5 Reasons An Angel Investor Will Walk From Your Deal

By Dharmesh Shah on July 25, 2011

The following is a guest post by Ty Danco. Ty is an angel investor and startup mentor. Read more of his thoughts at tydanco.com.

You’ve got a killer idea, a good prototype, a terrific market opportunity, and maybe even some funding already. But you still may lose potential investors that have nothing to do with your deal, and everything to do with you. Here are 5 of my non-negotiable hot buttons that will make me turn down an investment, no matter how good the financial prospects appear.hand stop

1. You knowingly mislead people. If you’re not trustworthy, it’s over. Full stop. It can be as simple as pretending to know answers when you don’t, implying that you have investors or contracts that aren’t real, or giving half answers to questions that conveniently leave out non-flattering but significant information. Note that I’m not going to dump you simply for painting the rosiest plausible picture and showing hockey stick revenue numbers that seem ridiculously ambitious. Investors expect some amount of hype, and we can put up with that. But you have to be honest.

Worst is a coverup: An entrepreneur presenting to an angel group was discussing his record as a "successful repeat entrepreneur", but didn’t give particulars other than "the last company he founded went IPO." When upon questioning he told us the name of that company, it only took a few minutes on Google to discover that 1) the company was now defunct, having been in the middle of a penny-stock trading scam, with multiple lawsuits still ongoing; and 2) that the founder/CEO had a different name than the man presenting. He responded to the first fact that he had been the victim of those scams, and to the second that he had decided to change his name. Needless to say, no checks were written to that company. His new company actually had acquired rights to some interesting technology, but the integrity question made it a total no-brainer pass.

2. You haven’t done your homework. Unfortunately it’s not the norm that an angel will have deep knowledge of the sector you are in, so we’re going to ask questions, and lots of them. But imagine what our reaction will be if you don’t know the answers to our basic questions about your own markets, your competitors, or worse, haven’t even considered an obvious question. At best you’re too green to invest in, shown by your chase of angel investments before you are ready. The good news is that this is easily correctible. Do your homework before you pitch angels; when you practice your pitch dozens of times before mentors and other entrepreneurs, chances are you will have had a chance to think about and respond to almost all of the obvious questions. But until you get to that point, don’t burn your bridges pitching to investors too early. Work on your business model and your pitch until they are shining jewels.

3. Your projected expenses are unreasonable. As mentioned above, I don’t really mind—and come to expect—entrepreneurs showing revenue projections that go straight to the moon. However, I will scrutinize projected expenses, hard. If they are unreasonably low—for instance, having a model that depends on external sales without any meaningful salaries or commissions, not budgeting in legal expenses, etc.--that marks you as a greenhorn that needs to go back to school. Worse than the greenhorn is the greedy entrepreneur who is looking to raise money to immediately go back into his or her pocket. This is especially true when the entrepreneur has been on the beach, or an "independent consultant" for a period of time. It’s no sin to need or get a paycheck, but if you are looking to angels to fund your six-figure package, that’s a telltale sign of greed. Down the road, a me-first priority will manifest itself in losing employees, creating lousy margins, and other bad scenarios. The CEO needs to take the lead in all aspects—including demonstrated hunger, commitment, and sacrifice. If you’re focused on the short-term rewards, there won’t be any long-term rewards around for us investors.

4. You don’t follow through. This is another "tell", as poker players say. This won’t be evident at a first meeting, but in the follow-up. Dharmesh and many other angels are correct in saying that diligence can be quick, given that startups will change directions. I too believe due diligence needn’t take more than a week or two, but I still think that in most cases there needs to be several interactions between entrepreneur and potential investors. Why? With the biggest risk for startups being execution risk, we need to assess whether you will do what you say you’ll do. If you call us when you say you will, if you follow-up on our questions quickly and efficiently, those are all positive indicators that you are accountable and will deliver on promises. There’s no shame in putting a reasonable but later date on some deliverable because you’re busy—I hope and want you to be busy, and maybe even you’ll earn bonus points if you turn something around earlier than promised.

5. You’re dogmatic. It’s easy to say no to someone who is a jerk. But assuming that you’re not arrogant, full of yourself, and "getting high on your own supply", you can still turn us off by not considering alternative viewpoints. When you answer questions before we finish asking them, when you don’t take the time to really listen to what people are talking about, when you assume you know every answer cold even before it’s clear where a comment is coming from, that’s another telltale sign of too much hubris and not enough coachability. There are plenty of people who are uncompromising—Steve Jobs is just one example—but Steve Jobs are few and far between, and I’m willing to bet that he listens before he rules.

This is not to say that the investor is going to be right or that you are wrong. I especially like it when an entrepreneur has considered an option I just proposed and educates me why they have decided not to go down that route…as long as they have taken the time to listen. But an absolute black and white dogmatic approach that leaves an impression of "my way or the highway" raises the likelihood of an inflexibility that will most likely doom your company. Pivots happen…and you have to be open-minded along the way as you build your company.

