Over the years of transitioning from an entrepreneur to an investor, I realized there is a great communication divide between entrepreneurs and investors. I was an entrepreneur starting, running, and raising capital for science and tech ventures for 11 years. When I was raising capital, I would hear, “we don’t like your valuation.” What I did not realize is that really meant, “I don’t think you have the right product-market fit to return my capital.” In retrospect, after working with investors for the last seven years, it seems obvious! But, that is the type of information investors use to deselect deals that rarely gets conveyed to an entrepreneur, who is left pondering what else he/she could have done to keep an investor engaged.
At Angel Capital Group, we tend to see between 500 and 1000 deals a year. We can’t possibly read 1000 business plans in a year. So, like all professional investors, we find ways to deselect ventures in 15 – 30 minutes, using heuristics, to winnow the field from 1000 to ~50 that we spend meaningful time researching, usually 2 – 4 hours to reduce the 50 to 8 – 12 ventures. We will spend 40 – 60 hours on these companies. We average 10 companies per year, which equates to 1% – 2% of the total deals we see in a year. And, we expect to spend 10 – 20 hours a month with the ones in which we invest for the life of the deal. I don’t believe anyone is telling entrepreneurs at the accelerator level that they are seeking business partners when seeking investment. Thus, the divide is created as expectations are not properly set to begin the conversation.
Every day we see entrepreneurs we simply can’t help because they are not ready for our diligence process yet, despite the overwhelming desire to do so. I wish we could become a source of education for entrepreneurs to help them succeed, but that unfortunately is not our roll or our business model. That is why accelerators were created, to educate entrepreneurs. We exist to invest in companies that are ready to scale their business, so we select for that characteristic. We would not be able to spend the required time with the entrepreneurs that fit our profile if we did otherwise.
Unfortunately, some entrepreneurs become defensive or despondent towards investors for this reason, believing they are “condescending” or “sanctimonious,” which simply is not the case in the vast majority of angel investors I know….and I know a lot of them. The truth is investors are bombarded by entrepreneurs asking for cash everywhere they go. It is hard for me to go to a coffee shop without getting pitched an idea, but that goes with the territory of leading an angel group. Angel investors’ attitude and demeanor are not born of arrogance. They are born of practicality! Good investors see too many deals and simply don’t have the time to dig into all of them. We generally have about 15 minutes to decide to dig in or pass. So, investors filter and focus…which is exactly what we tell entrepreneurs to do! Otherwise, we would never get any work done.
The truth is angel investors can only help the entrepreneurs that can help themselves AND fit the market/expertise/affinity profile of the investor or group/fund. Ever see the movie He is Just not that Into You? It is the same concept. Just because an investor does not like your deal does not necessarily mean it is not a good deal. It just does not fit his/her profile and they don’t want to waste your time. But, this is where the communication divide expands.
It may sound “sanctimonious,” but it is true. Most entrepreneurs don’t know how to communicate with investors, don’t do their homework in that respect, it shows within 15 minutes, and they are deselected with little feedback (> 75%). Many investors fear the defensive backlash from turning down entrepreneurs. Roughly 1 in 20 rejected entrepreneurs becomes belligerent if you give them real, actionable feedback. I know that sounds hard to believe, but I can tell you from personal experience it is so. And, it is prevalent enough that many investors simply rely on boilerplate language to reject a request for funding…the divide expands again.
Let’s face a cold, hard fact. Angel investing is a luxury for the investor class. It is not a “business” for the vast majority of investors. They do it because they enjoy it. And, it is a target-rich environment. Angel investors don’t need entrepreneurs, but entrepreneurs need investors to grow their businesses. Therein lies the crux!
The one thing I have learned is people invest in people in markets they like and understand. That is a big statement. An investor has to like you, like your market, and understand the market before he/she will invest. There is no reason to pitch an investor a food truck deal if he/she is a science and technology investor. It is a waste of your time and will generally receive a rebuff from an investor. And, entitled attitudes on the part of the entrepreneur violate the first premise of that statement – the investor has to like you. We are in effect becoming business partners. So, we all want to invest in people that we want to work with! Investors expect to contribute significant time and money to a venture, which is why we must like and understand you, your plan, and your market.
The reality is we say “no” vastly more than we say “yes.” That leaves entrepreneurs with the sense that we don’t care or are dismissive of their particular genius….and the divide expands. We are just executing our business model in the most direct fashion. It is not personal; it is pragmatic. The problem is expectations are not being set for both parties.
