Tag Archives: angel investors

Q&A: How Do I Finance My Company Without Losing Control?

Advice, Angel investment, Q&A, Starting a Business,

Question:

I need $250,000 to get my business started, but from what I see on the web, I’m going to have to give away the business, practically, to get that money from investors. And I don’t want to borrow the money because it’s a startup and I can’t be sure I’ll succeed.

cash ball and chain

My answer:

  1. You may be worrying about the wrong thing entirely because investors want know part of you or your business. Don’t even try to get angel investors unless you can convince them that there’s a reasonable chance that the money they give you today will give them ownership in a company that they’ll be able to sell to somebody else for 5, 10, or more times that amount of money in 3-5 years. “Reasonable chance” is just that, a decent shot at it, we know you can’t be certain. But can you convince people that it’s worth spending money on your business for their chance of return?   Ask yourself: do you have what investors want? If you don’t, then don’t waste time on this.
  2. Investors write checks. They expect something back in return. If they they write checks for your business instead of to buy a fancy car or second home, that’s because they expect to own something for a while and make money on it when they sell it. Don’t complain about giving them ownership.
  3. Real investors want control for good reasons. Good investors end up as partners. Don’t give up control if you don’t have to, but depending on how good your business looks, and how much startup experience you have, sharing control might be the only way to go. Or the best way. 
  4. I’ve written it many times, although this isn’t mine originally: choose an investor like you would choose a spouse. Find somebody compatible, who can offer help and advice, and ad to your team.
  5. If you manage to convince friends and family to invest in your business and give them a bad deal, you’re going to have to live with that problem for a long time.
  6. 10 good reasons not to seek investors for your startup.
  7. You don’t want to borrow the money because there’s too much risk? But it’s your startup, right? Why should anybody else take the risk you don’t want to take. Banks aren’t supposed to take risks either; it’s against the banking laws.
  8. Not that you should borrow the money, even if you can because you have house equity or something to pledge as collateral. Weigh your own risks and returns.
  9. If you want peace of mind, scale that business plan back to a size you can manage with your own resources. It’s possible for some businesses.
  10. Look for alternative financing like early prepaid sales, or share of future revenues, etc. Read 5 non-traditional ways to get startup money.

(Image: cash chained, bigstockphoto.com.)

More About Angelsoft.net and Angel Funding

Angel investment, Starting a Business, Venture Capital, , , ,

(I posted Organizing Angel Investors Monday on Up and Running about positive developments in angel funding. David Rose, CEO of angelsoft.net, added the following as a comment to that post. Although I haven’t had guest posts on this blog, David’s comment is worth it. And I’ve been using angelsoft.net for a while now, I know it’s good. So I’m posting David’s comment here as if it were a guest post.)

Tim, you are absolutely correct in your observations about what’s happening in the angel world. Historically, angel investing has tended to be a personal, haphazard thing, with entrepreneurs and angels finding each other almost by chance. During the dot-com boom, however, angels in various cities who repeatedly found themselves in the same deals began to organize into semi-formal groups, in order to share deal flow and expertise, and pool their funds to make larger investments.

After the crash, when venture capital firms effectively stopped funding during the ‘nuclear winter’, the Kauffman Foundation, dedicated to supporting entrepreneurship, figured that the best way to help entrepreneurs was to jump start angel investing (which, as you know, accounts for more startup investing annually than all VCs put together.)

So Kauffman convened a summit meeting of the major angel groups from around the country, and out of that arose the Angel Capital Association, the professional alliance of angel groups, and the Angel Capital Education Foundation, which trains angels and entrepreneurs in best practices. This past week we held the 2009 ACA Summit in Atlanta, at which over 300 leading angels and group managers from around the country got together to meet each other, share best practices, and work on syndicating deals.

At the same time the ACA was being formed, many of the angel groups were in need of a solution to help administer their organizations, encourage collaboration among angels, and enable cooperative investments both among groups, and between angel groups and VCs. Thus arose Angelsoft, which today provides the back-end infrastructure for virtually the entire global, organized angel investment community. Five years after its founding, Angelsoft supports 17,000 accredited investors in 450 angel investment groups in 45 countries.

While Angelsoft is not a ‘matching service’, nor does the company itself make investments, the platform functions much like the CommonApp for college admissions. The difference is that because the vast majority of angel groups use the system to manage their deal flow and collaboration internally, there aren’t parallel systems. So if an entrepreneur applies for funding to a group using Angelsoft, they’ll be working on an Angelsoft-powered application no matter how they got to the group in the first place.

This provides a number of advantages, among which is the need to only fill out an application once. After that, applying to any other Angelsoft-based group is a matter of a single mouse click. And entrepreneurs can find groups that invest in their type of company by using the Kayak-like sliders in Angelsoft’s investor search engine at http://angelsoft.net/startup-tools/investor-search.

Another by-product is that for the first time entrepreneurs have some visibility into the often-murky operations of angel groups. Because Angelsoft powers all the group’s processes, the system can provide entrepreneurs with statistics including how many other companies have applied for funding this month, how long it typically takes the group to review a submission, what percentage of applicants to a group actually get funded, and so forth. For example, check out the profile page for New York Angels, my home angel group here on the east coast, at http://angelsoft.net/angel-group/new-york-angels

Finally, one of the coolest things is that with all the angel groups on a single platform, Angelsoft is now also being used by other parts of the early stage industry, including, as you pointed out, VCs. Over 50 venture funds use Angelsoft to process their deal flow, and many of the leading venture law firms, such as DLA Piper and Cooley Godward, are beginning to use the platform to refer clients to angel groups and venture funds for consideration.

We are living in a fascinating time with fast moving changes in every area, and the expansion and growth of the Internet promises to bring some much needed order to the chaos of early stage funding!

-David S. Rose
CEO, Angelsoft
Chairman, New York Angels