Lean Start Up Methodology – the new litmus for investment capital

For the experienced angel investors who have cut their teeth on risky investment in ideas and visions, the popularity of the “Lean Start Up Methodology” as a way to start and grow a company may seem revolutionary and the latest craze.  For those business savvy men and women who believe in validating a product and market opportunity before spending R&D money or investing in capital infrastructure, the premise behind the “Lean Start UP Methodology is actually quite logical and practical.

For all those investors who ever thought angel investors were crazy for investing in companies whose only measure of success was how many clicks, or likes, or free users they could attract, there is a saner way to gain the benefits of investing in companies before they go public.  Early stage investors that hale from corporate America and understand the value of strategic planning now can venture into the world of early stage companies who still have relatively low valuations, but mitigate that risk because the company actually knows there is a market for their product and a demand for their product before they ever go to market.   Emerging Growth companies that have grown organically inherently utilize the market validation process of the Lean Start Up Methodology because revenues have been their source of growth capital.

In the Podcast “Business Strategies for Success – Attracting Capital & Customers” http://www.blogtalkradio.com/karen-rands/2014/09/23/business-strategies-for-success–attracting-capital-and-customers

Paul Hoyt and Karen Rands explore the importance and differences between a Business Plan and a Business Strategic Plan.   A business plan is more like a brochure to describe the business, where the strategic plan is a blueprint to be a road map for how the company will succeed in the marketplace.   When looking at a company to consider for investment, the executive summary introduces you to the opportunity at a high level, the business plan provides more detail about the direction and potential, but the strategic plan will show how they plan to actually get that point of success.   Often times the strategic plan is saved until due diligence starts.

Companies at different stages may have varying levels of completeness of a strategic plan.  Start ups simply don’t know enough information to have a great detail in their strategic plan whereas emerging growth companies with a history of performance leads to shifts or pivots in their strategy on how they need to adjust the plan to achieve the results they want and best utilize the capital they are raising.   Regardless of the stage, the company should have some form of a strategic plan that shows how they will use the funds to ramp up staff, implement marketing plans, enhance operations, and increase sales.

The Lean Start up Methodology in effect creates a corporate environment that is living the market responsive strategic plan.  Fundamentally it is an approach that embraces improvising, adapting and implementing – measure and repeat.

Check Out Entrepreneur Podcasts at Blog Talk Radio with Karen Rands on BlogTalkRadio

 

For more information about Paul Hoyt and his Beyond Business Services visit http://paulhoyt.com
For more information about Kugarand Capital Holdings and the educational programs for investors and the due diligence portal for emerging growth companies, visit http://kugarand.com

Compassionate Capitalist – Angel Investing When You Don’t Have Cash on Hand

Often I’ll hear investors say “That company has real potential.  I wish I had the cash to invest. My money is tied up in….”.

An investor’s cash can be tied up in real estate, traditional portfolio of stock, mutual funds, and bonds and/or 401K or IRA.   Investment real estate isn’t considered liquid because it is either income producing or a long term strategic location.  Although public stock can be sold at the investors request at any time, often an investor won’t want to sell their stocks for many reasons.   It could be that they are waiting for a period of ownership to pass to minimize capital gain taxes, or they are waiting for a market response to announcements that would increase the value of that stock.   Many other traditional portfolio holdings may have a longer holding period before they can be liquidated without penalty.  Furthermore, 401K/IRAs are generally considered to be illiquid because of tax penalties associated with the withdrawal of funds.

However, there are two ways that these investments can be used to make investments in private companies, with certain caveats.

  1. Self- Directed IRA:  By definition, the Self Directed IRA is an IRA that allows the account owner to direct the account trustee to make a broader range of investments than other types of IRAs.  The custodian of a self-directed IRA may offer a selection of standard asset types that the account owner can select to invest in, such as stocks, bonds, and mutual funds, but, by definition, permits the account owner to make other types of investments, including loans. The range of permissible investments is broad but regulated by the IRS.  Mostly the IRS regulates what an investor cannot invest in and leaves the “what can invest in” open ended.   For our purposes regarding private companies, here are the restrictions:
  • Not intangibles : art, alcohol, gems, collectables
  • Not an entity that is more than 50% owned by  the service provider who manages your IRA
  • Nor a partner or JT venture that is 10% or more with an entity that is 50% or more held by the service provider.