In all my years of entrepreneurship, I learned that the vast majority of entrepreneurs want to succeed. They want to be part of a high performing team. And, they want to satisfy their investor’s expectations, because in doing so, they create life-changing wealth for themselves. So, it is not that entrepreneurs don’t care, they just don’t seem to know where the bar is set to get high risk capital, and there are few sources of information that target this gap of knowledge. In all my years of working with investors, I learned that inside every great angel investor beats the heart of someone who genuinely wants to “give back” to aspiring entrepreneurs and to invest in companies that impact their community. So, it is not that investors don’t care. But, we know we are going to say “no” 98% of the time. So, we strive to give fast “yes’s” or “no’s” out of respect for the entrepreneur, which appears to be regularly misinterpreted….and the divide expands.
There are three major problems that need to be addressed. First, no one is telling entrepreneurs how to “talk” to investors. Entrepreneurs talk of opportunity; investors of risk. Entrepreneurs talk pitch deck; investors talk proforma. What results is investors sit back and wait for the few entrepreneurs that figure it out. That is often interpreted as arrogance or apathy, but it is neither. Investors really want to do more great deals, especially in our own backyards!
The second problem is no one is telling entrepreneurs how to become competitive in the larger market. If we invest in a company, but they can’t compete for resources outside their local region, then we are wasting time, money, and energy working with them. We would rather say “no” now and avoid the entire situation than struggle to save a lost cause. Sadly, we have learned these lessons the hard way, and our ability to perceive a failure pattern has been honed, which very likely contributes to the perception that investors don’t care. We have just learned hard lessons the hard way.
The third problem is entrepreneurs seem to feel that high risk capital is investor “mad money.” But, savvy investors know they have to make better than market returns, or it is a waste of their time. A good investment advisor can get you market returns with little to no effort on the investor’s part. The ONLY reason to get into angel investing is you can do the right thing AND make better than market returns.
The old days of spray n’ pray are gone…and the model never really worked except in a few concentrated locations, Silicon Valley (SV) being the most obvious one. And, it certainly does not work in the Heartland. We don’t have the density of capital, opportunity, entrepreneurs, or qualified mentors to make the SV model work. So, we have to focus on finding the right package of team, technology, and business acumen that is ready to scale before we engage. That is a TALL order! We have learned over and over again, it is not about being an angel optimist, it is about being an angel pragmatist. And, we have to remain fully engaged for the long hall. We have to be active investors, meaning we spend a lot of time with the few in which we invest…which means the bar is very set very high based simply on bandwidth. Jean Peters once said, “investing in a startup is more akin to adopting a puppy than to buying a lottery ticket.” That is not meant to sound condescending!
To address these problems, we have started the Mind of the Investor workshop to give us the ability to speak directly to investors AND entrepreneurs so they can understand why investors say “no,” and what entrepreneurs can do to get passed that “gatekeeper.” This workshop is designed to give entrepreneurs the playbook so they can use it to their advantage. And, it is designed to help communities understand the communications gap and to find ways to bridge it. Therein lies the solution and the impact. In most communities where we work now, we are creating angels and entrepreneurs from scratch to create ecosystems. And, this is the way we do it, set expectations for both and give them the tools to succeed, because that is what entrepreneurs do best – find ways to succeed.
Everywhere I go, I hear that the same thing, “the local angel group never invests in local deals.” This communication gap is part and parcel of the problem. If I am correct, it is a problem we can solve!
· Entrepreneurs sincerely want to succeed. Angels sincerely want to help entrepreneurs.
· Investors filter and focus just like you. Don’t take it personally. He/she is just not that into you.
· Angel Investors don’t need entrepreneurs, but entrepreneurs do need investors to grow their businesses.
· We are looking for the top 1% – 2% of ventures because that is the way our business model works.
· We are going to spend a lot of time with you once we invest so, we will become part of your team.
· Don’t be offended if we don’t call you back to answer questions that can be answered in the literature or online. We are already at capacity of bandwidth any given day.
· You only have 15 minutes to convince an investor to stay in the deal. Have a succinct, well-crafted executive summary or pitch deck ready and use your time wisely.
· Do your homework. Pitch an investor an idea that fits his/her profile.
· Learn to talk in the investor’s language
· Understand, the investor earned this money the hard way and will only part with it once he/she likes and understands you, your plan, and your market.
· Recognize this is a sales job! If you can’t sell me shares of your company, you probably can’t sell products or services.
· Recognize that you need to be competitive on a large scale (obviously by stage of your company) before an investor is going to invest.
Please check back again soon for the second in the series of the Mind of the Investor.
This was originally published under the Appalachian Regional Commission POWER Grant, PW-1835-M