CHAPTER NINE
After the Investment
So all your hard work has paid off and you’ve closed the deal. You are happy, the investor is pleased, and everyone is enthusiastic about expanding the company. So how do you interact with your angel investors effectively so you maintain the current positive relationship? Regardless of whether any given angel remains passive or becomes actively involved as an adviser, director, or confidant, you should stay in touch with all your investors and shareholders.
COMMUNICATE REGULARLY—ALL THE NEWS
If you send out quarterly updates on the status of the company, including financials, that is often enough for investors. Communicate honestly and in a timely manner. Most angel investors will take a relatively passive role, so proactive communication is essential to keep them satisfied. You want them to feel comfortable, knowing that you are working hard to grow their investment. Remember to express your appreciation for the trust your angels have placed in you. Colleen Stone, founder and CEO of InSpa, puts it well: “Say thank you—frequently. Let your angels know that you appreciate them and the trust they have placed in you to grow their investment.”
These days, with more and more angels and professional private equity investors in general making their investments in traunches against clearly defined milestones or benchmarks, communication is even more important than with one-time financing. Keep your angels informed of all progress toward accomplishment of the agreed-upon milestones. If you’re going to miss a date, regardless of the reason, inform your investors as soon as you suspect it will happen. Do not wait until a couple of days or even a week before the date. Most investors are quite understanding so long as you are honest and up-front with them about the status of the milestone. Your investors might even be able to help you resolve the issue or remove an impediment. They will also probably give you more time to meet the milestone without losing this traunch of funding. As with all relationships, the secret to success is communication.
The same approach should be taken when events take a turn for the worse. Communicate early about challenges you are facing. At the same time, explain how you plan to resolve these issues. Investors, and people in general, are impressed when you point out a problem and a solution at the same time. Consider how you would react to an employee who failed to inform you of a major issue, trying instead to resolve it quietly and ultimately creating a bigger problem. Then consider an employee who presents you with an issue before it goes out of control, and who has also outlined several possible solutions for your consideration. Employees of the latter type endear themselves to you, while the former type creates larger messes for you to clean up. The same is true of your relationship with investors. Be up-front about problems and also tell them how you plan to handle these matters. Again, relationships evolve around effective communication.
Keep your investors comfortable with your progress. Your openness will likely bode well when it is time for your next funding round. You want some of your prior investors to reinvest as a showing of confidence in you. As mentioned earlier, repeat investments are a form of third-party endorsement. Angels often have connections to other angel investors, and can work these contacts for investment in subsequent rounds. They also often have connections with venture capitalists. Ask for these introductions early on, even before you are ready to go out for your next round of funding. Preparing the capital market is important. You can show prospective investors where you are today—and then, when you come back a few months later, you will have lots of progress to show. Notes that begin, “Look what we have done since you last spoke to us” or “We would like to let you know the progress we have made since last speaking” are great mechanisms to impress current and prospective investors and get them excited about talking to you.
LEVEL OF INVOLVEMENT
Robert Wiltbank, an assistant professor of strategic management at Willamette University, conducts research on angel investors and has provided some interesting empirical data in a January 2006 white paper titled, “At the Individual Level: Outlining Angel Investing in the United States.” Dr. Wiltbank’s data is based on responses from 121 angel investors to a detailed survey reporting 1,038 new venture investments and 414 exit events from those investments. The responding angels had invested approximately $100 million in 624 ongoing new ventures. A series of questions related to participation after investment. From his analysis, Dr. Wiltbank concluded, “Overall, these investors spend about 12 hours per week on new venture investing; over 30% of that time is spent with ventures in which they have already invested.” Therefore, this study indicates that active angels are spending about four hours a week on existing investments. Spread this time over a portfolio of companies and you can surmise that most angels are passive investors, reading periodic communications and making occasional phone calls. The primary role angels take is monitoring their investments’ performance, but they also act as an informal sounding board for the management team. Dr. Wiltbank also points out an obvious caveat to this average time spent on existing ventures; investors, he says, generally “take a greater interest/role when larger amounts of money are riding on the success of the venture.”
