Category Archives: Starting a Business

5 Secrets of Creating a Great Business Team

team working together

My favorite five secrets of a great business team? This list came to me first as an answer to the question how do you build a great business team on Quora.  These five points aren’t something from the business school curriculum. They come from the experience of actually doing it, recruiting a team and growing a business from zero to millions. (For more on that story, click here).

My list

  1. No skill or experience justifies lack of integrity. You need to trust the people you work with, and particularly, the people who become key team members to build on.
  2. Diversity makes better businesses. Not for fake political reasons, but for real business reasons. Teams of different kinds of people – gender, background, ethnicity, and so forth – have broader vision than teams of people who are all the same. Diversity has been given a bad name by bigots. It’s not just morally correct, it’s also better business.

What diversity does and doesn’t mean.

  1. Different skills and experience. You don’t want all developers or all marketers, you want developers, marketers, administrators, producers, leaders, and so forth. I see student groups that are three and four people who share the same major; that rarely works.
  2. Shared values create strong bonds. Palo Alto Software was built by a team that shared my founder values about good business planning, startups, and small business. Jurlique was built by a team that shared founder values about cosmetics with only natural organic ingredients not tested on animals. And don’t confuse shared values with diverse types of people, skills and backgrounds. They are compatible, not contradictory, ideas.

Avoid the all-C-level-officers team

  1. Beware of title inflation. Having the first four people all have C-level titles is usually a sign of youth and lack of experience. In the real world, founders are rarely all fit to be C-level officers for the long term. I recommend vague non-committal titles in the beginning, like “head of tech,” “marketing lead,” and so forth. Leave room to recruit stars later on, as needed, with the big titles.

 

Top 10 Pitch Fails

I was asked recently for a list of things that annoy me in angel investment pitches from startups. I’ve done this before, so there will be some duplication here. But here is my top 10 pitch fails list. 

  1. Profits. Talk of profits, overestimated profits, the failure to understand that investors make money on growth, not profits; startups with high growth rates are rarely profitable; profits in high-growth startups stunt growth and reduce the odds of successful exit. That’s why you need to spend other people’s money, right?
  2. “I don’t need no stinking projections.” Surprises me how often I’ve seen it. “We all know,” the pitcher says in a cynical tone, “that all those projections are useless.” And dismisses the idea, often with a wave of the hand. Or sometimes it’s a holier-than-thou tone. But no. I need you to think though unit costs, realistic volume, the conceptual links between marketing spend and volume, what it takes to fund growth. I want to know that you know, roughly, that you’re growth will take a ton of marketing spend, and that when you get to $20 million annual sales you are going to have a big payroll and overhead.
  3. Expecting me to believe your numbers. You’re damn right I want to see them, but don’t expect me to believe them. I use them to guess how well you know the nuts and bolts of your business. But at the moment of truth, I’m going to trust my instinct for what I think you can sell, and how much I think you can grow, given the stories you’ve told me and the markets you’ve carved out.
  4. Discounted cash flow. IRR and NPV. Amazing how people can believe numbers that project the future based on a compounded absurdity of assumed sales, less assumed spending, multiplied by an assumed discount rate, five years from now. And yet, I see young people crushed because I wanted something that had a lower IRR than their thing. Y’see, I didn’t believe the IRR either way. I went with the people and the market. This is actually a particularly annoying subset of the point above it.
  5. The annoying myth that nobody reads business plans. Big mistake: confusing the obsolescence of the big pompous formal use-once-and-throw-away business plan of the past with not wanting or needing planning. Ask the two faces of lean startups, Eric Ries and Steve Blank, whether startups need to set strategy, tactics, milestones, metrics, and essential projections for revenue, spending, and cash, and they’ll say the equivalent of “yes of course.” But they are (mis)quoted often as saying don’t do a business plan. What they mean – ask them – is don’t do an old fashioned business plan. Keep it lean, revise it often, and manage with it.
  6. Knowing everything. Sometimes people think investors want founders who know everything, answer each question no matter what, and are the world’s leading expert on any possible subject to come up. No. I want people who know what they don’t know, and aren’t afraid to be not certain.
  7. I don’t want people who get all defensive when challenged. The win is in the relationship, long term. I can’t tell you how many times I’ve seen private discussions between investors, after a pitch, go negative for somebody who investors feel “isn’t teachable.” It’s easier to work with people who listen, digest, than with people who think every doubt is a challenge to their leadership and authority.
  8. The small piece of a huge market. No, please, don’t ever tell me that your $10 million sales figure is realistic because it’s only one percent of a $10 billion-dollar market. Or 1/10th percent of a $10 billion market. That logic never works. Build your forecast from the units up, not from the top down.
  9. Oversharing the science or technology. I want to hear about the business, not the physics, not the biology, not the chemistry. Pitches and plans are not the right place to show off all of your knowledge.
  10. Not needing the money. If you don’t need the money then don’t seek investment. Own it yourself. Never seek outsider money you don’t really need. People who can live off of their generated cash flow are never going to exit
  11. (bonus point) Stock words and phrases like “game changer” and “disruptive.” Don’t tell us that you are either that. Cross your fingers, and hope we tell you that you could be.

