to do due diligence on the angel, it signals that you have singular pride in the business you’re building. I can tell you that such pride, if backed up by the real thing, inspires angels to get on board. Angels are rarely engaged in this manner. It signals your startup is special and that as the founder, you have a real handle, real control, and real belief in what you are building.
Then you are ready for the only closing question that matters: “We’d like you to participate in our round. Will you invest in our startup?”
Tom Patterson, the founder of Tommy John underwear, asked me an outstanding variant of that question. As I described in Chapter 6, when I heard Tom make a presentation on how he reinvented men’s underwear, I was hooked. Later Tom called me and said, “Why I should take money from you?”
I was pleased by the fact that he wanted more than just money from me; he wanted an investor partner. This was different than just responding to some e-mail questionnaire. Tom was listening carefully about how I thought I was the right guy to invest in his business.
Smart investors are active investors. These investors tend to be high-wealth businesspeople whose wealth flows from their success as entrepreneurs, usually from a liquidity event. They are eager to devote both time and money to their portfolios of invested companies. Funding from the best angel investors is smart money. The more you get to know angels, the more targeted you can be. Ideally, you want angel investors who bring with them a set of experiences, skills, and contacts relevant to your industry. Many entrepreneurs report that the time and counsel angels provide their companies is more valuable to them than the initial money.
I’ve said that every angel investor is different. No angel is more different or gets better results than Jeffrey L. Pulver. Jeff is a New York–based entrepreneur (he started the company that became Vonage), thought leader (VoIP), and angel investor (he was an early investor in Twitter). Jeff modestly calls his investment in Twitter “pure luck.” He is currently focusing his investment efforts on preseed opportunities in startups in New York City and Israel.
Jeff has invested in over 200 startups and has had a respectable number of exits. A number of the companies he has invested in have grown into significant operating companies and continue to thrive today. His sweet spot is the earliest possible moment of the startup’s creation. He prefers to be the first person in whenever possible. Jeff has been known to sit in on high school business plan competitions to look for startup ideas to fund.
What I love about Jeff Pulver in his angel role is how optimistic and people-centered his investing is. “The best gift you can give entrepreneurs is to believe in them,” he says. “So I actively look for people to believe in. It’s people first, ideas second.” Jeff, like me, is an angel investor in order to make the world a little better. “Investing in startups is an amazingly noble effort to change the world, and everyone that does a startup should have that chance,” he says.
So what kind of entrepreneurs does Jeff look for? “Life is a series of micropivots. I look for people who are dynamic and flexible,” he says, adding that every successful company is successful not for what it plans to do but for what it ends up doing successfully.
When he encounters someone he likes, he tends to say yes. This is “do diligence,” Pulver-style. (See Chapter 10 for my take on due diligence versus do diligence.) For Jeff, conventional due diligence in a paint-by-the-numbers sense is a total waste of time. “Business plans and projections are total fantasies,” he says, “and I’ve never seen a spreadsheet worth anything.” Instead Jeff relies on his gut as he looks for some proof of concept and proof of competence. “Does the team have the dynamic ability to look around the corner, run fast, and break through walls or shift direction?” he asks.
A process does inform his judgment. For example, for startups in the digital world, he always wants to confirm that someone on the team is writing the code. Pulver will not fund a startup that intends to use his money to outsource development or prototyping. “I’m looking for a team that’s whole,” he says. “Having a visionary founder is great, but the founder needs to have someone who writes good code, and they must be standing right next to you.”
Pulver is too impatient for PowerPoints or videos. “I’m here,” he says. “Talk to me. Don’t try to impress me with names of people who already made the commitment to invest in you. I don’t care about who’s on your advisory board.” And when he says “no,” he means no, not yes with a lower valuation.
Perhaps the biggest benefit an experienced angel investor can offer a founder is a set of outside eyes and ears. Living the startup life is a submerging experience for most founders. You live and breathe the startup 24/7. It’s often difficult for founders to find their bearings under such conditions. Usually everyone involved in the startup is literally breathing the same air, sharing the same assumptions, working with the same metrics, and occasionally drinking the same Kool-Aid. Having an experienced angel who is willing to talk to you, challenge your assumptions, and ask pointed questions is priceless.
Here are five ongoing advantages that angels earned by successful investor raising can deliver to your startup:
• A guide who’s been there. It’s not easy to be the founder of a company. Someone has to make the decisions, and that’s true even in the most cohesive of teams. Teams don’t make decisions; some individual has to take the responsibility, and that individual is you. Leaders quickly learn that executive responsibility is an inherently isolating task. As soon as a CEO accepts leadership, relationships with former peers suddenly begin to shift in ways that leave leaders feeling alone, like no one understands them. This perception is based on reality. Just ask anyone who has embraced leadership, from the school teacher who is named principal to the founder who is now CEO. What was equal suddenly is not. Jealousies and undermining behaviors can ensue. Most leaders report that the most challenging aspect of leadership is that it gets lonely at the top. It’s a reality that all startups confront.
• Access to the truth. Getting authentic information when you are at the top is also a challenge. There is something in human beings that resists honesty with leaders, especially when things are not going well. Maybe it’s all those fears of the leader killing the messenger. One CEO told me, “The last day I knew I was funny was the day I was appointed CEO.”
• Recruiting. Hopefully, the time will come when your startup needs to staff up. Angels can be very helpful in recruiting because we meet lots of smart, talented people every day. Startups often under-utilize the angels they have raised when it comes to recruiting. For example, comiXology, the digital comic book startup I introduced in Chapter 4, was recruiting for a chief marketing officer (CMO). This is a critical position, so founder David Steinberger asked me to interview two of the executives who had survived a series of internal interviews. He liked both candidates and seemed willing to offer a position to either one. I think he was surprised and a bit frustrated when I recommended that he keep looking. For the next set of candidates, I asked David and his team to sit in on my interviews so they could see my interviewing techniques and the way I evaluate candidates. I think they came to understand and respect the power of my interviewing approach to reveal the strengths and weaknesses of candidates. I know their organization and what kind of individual will succeed in that culture. They trusted me to save them the headache and expense of a bad hire.
• Raising additional equity. Let me be blunt. When it comes time for you to raise additional rounds, you want to be confident that your original angel will be there for you not only to participate but to champion you to other investors.
• Building relationships. If there is one thing that angels need to be good at, it is helping the startups we invest in to build relationships. We do so by being a resource for introductions of all kinds: potential partners, experts such as lawyers and accountants, customers, potential recruits, and sources of capital.
All this is by way of saying that a smart-money investor on your team can be an invaluable resource to think out loud with you as you make the thousands of decisions necessary to grow your business. If you pick wisely, a smart-money investor can be called on for mentoring by serving, formally or informally, on a board of advisors, and in other capacities, structured and unstructured. A thoughtful smart-money investor is in the best position to encourage a founder to work “on” the business instead of “in” the business.