Startups: Why Investors Aren't Writing You Checks

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Startups: Why Investors Aren't Writing You Checks


As a follow-up to what was a very popular article titled “Why Your Software Isn’t Selling”, I thought I’d reuse that conversational (and slightly humorous style) to look at another issue many startup founders deal with.  The inability to raise investment from angel investors.

Once again, I’ll use a conversational style with a hypothetical founder.  Note:  This article is not based on any specific founder (this will become obvious as you see the extreme positions I have the “character” take).  Also, I mean no disrespect to the startup founders I have funded or otherwise explored opportunities with.  All of you have been very clueful.  It’s those other startup founders that I’m really talking about here.  J  [Please remember that this article, like the prior one, is intended to be mildly humorous.  Don’t take it too seriously].

Why Aren’t Investors Writing Me Checks?
Founder:  For some reason, and I can’t figure out why, I haven’t been able to convince an angel investor to agree to invest money in my new startup.  Despite the fact that it’s an amazing investment opportunity and is sure to make them a bunch of money.  I thought angel investors were supposed to be smart and savvy.  They sure don’t seem that way.

Dharmesh:  Well, before we go too much further, a quick note:  What you need is not an agreement to invest money, you need an investment (i.e. a check).  The difference may be subtle, but you can’t pay bills with an agreement to invest money.  But, moving beyond that, a lot has to do with whether you’re talking to the right angels.

Founder:  Of course I am.  I’ve done my homework.  I’ve looked through lists of local angel investors and found those that have experience in my particular space (building a next-generation Web 3.0 company that leverages anti-social networks of people that don’t like each other).  I’ve made contact with many of these angels.  Most didn’t even respond back to me.

Dharmesh:  Well, most angel investors can’t afford to spend time looking at every deal that comes their way.  As such, they tend to focus on ideas that originate from people they know or ideas that are referred to them from people they know and trust.  

Founder:  I thought that’s what VCs did and that angels were different.  Aren’t angels supposed to be actively seeking investment opportunities?  If they’re just going to sit back and wait for their colleagues to refer deals to them, what makes them different from VCs?    In any case, I read about this behavior somewhere too, so I found a couple of people that I knew that were connected to angels and had my business plan send to them through that route.  This way, I could get through the spam filter and check the “came in through a referral” box and make the angels happy.  

Dharmesh:  For the record, few angels will have the time to read a business plan.  Also, sending a business plan without first making contact and determining if the individual is interested may be jumping the gun a bit.  The goal of the referral is not to have your plan go through someone else’s email account (so it gets noticed), but genuinely get someone to look at the idea and look for a “fit”.  But, putting that aside, you have to remember that angels are indeed different from VCs in some key ways – but they’re not totally different.  Some of the VC behaviors exist for a reason, and angels are investors too – just on a smaller scale.

Founder:  Ok ,fine.  I had one of those referrals too where one the successful entrepreneur that I’m neighbors with actually did read the business plan and refer me to a few angels that he thought might be a good “fit”.  Even in this case, I’m still not really getting much uptake.

Dharmesh:  Well, you have to also remember that angels look at investments for a number of reasons – only one of which is making money on their investment.  They want to live somewhat vicariously through the entrepreneur.  They want to be able to contribute to the startup’s efforts.  They want to actually enjoy their involvement – and tell their friends and family about the exciting things their startups are doing.

Founder:  This is not a problem at all.  I have a world-changing idea that any angel would be excited to brag about to his wife and kids.  On the involvement front, I’ve already started asking potential angels for advice, access to their key contacts, help with forming partnerships and their involvement in closing some key management hires I need to bring on.  Trust me, they’ll be involved.

Dharmesh:  Well, when I say involved, I’m not really suggesting you treat them as a non-paid consultant and overstay your welcome.  Angels really want to establish some chemistry with the people they’re doing business with and their involvement, though important, needs to be limited to what time they want to invest.  If they wanted to do real work and be that involved, they’d be starting their own companies again.  Also, on an unrelated note, don’t assume that all angel investors are men with kids (stereotypes are a subtle signal that may not resonate with all investors).

Founder:  Fine, Fine, Fine.  I’m getting mixed messages here.  First you tell me they want to be involved, then you tell me they don’t want to invest that much time.  Not sure which it is.  But anyways, this still doesn’t explain why they’re taking so long to make a decision and write me a check.  This opportunity is not going to be here forever.  I can’t get started until some cash comes in the door.

Dharmesh:  I think you may be confusing your urgency with theirs.  Angel investors are rarely in a hurry to write checks.  Every startup founder believes they have a great idea and great investment opportunity – and angel investors have no way to figure out whether you’re the one that happens to be “the next Google”.  Odds of  success on angel investments are not that high.

Founder:  Clearly, their success is not going to be that high if they can’t even see a great opportunity when it’s staring them in the face.  What do you suggest I do?

Dharmesh:  Well, I think it’s going to take more conversation to really figure out your problem.  We may need to continue this over a cup of coffee next week.