This is another of my Quora answers. The original is at: What are the things that annoy you when entrepreneurs pitch to you Angels and VC? And someday I’m going to answer the question what annoys me about my fellow investors. Because writing these items generates a thought about that side of the table too.

What Are the Normal Steps for Angel Investment?

Question: What are the normal steps for angel investment? What’s involved in submitting a business plan?

I decided to answer this question here because I see it so often in email and in question and answer sites on the web, especially Quora, which is where I first saw it and answered it.

Yes you do need a business plan

In the U.S. market the business plan generally stays in the background while investors look at summaries first, then pitches, and only eventually, after a lot of screening, if they are interested enough to do the detailed study called due diligence, then the business plan.

You want a bare-bones lean business plan to guide your summary and pitch deck. You need to know strategy, tactics, milestones, and essential projections. But investors screen startups based on summaries and pitches before they look at full business plans.

But that’s not what you show investors first

So here are the normal steps:

  1. Summary. That’s either summary memo, or profile on Startup Funding & Investing and AngelList, or similar.
  2. If and only if the summary is interesting, then the pitch. There is a lot more information on the business pitch here on bplans. And for more of my posts, on this blog, choose the business pitch category.
  3. If and only if the pitch is interesting, investors will want to see a full business plan for due diligence.

However, this applies as general norm only, and in the U.S. market only. Generalizations are never always true. There are always exceptions.

(note: this first appeared as my Quora answer to What are the steps involved in submitting a business plan?

Good Data Debunking Popular Startup Myths

Contrary to popular startup myths and misunderstanding, tech founders aren’t mainly younger than 30. They are generally well educated, not dropouts. They tend to start up where they are, instead of moving to Silicon Valley or other tech hubs.

Here’s a summary of data published by the Kauffman Foundation:

We observed that, like immigrant tech founders, U.S.-born engineering and technology company founders tend to be well-educated. There are, however, significant differences in the types of degrees these entrepreneurs obtain and the time they take to start a company after they graduate. They also tend to be more mobile and are much older than is commonly believed.

Founders are in their late 30s, 40s, and older

  • The average and median age of U.S.-born tech founders was thirty-nine when they started their companies. Twice as many were older than fifty as were younger than twenty-five.

90+% have college degrees

  • The vast majority (92 percent) of U.S.-born tech founders held bachelor’s degrees. Additionally, 31 percent held master’s degrees, and 10 percent had completed PhDs. Nearly half of all these degrees were in science-, technology-, engineering-, and mathematics- (STEM) related disciplines. Onethird were in business, accounting, and finance.

  • U.S.-born tech founders holding MBA degrees established companies more quickly (in thirteen years) than others. Those with PhDs typically waited twenty-one years to become tech entrepreneurs, and other master’s degree holders took less time to start companies than did those with bachelor’s degrees (14.7 years and 16.7 years respectively).

  • U.S.-born tech founders holding computer science and information technology degrees founded companies sooner after graduating than engineering degree holders (14.3 years vs. 17.6 years). Applied science majors took the longest (twenty years) to create their startups.

Top-rank universities are over represented

  • These tech founders graduate from a wide assortment of schools. The 628 U.S.-born tech founders providing information on their terminal (highest) degree, received their education from 287 unique universities. But degrees from top-ranked universities are over-represented in the ranks of U.S.-born tech founders. Ivy-League universities awarded 8 percent of the terminal degrees to U.S.-born tech founders in our sample.

  • The top ten universities from which U.S.-born tech founders received their highest degrees in our sample are Harvard, MIT, Pennsylvania State University, Stanford, University of California- Berkeley, University of Missouri, University of Pennsylvania, University of Southern California, University of Texas, and University of Virginia. U.S.-born tech founders with Ivy-League degrees tend to establish startups that produce higher revenue and employ more workers than the average. Startups founded by those with only high school education significantly underperform all others.

