I recently attended an Angel investors group in Vancouver. It’s fascinating to hang out with a bunch of zillionaires for the day and listen to startup pitchers trying to wrestle money from them. The Keuretsu Forum is based in Seattle and with over 2500 accredited investors is the largest investor network in the world. The great thing about Keuretsu investors is that they regularly come to Vancouver to meet with startup entrepreneurs at the Vancouver chapter. They are well known for sharing opportunities with three or more chapters in different cities in order to close a deal.
Mike Volker, a well-known investor who is also part of the Vantec community, runs the Vancouver Chapter, founded in 2012. VANTEC has provided investors with a steady flow of pre-vetted investment opportunities since 1999. More than 1,000 startups have pitched their investment opportunity with 50% of them raising Angel funding. The average amount of angel capital raised in this chapter is $250,000.
Of course, while networking at these forums, the talk is always about finance, cool projects they have found and new deals they would like to share with the rest of us. It’s funny to be in a room of a couple hundred high net-worth investors who have no pretense and are a very unassuming bunch. I felt like I had gathered for a presentation at a MLM venue without the hype.
These multimillionaires looked like average folk that I am sure added some sense of relief to the five entrepreneurs who did their 20 -minute pitches. Having said that, with startup entrepreneurs expecting to wow them, I wonder when they are looking at an Angel for investment they realize that these angels are using their own money, not monopoly money. It sometimes feels that way with nothing actually changing hands at the event.
A typical Angel might be invested in 10 or so projects with some risk, but not enough to ‘take them down’. The usual pitch at these forums is for between $200k – $2M with the upper limited shared by more than one angel. Some may invest in upwards of 30 projects with the assumption they will ‘average down’ and have a big win with one company. They get the same excitement that some of you get playing penny stock or in an odd way, shopping at flea markets – you never know what to expect and what deals can be had.
One of the conversations that is universal and always comes up is the naiveté or lack of knowledge startup founders have when dealing with angel investors in this environment.
1. Not Listening – A colleague and I met with a founder and his team and from the beginning it was all about them. We could hardly get a word in, and when we did they changed the topic. It was like they had a script, and golly they were going to stick to it. Funny – didn’t they come to us for money? It certainly shows their lack of experience.
2. Exaggerated Cash Needs – One guy approached us and said he had brisk sales on an upward trend and needed $500k for ‘the next level’. In his mind, the next level was a company car, new offices and an ill-advised, unrealistic, fancy marketing campaign! Investors love to be told the startup is in ‘bootstrap’ mode and money will be allocated to activities that actually raise the profile of the company and generate sales.
3. Ridiculous Cash Demands – A guy pitched me to invest in his tech company that had been running for a year with no revenues. He said he needed between $1 and $2 million. Flabbergasted, I asked him whether it was “one or two million”. With a straight face he said he would prefer $2 million as he missed giving his team annual bonuses last year and he should have topped off his own salary last quarter but didn’t. With the extra money he would make those amends. WHAT? Remember the word bootstrap.
4. Advice – It never ceases to amaze me, but you just have to watch an episode of Dragon’s Den or Shark Tank to see how people react to constructive criticism even after they have pitched their idea and ask for feedback. They don’t really want to hear negative feedback. They have convinced (or maybe brainwashed) themselves so completely that what they have is so incredible that any feedback is rejected. It’s as if there was some intent on the investor to ruin them in their mind or the investor must be nuts for not pulling out his checkbook.
5. Projected Demographics – One ‘non-client’ came to me with a business plan, of sorts. His product was an online service for actors. His first line was, “there are eight billion people in the world, with five billion having computers; that is my market”. WHAT? Without a serious, in-depth focus on your customers’ demographics and psychometrics (Lean Canvas calls it Persona) you won’t have a hope of raising capital from anyone I know.
6. Inflated Sales – I will never forget a young woman coming into my office telling me she needed money to open a daycare. She projected $1 million in sales the first year. Hmmm. When I pointed out she would need a warehouse the size of a football field to manage about 150 children per month to make that money, she said she had a place picked out. She did – a huge warehouse in the industrial part of town that could be picked up cheap and renovated for peanuts.
A typical daycare in Vancouver may have a maximum of 7 children. Would you want your child in that warehouse daycare? It makes you wonder if people ever ask for outside assistance before coming up with such audacious projections.
These are just some of the silly things startup entrepreneurs do on a regular basis. I wonder when they are approaching their family and friends in the traditional first round of financing are they being honest with each other? Who vets these business owners? We will always look at an entrepreneur’s pitch, and yes; we will be honest with an assessment. You never know when the next Facebook (FB) orApple (AAPL) iPhone will come to your door. However, planning and strategy is important on the part of the entrepreneur seeking capital. After all, time is our most important commodity, and I don’t want to waste yours or ours.
Originally published on Equities