Most angels remain passive investors because they feel comfortable with the capabilities of any team they choose to invest in. Again, Colleen Stone of InSpa eloquently states this point: “If you pick the right angel investors, they can relate to your company and you. They will understand your business model and market. They have an emotional connection with your company, rather than taking a hands-off approach. You are not just one more company in a portfolio; it’s personal.”
You should have a good understanding of your investors’ expectations regarding the post-investment relationship. Many angels can bring important experiences and background to your company. For those angels, you should have discussed their post-investment role in general terms prior to the investment, to ensure alignment of interests. Now, sit down and outline the specifics of each investor’s contributions and interactions with you and your team. Angel investors typically have a very good idea where they can add value, and ultimately their level of involvement is their choice. You should have already read your investors’ résumés and understand where they can provide contributions to your business. Your investors will be impressed and appreciative if you take the lead on suggesting possible areas where they can provide value. These topics will probably have arisen during the investment process, so make sure you have kept track of those conversations.
In defining your angels’ roles, some mechanical questions should be addressed:
How often will they be in the office? You do not want your investor just dropping in and engaging team members in conversations without pre-planning. An energetic angel willing to help out can be invaluable, or a disruption to the flow of work. Make sure each angel appreciates the difference. Your team will look to you to manage the investor relationship.
Who will they be working with? Make sure those key members of your team are involved in the discussions of setting expectations and developing mutually agreed-to processes for the investors’ activities and contributions.
What goal should be set for the angels’ involvement? Advisers are not typically responsible for accomplishing goals for your company, but rather for sharing their knowledge and their connections. Make sure your team is involved in developing the goals and strategies for your investors’ activities. Just as the investment process involved your team, so should the post-investment relationship.
Because angel investors are often successful entrepreneurs themselves, they have the wealth of knowledge of the right and wrong strategies. Learn from their experiences. Many aspects of business are not intuitive. In addition, your angel investors did not invest in you because you had all the answers but because they believe in you, your team, your idea, your path to profitability, and your ability to execute on your business plan. Angels also invest because of the personal connection they make with your company and you. They will relate to your struggles, frustrations, and triumphs.
ANGEL VALUE
As discussed much earlier, angels invest for reasons beyond making money. It is worth looking at the list from Chapter Two again to review the reasons angels invest outside the desire to receive a financial return. Angels typically:
• Have a sense of social responsibility and enjoy community involvement.
• Take a role in the entrepreneurial process.
• Act as mentors and advisers to the entrepreneur.
• Provide early-stage investment dollars.
• Invest regionally.
• Have a diversified portfolio.
• Take a long-term view of their investments—which are often referred to as “patient money.”
One of the overriding themes of these attributes is that investing for angels is personal. Remember, angels do not have to make an investment. Investing is not just business for angels. Their personal passion shows in their investment choices and style, just as their passion made them successful as entrepreneurs. So angels will take their involvement and desire to help you grow the company personally. They will give you insights on employee management, finding key hires, market realities, and how to get those purchase orders. Individual businesses are not unique; every company faces similar issues. Listen to your angel investors. They have your best interests in mind since they also have their money in your company.
Just as important, angels will help you understand what not to do. Do not kid yourself that setbacks will not happen to you. Angels can help you by pointing out possible future problems based on your market, operational structure, and other factors both within and outside your control. You cannot necessarily avoid problems such as a downturn in the market, but you can be prepared with a contingency plan. No one has a crystal ball to tell the future, but experienced angels can give you the benefit of their insights based on the past. As you have heard before, history repeats itself.
Angel investors can also be great confidants. Sometimes you may need someone to talk to about the challenges of growing a company, the stress of being responsible for your team’s livelihood, and the endless demands on your time. Many angels are glad to lend support, but keep it professional. Do not let an angel become concerned about your ability to cope. Everyone has meltdowns—just avoid them in the office.
Angels facilitate company growth, but they do not make it happen. Often, investors can open doors for you through their contacts and prior professional relationships. They have built one or more successful companies, giving them a positive reputation in the market. This local, regional, or national visibility can be part of your company’s growth strategy. Remember, angels bring much more than money to your company—they also bring experience and connections.