They start closer to home

  • Nearly half (45 percent) of the startups were established in the same state where U.S.-born tech founders received their education. Of the U.S.-born tech founders in our sample receiving degrees from California, 69 percent later created a startup in the state; Michigan, 58 percent; Texas, 53 percent; and Ohio, 52 percent. In contrast, Maryland retained only 15 percent; Indiana, 18 percent; and New York, 21 percent.

 

 

 

 

Do You Believe the Legendary Startup Failure Statistics. I Don’t.

This recent piece on startup failure statistics caught me eye on Twitter first, and I followed the links to discover Startups: Conventional Wisdom Says 90% Fail. Data Says Otherwise. | Fortune.com. Here’s a direct quote from author Erin Griffith:

“I recently found myself carelessly repeating a statistic that I’d heard dozens of times in private conversations and on public stages: ‘Nine out of 10 startups fail.’ The problem? It’s not true. Cambridge Associates, a global investment firm based in Boston, tracked the performance of venture investments in 27,259 startups between 1990 and 2010. Its research reveals that the real percentage of venture-backed startups that fail—as defined by companies that provide a 1X return or less to investors—has not risen above 60% since 2001. Even amid the dotcom bust of 2000, the failure rate topped out at 79%.”

I was happy to see this because I’ve agreed, including here and here on this blog and also here in the bplans.com articles, that failure statistics are bogus. Overblown. Exaggerated. And taken for granted.

What drives the startup failure statistics myth

I’m not so sure about Erin’s explanation of why that occurs. She says, in the paragraph explaining the one above:

Yet the denizens of Startup Land continue to cite the 90% figure because it serves a purpose. It comforts failed startup founders who burned through their investors’ money, laid off staff, and shut down their companies. It supports the startup world’s celebration of failure. “Sure, you failed, but that’s the norm,” the thinking goes. “The odds were against you.”

I don’t buy Erin’s explanation there. She’s too kind. I think the 90% myth is driven by bogus would-be experts who clutter the web and even business publications spouting worn-out startup clichés to bolster their alleged expertise. I think it’s a side effect of our everybody-is-a-publisher society. People can get attention with certainty untempered by experience. I did a rant on that subject here, not that long ago: Bogus experts give bad startup advice.

An important clarification

Although it doesn’t quite support my point, I can’t leave the subject without pointing out that the data we’re looking at there is not for all startups. It’s just about venture-backed startups, which are the cream of the crop. Of course they do better than the average startup. They are the ones that get through the investment filter process.

And this also shows that so much of what we value in information depends on the definitions. What’s a startup? To me it’s a new business of any kind. To many other experts, the term startup applies only to high-growth new businesses suitable for outside investment. So we have to look, with any of these studies, on what they are really studying. All businesses, or just high-end tech businesses?

And then, before we leave the subject, there’s the obvious thought that not all businesses, startups, small business, or whatever, are equal. When you start your own business, if you do, your odds are not the same odds as everybody else who starts a business. Your odds depend on what you’re trying to do, how well you do it, how well you plan and manage, and what resources you bring with you.

Last thought: I can guarantee you that your odds of failure go way down when you run your business with good planning process. Start with a lean plan and review and revise it regularly.

 

 

How to Raise Money and Succeed Long Term (Video)

Jess Lee (Partner at Sequoia Capital) and Aaron Harris (Partner at YC) discuss raising money as an early stage company, and how to think about the fundraising process. Ali Rowghani (CEO of YC Continuity, previously CFO, COO @ Twitter, CFO @ Pixar) shares his thoughts on how to be a great leader and succeed long-term. Thanks to Stanford Online.

The direct link for the YouTube source is: https://www.youtube.com/watch?v=5ZXU84_sGXo&feature=em-subs_digest

Angel Investment Red Flags

Last week at an angel investment meeting one of our group members asked whether anybody had a list of red flag problems that would immediately eliminate a startup from consideration by angel investors. That seemed like a good idea to me then. And over the weekend somebody asked a similar question in Quora: what are some red flags for people new to angel investment when evaluating companies

This blog post is a compilation of my own items and a lot of others contributed to the Quora question. 