For a good entrepreneur, it shouldn’t be hard to avoid these potholes: you do your homework, you don’t lie, you follow through, you’re not short-sightedly greedy, and you’re open to hear what others think about your strategy and prospects. Miss any of those, and you become a bad bet—low odds that can’t be papered over by any amount of experience, social proof, traction or the other building blocks that attract an angel’s attention. When our due diligence shows that you’re not going to let us down in those five areas—now you’re a whole lot closer to being bankable.

What do you think?  What else should entrepreneurs keep in mind to keep angels from walking from their deal?

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Sorry. My heart says yes, but my schedule says no.

By Dharmesh Shah on July 21, 2011

The following started out as a late night email I was going to write to someone that reached out for some guidance and advice.  Expanded version posted here in a somewhat desperate attempt at garnering sympathy and understanding.  Thanks for your patience. -Dharmesh

Dear Friend,

Thanks for reaching out and connecting.

It is likely that you, your idea, your company, or your proposition is awesome. Unfortunately, my schedule is totally not awesome.

One of my biggest weaknesses in life is that I too often say yes. I'm passionate about startups. I get excited about new ideas. I love making new friends online. And, it's so much easier to say yes than it is to say no. “Yes” is more fun and carries less guilt (in the short term).

However, I've learned the lesson that every time that I say yes to something new, I am effectively saying no to something else. And, I've already said yes to too many things, and so have to say “no” to you. No, I can't accept a request for a call, a meeting or some time to review your startup or your business opportunity.  Embarrassingly, I'm unlikely to be able to respond to your email (though I do read just about all of them).sorry

Although my heart says yes, I MUST SAY NO.

I know you feel like you're asking for so little (“I just need 15 minutes for a quick call…”), and you are. But, there are just not enough hours in the day, or days in the week (I work all 7) to review or respond to all those that reach out. I confess that I am overwhelmed. My sincere apologies. I wish I could bend the laws of space and time, but unfortunately, my past efforts at doing this have proven futile.

Here's a bit more detail on my professional priorities:

My #1 priority, by a long shot, is my company, HubSpot. I am emotionally, financially and morally committed to HubSpot. I want HubSpot to be successful. By my definition, success is making those who believed in you look brilliant. So, I work very hard to make HubSpot customers, employees, partners and investors look brilliant. If you have your own startup, I think you can likely appreciate what an all-consuming activity it is. There is precious little time for anything else.

What little professional time there is left, I mostly spend on OnStartups.com. I write blog articles. I do some tweeting. I do some public speaking. I make some angel investments. The way I choose how I spend this time is very simple: I'm looking for leverage. I'm looking to positively impact the most number of people with the limited time/energy I have available. This is why, although I have invested in over 60 great startups as an angel investor — I spend very little time with any of them individually (I make this clear before I invest).

And, as it turns out, I have a bit of a personal life too (though some might argue that point). So, when I'm not “working” (I use the term loosely), I like to spend it with my wife Kirsten, and my son, Sohan.

Abandon all hope all ye who enter my inbox. -Dharmesh

If you're not saying HELL YEAH! about something, say no. ~Derek Sivers 

To prevent this entire article from being a self-indulgent pile of poo, I'd like to share some useful resources.

Some Useful Links and Information

1. If you're raising angel money for an early-stage startup, I highly recommend AngelList. It's an easy, efficient way to get in front of some great angel investors. There's nothing like it anywhere else. I do many of my angel investments through there now.

2. Already in negotiations with investors? Have a term sheet? You MUST read Venture Hacks. A super-practical guide to some of the ins and outs of what you should look out for. (Interestingly, Venture Hacks and AngelList are run by the same two awesome guys: Naval and Nivi).

3. If you're a super-awesome developer (and I mean really, really awesome) and looking to join a startup that is equally awesome, you can proceed directly to GO, and just reach out to me via email. I can connect you to HubSpot, or one of the many startups that I am invested in who are almost all looking for great people.

My email (in simple Python code): 'hahsd'[::-1] + 'moc.sputratsno@'[::-1]

4. If you're new to the startup scene (i.e. just getting going), I highly recommend Guy Kawasaki's “Art Of The Start”. It's an easy read and super-helpful.

5. If you're looking for great blogs about startups, you can do no better than the awesome list here: Top Blogs On Startups

7. And, if you're on twitter, here are some of the great startup peeps that I've learned a bunch from: @davemcclure, @hnshah, @danmartell, @ericries, @randfish, @asmartbear, @dcancel, @msuster, @sivers, @jasonfried (and many more…)

Wish you the best in all of your efforts.  Thanks for your support and understanding.

Sincerely,

Dharmesh

Topics: personal
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