Your investors will be glad to introduce you to prospective customers, vendors, or strategic partners. But they will not make the presentation or close the deal. On a rare occasion, an investor may accompany you to the first meeting, possibly to reinforce the message of enthusiasm about your company. Typically, your investor will give you a very warm introduction and some background information on the individual you will meet, including key interests to highlight and any individual quirks to address or avoid. You are expected to take the introduction from there, follow it through, and create value. Angels are advisers and mentors; they are not employees. It is still your responsibility to run and grow the company.
As with other communications issues, it is very important to keep the angel informed in a timely manner of your interactions and progress with the introduction. Many times the party you’re scheduled to meet will call your angel, so you want that angel fully and accurately informed of all activities. You may even suggest emphasizing certain points you want to drive home or clarify. Again, your angel should gladly support your efforts.
PATIENCE TO EXIT
One of the other attributes of angel investors is patient investment. They understand that building a company takes time. Whether that is two years or eight years, maintain a connection with your angel investors. Be disciplined about your regular communications. Keep a copy of your angel investors’ skills and contacts and occasionally review the list. Even two or three years after an investment, you may want to ask for an introduction, or for help in thinking through a particularly complex matter. Even if you do not hear from them, your angel investors have not forgotten about you.
Exit Strategy
Angels are patient, but they do want an exit event to reap the benefits of their investment. As discussed before, the two primary exit strategies are acquisition (or merger) and initial public offering (IPO). While IPOs may draw much attention from the press, they are relatively infrequent in the United States, and almost nonexistent in the rest of the world.
Figure 9.1 provides information from Dow Jones/ Venture One on IPO activity in the United States from 1994 through 2005. Comparatively, the rest of the world showed a fraction of this level of activity.
This information should reinforce the hard truth that IPO is not the typical exit strategy for private companies. Instead, acquisitions (being bought) or less frequently mergers (being combined with another company) are the most likely route to liquidity and a return on investment.
Figure 9.2, from VentureSource, shows a definitive trend toward mergers and acquisitions (M&A).
What this tells you is the need to operate your company to maximize value for your likely exit—an acquisition or merger. Clean corporate structure, financial controls, comprehensive policies and procedures, and strong intellectual property protection all influence valuation. In addition, private companies must now think about Sarbanes-Oxley Act compliance. While Sarbanes-Oxley applies only to publicly traded companies, the enormous expense of compliance can have a serious impact when a public company acquires a private company. The logic behind the effect on valuation is that if the publicly traded company has to put considerable time and money into making an acquired private company compliant with Sarbanes-Oxley after incorporation into the public company, the private company will feel the effect of this cost rather than the public company. In other words, the cost of getting the acquired private company compliant is passed down through the private company, ultimately to the shareholders, in the form of reduced valuation.
Figure 9.2 IPO and M&A Trends in the United States
Sarbanes-Oxley is a complex set of laws and regulations with significant requirements pertaining to a public company’s accounting and legal practices. Entire treatises have been written on this legislation, which resulted from corporate and accounting scandals like Enron and Tyco International. Provisions place controls on the accounting industry, as well as requirements for internal company financial controls, reporting, and accountability. Therefore, seek experienced financial and legal counsel to help you understand when to implement many of these requirements in your company. Taking a proactive approach to Sarbanes-Oxley will save significant dollars in the long run. Even better, if you do have an IPO as your exit strategy, you are already on the right track for post-offering public status.
Remember
Just as landing your angel investor involves much preparation, so does managing the post-investment relationship in concert with growing your company. Themes run through this book that describe characteristics of successful entrepreneurs:
• Passion
• Coachability
• Preparedness
• Open, consistent, and timely communication
• Honesty and forthrightness
• Team approach—within the company and with outside professional advisers
• Strong advisers
• Focus on the end game: developing profitability and setting up an exit event
Live by these edicts and you have a great chance to become an angel investor yourself one day, providing much-needed capital, experience, and a sympathetic ear to young entrepreneurs eager to learn and grow their own companies.
Best of luck—because it never hurts to have a bit of luck.