My big two: 

  • Issues around trust or integrity. Alternative truths don’t fly. Lies, gross exaggerations, hiding significant information. Fudging past financial data. Not mentioning about or grossly exaggerating their previous business history. Omitting significant facts. the pitch brags about a founder’s previous successful exits that turn out, later, to have been either grossly exaggerated. Founders holding back critical information for problems of perceived confidentiality or trust. Lawsuits that weren’t mentioned. Cap tables that hide things. Gaps in the history.
  • Issues around Leadership. For example, the scientist alone, instead of the scientist in a team with experience in the industry and business sense and experience. Or the team that lacks the CEO and is promising to get one after funding. Or the team of very young people that assigns all C-level positions to team members without realizing they need somebody else.

Four other good ones from Heather Wilde

  • Lack of domain expertise – Anyone can have an idea, but if the person you’re considering has no clue about what’s possible, what’s been done before, or even a tangentially related background – that’s a huge red flag.
  • Lack of Coachability – there’s a certain amount of arrogance expected in an entrepreneur (they need to beat down their competition), but if they aren’t willing to consider outside advice or suggestions, stay away.
  • Terrible Idea – I shouldn’t need to say this, but the majority of ideas are actually just bad, really, really bad. Yes, you are investing in the human, but that doesn’t mean you should throw money at a bad idea in the hopes that something they come up with later might be good.
  • “No Competition” – This is like one of those logic puzzles. Every time I hear someone say “we have no competition” it immediately is a red flag, for two reasons. One, it’s a sign they haven’t done their research, because there’s always competition, or at least something comparable. Two, it’s a sign they might be naive enough to actually think it’s true. Either way it’s a sign to stay away.

Four more from Greg Brown:

  • Awesome team in a small market can figure out how to expand the market opportunity. Mediocre team in a brilliant market will produce mediocrity. Bet on the team.
  • Legal and financing structures that violate the norms are non-starters for me. No need to reinvent the wheel.
  • If a company is pushing too hard to get your investment that’s a bad sign. If it doesn’t yet feel right hold off. It’s OK to miss out on something. There will be other opportunities. You cannot ride every unicorn.
  • Bad co-investors suck. Bad means fundamentally bad people or people who will provide bad advice or influence. Most founders will to some degree bend to the will of their board/investors. Make sure they will be getting good advice.

And a bunch from Terrence Wang

  •  No Deck/No Financial Model. Sending decks are standard unless you are a Siri co-founder working on Viv. VCs want financial models. If you are investing later seed then the startup should send you a financial model where you can see the assumptions and play around with the variables to test different scenarios and outcomes. If founders won’t send you both, red flag.
  • Finders/Brokers/Enthusiasts. At present the vast majority of finders, brokers and enthusiasts who connect founders and investors are working with non-great founders. Red flag.
  • Super Angel or VC Advising, Not Investing. Peter Thiel is advising a PayPay mafia cofounder-CEO. The CEO pitches fellow angel investors and me. We ask if Peter is investing. The CEO says he wants to be careful about asking Peter to invest. So why are you pitching us then? Red flag.
  • Product Not Needed. If someone loves a startup’s product and service, that could be because the product is free and a good time filler. Doesn’t mean they will spend money on the product or service. Maybe they don’t need the product. Red flag.
  • Not Great Sales. A great product with bad sales is often a bad sign. For example, a startup might have a great e-commerce product but Amazon is going to out-sell them about a billion to one. If the product is easily monetizable and they haven’t even tested monetization, that is a red flag.
  • Incompatible Goals. Some angel investors don’t want VCs involved later. This includes at least a couple Harvard Business School Angels who invest in startups that should not need VC funding because the startup is in a smaller market and should get to break-even pretty quickly. But does the founder agree? If you and the founder don’t agree on the financing goals, that is a red flag.
  • No Grit. If the CEO does not have grit, the startup likely won’t work. Red flag.
  • Uncompelling Pitch. CEOs need to be persuasive, regardless of context. They don’t have to be high energy. Elon is more reserved but still charismatic and persuasive. Uncompelling pitches are a red flag.
  • Differing Visions Intra-Team. Talk to the CEO and other core team members individually. Are they on the same page as the CEO? If not, red flag.
  • Can’t Lead. Has the CEO built and led a team successfully before in anything? Sports, clubs, etc.? Her siblings? Anything? If not, red flag.
  • Unanswered Questions. If you have unanswered questions that are important to you about anything related to the startup, the team, the legal documents, etc., make sure the CEO or someone from her team who’s authorized (e.g., her law firm) answers your questions to your satisfaction. If you feel pressure to not ask too many questions, just ask this one
  • Legal and Ethical Issues. Does the CEO do things that are highly unethical or technically crimes? If so, you may have a Theranos or Zenefits on your hands. Red flag.

