Digital Ventures

Part Two: Choosing the right angels, the pitfalls of poor choices, setting expectations and controls

Taking other peoples money: for many entrepreneurs taking funding is akin to doing a deal with the devil. The motivation for many of us is freedom and when you take money from an investor you essentially become an employee of your own business – beware! This is a big step for many and it’s essential that you are prepared to take this step mentally, don’t rush into getting money and then regret it later

There is no point in building a business with other people’s money if you are not fully prepared to share the power and rewards. If that’s not you then stick to friends and family plus bank funding

Choosing the right angels: angels are not heaven sent, they are ordinary people with the same problems and issues. When you take their money it’s like getting ‘married’, you are going to have to spend three to five years together if successful and they will generally want a say in what you do and how you run your business.

You will also have a legal ‘fiduciary’ duty to all shareholders and need to consider their views in your decision making. Their views are not always the best for the business or you!

Types of angels: in my experience angels tend to come in four types:

1. The ideal angel
2. The know it all fiddler
3. The buying a job type
4. The passive investor

The ideal angels will have domain experience in your business sector, will have a strong ‘network’ of contacts that could help you, they will have the ability to coach and assist when you need them and leave you alone to run the business the rest of the time. The best ones will fill gaps in your knowledge and team, will use their abilities to ‘leverage’ their investment and will add significant value outside their investment

Beware the ‘fiddlers’. These are those types that think they know better and can cause you immense pain as they try to run your business from the outside, often making demands that are entirely ego driven or based on their own needs and not yours or those of the business. These people should be avoided at all costs, even if you are desperate for the money, find another way!

The other types of investors that you need to be wary of are those trying to ‘buy a job’, they can often be most useful but there are those that will invest on the basis of a non-executive contract or other payment. In the early stages of a business this can be a drain and sometimes this a cynical way to get free shares as they are essentially paying themselves back out of their investment ending up with shares and their money back

Finally, passive investors make a decision give you the money and leave well alone. These are also very valuable if rarer types for the experienced entrepreneur but don’t really bring much to the table for the start-up or those new to running a business

Match making: just as in any relationship, getting the right long term chemistry is essential. You should do as much due diligence on your investors as they do on you. Don’t be afraid to get their CV and references, call up other companies they have invested in and check them out. Also, spend time with them if they are going to be active investors – get to know them well and work out if you can work together for the long term, if you are not comfortable with them don’t take their money or expect
a ton of pain. Disputes with investors can be fatal so invest the time to get it right

Mix and match: long term planning is also essential with raising funds, if you feel that you will need several rounds of investment as is usually the case, then you need to ensure that all the parties will mix during the lifetime of your business. For example, if you intend to get VC funding, they will be happy to see a small group of angels as seed funding partners but they don’t like business with lots of investors and complex legal arrangements. VCs also don’t like third party fund raisers
in deals with warrants and different classes of shares. Don’t forget that if you intend to get more angels that all these people need to work together too

Setting expectations: on the basis of the previous points, it is essential that you agree with your investors what they bring to the team, what they expect in return and how you will all work together. Get this in writing and stick to your vision of the business, don’t get bullied into running things in a counter productive fashion

Controls: in most small investments their will be a shareholders agreements, executive contracts and other legal paperwork. It is essential that these be put in place for all parties and that they cover as many major eventualities as possible i.e. the sale of shares, death of the founder etc. As an entrepreneur it is also important that you get these controls carefully checked and limited, many investors will try to tie you up will legal paperwork – resist those clauses that involve your day to day running of the business or you will find that you will have to get ‘permission’ to make decisions and this could be fatal in today’s ‘now’ world along with very damaging to morale.