5 Reasons An Angel Investor Will Walk From Your Deal

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5 Reasons An Angel Investor Will Walk From Your Deal

 

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?

Posted by Dharmesh Shah on Mon, Jul 25, 2011

COMMENTS

Great tips! I think it's notable that all of these recs are exactly what a entrepreneur should be doing when working with product customers. Think good customer relations is a formula for good angel relations?

posted on Monday, July 25, 2011 at 1:17 PM by Ash


Very apt observations that can come only from seasoned Angles like you. We are trying to earn investment for our venture and these points definitely help.  
 
I learnt one more aspect--keep your books, plans, strategy ready. The investors will ask these and will further work on these. Be prepared to answer questions that you do not like or have been keeping under carpet. The promoters should sort out the issues among themselves first instead of bringing these internal matters in front of investors. You should appear a strong united team focused on one goal.  
 

posted on Monday, July 25, 2011 at 10:01 PM by Bharat Lohani


Is it possible to apply these 5 points to investors ?

posted on Monday, July 25, 2011 at 10:23 PM by Adam Joyce


Sage advice! We are in the process of raising money and the point here are well taken 
David Robins 
CEO Binfire.com, Online Project Collaboration

posted on Tuesday, July 26, 2011 at 3:40 AM by David Robins


All this stuff seems like common sense. The good thing though is it's all hard to fake - I imagine there aren't many people who get the better of angel investors... 
 
I think for me, the worst thing would be the first one - essentially, not telling the truth, or knowingly concealing the truth... 
 
Thanks, Dan 
Confidence Coach

posted on Tuesday, July 26, 2011 at 4:12 AM by Dan O'Neil


Very good advice to start up and people who are looking at setting a new business. This is great advice to keep your investors interested in your business.

posted on Tuesday, July 26, 2011 at 8:13 AM by Eddie Gear


Great post. It seems to me that 3 of these 5 flaws (and arguably 4 out of 5 if you include flaw #2) are deficiencies with personality or character. 
 
And I think this might be a discussion that's often missed out on. There's a lot of talk about the specific steps that a successful entrepreneur must take, along with the various technical and soft skills he or she must possess, but there's a dearth of material that guides individuals towards the appropriate character. Character development has its own rewards outside of being a prime contributor towards successfully raising funding, and I believe that there should be a bigger focus on this issue. 
 
-Carl

posted on Tuesday, July 26, 2011 at 3:05 PM by Carl


Good timing and great post Ty!  
 
I literally just wrote a blog article that relates to #2 on your list - it's about Startups and avoiding the bullshit.  
 
I think startups are in a unique situation to be able to be brutally honest - something that I find to be sadly lacking as organizations tend to grow. They replace honesty and integrity with garbage statements that just reflect what others want to hear. Lame.  
 
#3 I think is also important and an interesting situation I find myself in. As a somewhat older founder with a baby on the way and a house and mortgage, I certainly can't live on ramen noodle salary. That said, i don't mind taking a significant pay cut to get the company going and set the example that way - but I do have to make ends meet. There is definitely a fine line there. I wonder about whether investors in general take into account various founders personal situations when determining what a reasonable startup salary is (if any).  
 
Nick Reuter 
CEO, TotalTab

posted on Wednesday, July 27, 2011 at 9:14 AM by TotalTab


it all boils down to good old fashioned, honest business. know what you are trying to sell, be realistic in projections, and basically don't BS people. Including yourself!

posted on Friday, July 29, 2011 at 12:20 PM by Greg Carbone


At Merar we believe that this article is great. At the same time will distribute it to our members who post their investment projects on the network. 
 
Too pity there is so much spam in the comments.

posted on Monday, August 01, 2011 at 9:19 AM by Investment Network Merar


These advices looks great and i definitely agree that these five points should be kept in mind while working for your project especially the one where you should listen to them properly and then answer them.. though i always had this question in my mind, IF YOU AREN'T ABLE TO ANSWER SOME QUESTIONS OF INVESTORS DOES IT BRING A BAD RAPPORT TO U AND WILL IT BE ANOTHER POINT FOR INVESTORS TO THINK TWICE FOR THE PROPOSAL?? COZ I DON'T THINK EVERYONE CAN ANSWER EVERY QUESTION, THERE IS A LOW POINT FOR EVERY ENTREPRENEUR...

posted on Monday, August 01, 2011 at 9:50 AM by Pallav Kaushish


I recently joined Angel List. I am honest ethical and have spent three years working on a test site and proven my concept made money and now have developed a wire frame that is a trillion dollar business plan and wire frame document. I have the best business in the world right hear in my hands with all the work and heart blood sweat and tears I expect to be treated with some compassion. I am honest ethical truthful decent and passionate I go an angel list straight away a con artist starts trying to suck my brain then abuses me. I google his name and some entrepeneur has warned everyone about this man..and he is on there when will there be some protection on these supposed great sites. The damage these people do means by the time you find a decent VC you are destroyed or at a minimum demotiaved.. very very disapponting you have to go through so much to talk with people who have been fortunate and yet dont worry about those of us who are doing everything right and can only get negative & damaging experiences.

posted on Tuesday, August 09, 2011 at 8:16 AM by Melissa Burrows


Great article. There are many more reasons angels or VCs will walk from a deal, obviously, but character "flaws" with a founder are the hardest to fix (and the hardest for an investor to communicate back to the entrepreneur).

posted on Friday, August 12, 2011 at 9:44 AM by Dov Rosenberg


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posted on Tuesday, September 06, 2011 at 12:34 AM by Canada Goose Outlet


IT BE ANOTHER POINT FOR INVESTORS TO THINK TWICE FOR THE PROPOSAL?? COZ I DON'T THINK EVERYONE CAN ANSWER EVERY QUESTION, THERE IS A LOW POINT FOR EVERY ENTREPRENEUR...

posted on Wednesday, September 07, 2011 at 8:14 PM by


I google his name and some entrepeneur has warned everyone about this man..and he is on there when will there be some protection on these supposed great sites. The damage these people do means by the time you find a decent VC you are destroyed or at a minimum demotiaved.. very very disapponting you have to go through so much to talk with people who have been fortunate and yet dont worry about those of us who are doing everything right and can only get negative & damaging experiences.

posted on Wednesday, September 07, 2011 at 8:28 PM by disapponting


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