Founder:  Next week?  I can’t wait until next week.  What can you do for me today?

Dharmesh:  What I can do for you today is to advise that you revisit your plan and create a “Plan B” that assumes you’re not going to succeed in raising outside funding.  Bootstrap.  Get the idea further along.  And, most importantly, read up on how angel investors work.  I don’t think you completely understand them yet.  Also, we’ll need to talk about deal terms.  You may be asking for too much money, or your price may be too high.  [Listens to founder for five more minutes about how the “price” is really very, very low given how big the opportunity is…]

…to be continued.

Wanted to cut this off here.  There are a few more concepts that I want to cover, but the article is getting too long, so I’ll save the rest for a “Part II”.

Summary of My Point:  Angel investors usually invest for a myriad of reasons (only one of which is return on their investment).  They work in cycles and are generally pretty busy people (even those like me that are not yachting in the Greek isles for 3 months a year).  The single most important factor in raising angel investment is that the angel has to like you.  This is even more important than liking your idea.

Posted by Dharmesh Shah on Mon, Jun 26, 2006



As usual, very interesting! I gave up on business angels sometime ago. They are risk averse as much as VCs. It has been catch 22 scenario for me from Day.

You need clients first. Clients wouldn't buy without a product (unless you focus your effort on finding ways to convince, which means no time to build the business). Product cannot be developed without money. Hell, what can you do?

Bite the bullet and go for it! That's all one can do. (This would not be the case if I had number of ventures under my belt!!).

So we finished development in Mar 06 and has been testing and debugging eversince. We got few clients lined up and need few £££ before product launch. Again ideal for a business angels.

I am adapting a different strategy. I am hiring a VC (financed by a small regional grant) and working with a foreign bank (less risk-averse than the traditional hig street bank).

That's my story! The show must go on whether one has money or not.

posted on Monday, June 26, 2006 at 12:18 PM by Manoj Ranaweera

Apologies for the typos.

posted on Monday, June 26, 2006 at 12:20 PM by Manoj Ranaweera

Founders need more encouragement to bootstrap. This is a healthy mindset, to focus on producing rather than asking. It applies to every stage of a start up. Also, one should avoid making a rich angel richer unless you absolutely have to!!! :)

posted on Monday, June 26, 2006 at 1:51 PM by John

I used to entertain potential business angels. None of them commiteed to invest until there product and revenue were demonstrated (same conditions as VCs and banks). They fail to understand that if I am revenue generating, then I would not need their money. They tried to show how much their advice will help me, which I do not doubt. For this advice, they were expecting a return, which is only fair. I need more commitment from them with respect to timing of their investment, etc. They were extremely non committal. Perhaps this may be due to this venture being my first venture. But I do not like free riders!! I believe that if they truly believe in the business potential, then they should also be taking some risks. I fully understand that they may have other less risky opportunities. Rewards do reflect the risk.

Don’t get me wrong! I am still interested in speaking angels, but would not hunt them down as I have done before. I found that it is better to work with a selective few. Wish me luck – then again I am not a believer of luck. I believe you have to create an environment where opportunities can start to emerge! It is all in the timing!

posted on Monday, June 26, 2006 at 2:54 PM by Manoj Ranaweera

"even those like me that are not yachting in the Greek isles for 3 months a year"

I like your sense of humor, subtle and to the point.

Great stuff by the way ... I'll add the Startup School idea to the agenda. YCombinator asks struggling entrepreneur in very nonchalant way to go all the way to Stanford to attend their startup school and some actually do it!!!! I'd like to fix that ...



posted on Tuesday, June 27, 2006 at 6:31 AM by Marc

In the UK there is a reality TV show called Dragon's Den which is about people pitching their ideas to business angels. Judging from the show, the angels do sometime likes an 'idea', however they would the usually ask for a bigger slice of equity.

posted on Tuesday, June 27, 2006 at 9:50 AM by Perry Ismangil

I agree. I keep going to these networking events for entreprenuers and angels and the topic is always how to get funded. So many entreprenuers focus on raising money instead of buliding product and sales. Do things right and you will not have a problem. Definitely know what you will do if you cannot raise money -- ie. the bootstrap scenario. Proceed on that plan while you are looking.

It is much easier to get funded if you have a working product and revenues. It is easier than ever to get this far on your own dime. I got to first revenues spending about $30k of my own money which I made from consulting. Most of that was used to support a partner, full time, for a year. By the time I was tapped out personally and went for outside money, the business was an easy pitch. Still took me 3 months from start to close and it ended up being people who knew us all along. If you do not already know your likely investors, you will have a harder time of it. Cultivate relationships with successful entrepreneurs before you set out on your great idea. And don't stop networking once you are funded. You never know what will happen or what you will need down the road.

posted on Friday, June 30, 2006 at 5:53 PM by Steven

An informative article. Sure to help startups that are on the lookout for vc.  
I was under the msiconception that the investor had to like my idea. Looks like it's the other way round here.

posted on Wednesday, September 24, 2008 at 6:38 AM by Chris

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