Startup Stock Options as Fool’s Gold

Pot of GoldTerry had a good job with an established software company but left to join a startup. Why? “Because they’re giving me startup stock options.”

Too bad. Two years later that job ended. That startup was going nowhere, cutting costs, and fighting extinction. Terry needed a new job. Again.

What about those options? They had no value whatsoever. They were a ticket for a lottery that had no prize and no winner. As likely as the pot of gold at the end of the rainbow. And Terry, influenced by options to switch jobs, made a bad decision.

Terry’s mistake is way too common in the world of startups and people working with high tech. Options cloud judgment. They are almost always worth way less than the psychological value we give them.

 

7 hard facts about stock options

Here are some hard realities about stock options for startups

  1. Stock options for an early startup will normally only have value if the company grows, prospers, and has a liquidity event later. Options for shares that are never publicly traded can’t normally be sold. They are a chance to join in sharing the pot of gold at the end of the rainbow, but only for the small minority of startups that make it that far.
  2. Options usually involve vesting: you get them over time, as you stay with the company. Vesting often takes four years, but can be any specified time. In the most standard four year vesting, you get one fourth of your options for every year you stay. Vesting means they are yours – the company can’t take them back.
  3. The number of shares is only half a number, meaningless without the other half. You have to divide that number of shares by total shares outstanding to calculate what percent of ownership is involved. A thousand shares is 10% of a company that has ten thousand shares outstanding, but only a thousandth of a company that has a million shares outstanding.
  4. The number of shares outstanding generally grows as a startup gets more investment. That’s called dilution. So an option for one thousand shares might be worth one percent ownership at the beginning when the company only has ten thousand shares outstanding, but those ten thousand can easily become a hundred thousand or a million later.
  5. Options have trigger prices to exercise. You have an option to buy; you don’t own them. You need to pay attention to the trigger price because that’s part of the value. Options for a thousand shares with trigger price of $1 per share cost $1,000. If the trigger price is $5, that’s a $5,000 purchase price.
  6. There are tax implications related to exercising options. The difference between the trigger price and the market price, at the time of exercising the options, was taxable at regular income tax rates the last time I looked (but check with an accountant; I’m not an accountant or attorney, so check me on my understanding). If you buy the options early, before they have real market value, your tax burden will be lower, but your risk higher. If you wait until the company gets liquidity (if it ever does) then your risk is much lower, but your tax burden higher.
  7. Most startups that raise venture capital investment are subject to so-called ratchet clauses that protect the investors from losing money band hurt the founders’ and option holders’ value. If the company achieves liquidity but for a market value less than what the venture capital investors put in, then they get all of that value first, before the others get any. You could have one percent ownership of a company worth $50 million, but get nothing if investors put in $75 million.

Get the stars out of your eyes

Stock options started decades ago as incentives for managers working in big companies whose stocks were traded on major public markets. The big publicly traded companies use them as incentive and reward. They give a manager options to buy shares at the current market value, so if the market value goes up, those options are worth money.

Stock options for startups, on the other hand, will only mean money if the startup is very successful. Even if the startup survives, grows, and prospers, the options might still be worth money if it doesn’t get acquired by a publicly traded company, or register and go public. Small shares of a healthy company that will remain privately owned forever, without a liquidity event, have almost no value to employees. They are better off negotiating salary and real benefits such as health care and vacations. Some companies whose use options to influence employees are, wither they intend to or not, giving them something equivalent to false gold.

 

7 Small Businesses Lessons From Tech Startups

Small Business Lessons from High Tech

What can every small business learn from tech startups? David Rose, founder of Gust.com and long-time leader of the New York Tech Angels, says normal businesses are different from tech startups, and offers small business lessons he’s taken from decades dealing with what high-end tech startups do as they start. He says:

One of the most valuable lessons I’ve seen proven true over and over again, is that many of the biggest obstacles that businesses face along the way can be avoided IF you take care to start things up correctly from the beginning. When launching a company, investing a little bit of time and money at the very start can pay large dividends later…but only if you have a solid foundation, a thoughtful structure, and a strong focus.

That’s from 7 Lessons Small Businesses Can Learn From Tech Startups, published in Forbes yesterday.

What’s a startup to you?

For the record, David’s view on startups is somewhat different from mine. I think of every business that starts up as a startup. He defines startup more narrowly:

While all businesses “start up” and start out “small”, not all “small businesses” are “startups”. Whereas a small business is founded to be profitable and create a good living for the entrepreneur and his or her family, a “startup” is founded with the intention of rapidly achieving exponential growth through scale, and either being acquired in a few years by a larger company, or becoming a “unicorn” and going public in an IPO…in both cases bringing in massive returns to its founders and investors.

The 7 Small business lessons

We come back together, however, on what David Rose recommends all businesses do. He’s recommending all businesses should take the same care that his version of startups do. That includes:

  1. Get smart. Read up on it. There’s so much wisdom available for a few dollars. Take the time to browse the essentials. David doesn’t mention it in this context, but his book Startup Checklist is a good one.
  2. Resolve your business model. Know how you make money. How will people pay you, and why.
  3. Get initial feedback. Talk to people about it. Find people you know who have experience. And listen.
  4. Analyze the market. “You must understand the landscape you are about to enter, inside and out.”
  5. The business plan. All businesses deserve business planning. I’m quoting him in detail in the next section, below.
  6. More feedback. Now you have market knowledge and an initial business plan. “At this stage you are looking for substantive comments about the business and market, along with specific critiques (don’t take offense; listen to them carefully!) and actionable insights.”
  7. Put it to the test. Launch. Do it. “The biggest test will be to see if customers really want or need what you are providing, and to understand if they are willing to pay for it at a price at which you can afford to supply it.”

The business plan we all need

And my favorite of David’s recommendations is the business plan.

“Many entrepreneurs draw up a complicated business plan as step one, but end up wasting a lot of time rewriting it as they work through their business concept. If you’ve done all the previous legwork and feel confident that your concept is marketable, viable and profitable, the next step is to begin to write it down. You’ll want to use a simple, structured format to note the various things that you are going to need to do to implement your business idea. For now, don’t worry about a long document for investors…just start by writing down bullet points outlining what is supposed to happen, a timeline, assignment of responsibilities, cost analysis, and revenue projections.

I strongly agree with him on this. We may not all need a that “long document for investors,” but we can all use the kind of business plan he suggests, “bullet points outlining what is supposed to happen,” and so forth, in that last sentence.

And then there’s this, my favorite part of David’s article, his recommendation.

There are some great resources available for this, and the best I’ve seen is the web site leanplan.com, by Tim Berry, the legendary author of Business Plan Pro. The site offers an online course you can purchase, as well as commercial online tools such as LivePlan, but it also includes the entire text of Tim’s book ‘Lean Business Planning’ for free. As you’ll learn from Tim, the most important thing about a business plan is not that it be long, but that it be live. An effective business plan is a living document, reviewed and updated every month, that adapts to the market, the field, and your actual results.”

Did I bury the lead?

 

Finding Dumb Investors is a Dumb Idea

Are you looking for dumb investors?

investor money
investor money

“How can I find investors who don’t take much equity?”

“How can I find investors who don’t interfere with my running the business?

I first posted my objections to this kind of thinking nine years ago in Dumb Investors Dumb Idea, one of the earliest posts on this blog. That was before I joined an angel investment group and became one of those investors. My objections then are a lot stronger now. And I still see a stream of this kind of thinking in blogs and at my favorite question and answer site, Quora.com.

Valuation determines equity

The equity share from investment is simple math. If your investors put in $100,000, that’s 10% of a startup valued at $1 million, and 50% of a startup valued at $200,000. So what’s the underlying valuation? Read up on that with 5 things entrepreneurs need to know about valuation and understand startup valuation. So with normal angel investment, the startup founders want a higher valuation and the angel investors want lower. It’s a lot like negotiating to buy a house or a used car. Ultimately, both sides have to agree, or there is no deal.

Angel investors normally care and add value

Angel investors are overwhelmingly amateur investors, investing their own money, investing in industries they know or local startups. They are successful entrepreneurs giving back. They believe in their ability to select startups well, study them well (it’s called due diligence) before deciding on a deal, and to offer valuable advice and experience. I’ve seen dozens of pitches that ended with investors not interested in startups whose founders knew everything and wanted no advice. People who don’t want interference with their business are not going to do well with angel investors.

Normal angels choose angel investment instead of leaving their money with an investment advisor, bank, or some other institution. They know that investing in startups is risky, but they trust themselves and expect to be able to help.