For more information regarding Self Directed IRAs, here are two good sources:
http://en.wikipedia.org/wiki/Self-directed_IRA

http://cdn2.hubspot.net/hub/319644/file-395650388-pdf/Email-Attachments/Article_Top10Mistakes.pdf?t=1386019713000&t=1386019713000&t=1386019713000

2. Portfolio Margin Loan:  Margin loans on an investment portfolio have long been used by sophisticated investors with high risk thresholds to expand their investment portfolio by borrowing against the value of a stock in order to purchase another stock that they believe they can profit from before they need to repay the loan.  Taking a margin loan out in order to purchase a private non-traded stock is not as common.   Only a few investment advisory firms have provisions for such uses of a margin loan.  Similarly only a few firms have provisions for securing a margin loan for personal use.   Investors that have substantial portfolio holdings and want to consider use of this asset to facilitate an investment in a private company should inquire about restrictions their advisory firm has on the use of margin loans.   There are  3 ways a margin loan may be used to finance an early stage company:

  •  Margin Loan on existing portfolio to directly invest in a direct public offering.
  • Margin Loan as a personal line of credit with authorized use by the CFO of the target company.
  • Margin Loan with the cash extracted as one time loan.  The investor can then provide that capital in a form of a note with warrants or as a convertible note to the company.

More info on Margin Loans: http://en.wikipedia.org/wiki/Margin_%28finance%29

Sample Rates: http://www.schwab.com/public/schwab/investing/accounts_products/investment/margin_accounts

What the SEC has to say: http://www.sec.gov/investor/pubs/margin.htm

Managing the High Risk

Using debt to finance an early stage company is highly risky.  Most often, if a payment is required, it is an interest only payment based on the loan rate and the principal loan balance.   If the margin loan remains in good standing and the portfolio retains or grows in value, the investor is unlikely to have a “margin call” where they must pay down a portion of the outstanding loan balance.  The typical margin loan cannot exceed 50% of the value of the portfolio and are closely monitored the relationship of the margin loan to the total value of the holdings.

Using a self-directed IRA to purchase non-trading private stock is very risky simply because no one can ever actually predict the success and how much success an early stage or emerging growth company may have.   You cannot declare any capital losses if the company does go out of business.

Given the odds of using all of the investment amount, and having little to no recourse, this strategy should only be employed when the investor has a high level of confidence the company will succeed or the investment vehicle would be a revenue producing structure (see Investing for Residual Income Blog Post).   Consider these precautions when considering using either of these “illiquid” investment holdings to finance, either through debt or equity, a private company:

  1. Do the mental exercise….what if you lost the investment?  Would you be disappointed or devastated?   Disappointed is OK.  Devastated? – Then don’t invest.
  2. Company should be in revenue with a respectable back log of trailing revenue.  In the case of the Margin Loan, you could be the “private banker” to finance a transaction so the time the money is required is shorter than a straight equity investment.
  3. The management must have experience in running a company previously so you have a reasonable expectation that they know what to do to generate revenue and make operational corrections as needed to ensure continued growth.   You can’t afford to babysit or for them to get a life lesson on your nickel.
  4. Ensure they are compliant in every way with the SEC.   This includes legally reviewed offering memorandums, not paying finder commissions, and any registrations required with the state that you reside when making the investment.

 Summary

If you have been making an income that would qualify you as an accredited investor ($250,000 personally), then it is likely you have accumulated a portfolio and/or a 401K that is worth over a million dollars. You may have heard about “angel investing” but didn’t think you could participate because you simply were not liquid enough and you didn’t know much about how to make that investment because your Financial Advisor or Wealth Manager never talks about private offerings.  In the Podcast I go into some of the regulatory and market reasons for this: Listen Now. Typically only a Registered Investment Adviser who is not paid a commission on the placement of investments will explore how a high net worth investor could uses existing holdings to make investments in private companies.

Karen Rands, Host of the Compassionate Capitalist show, explored these two ways to make investments into private companies when an investor doesn’t have cash on hand but has ample accumulated wealth.

Listen to the replay:  http://www.blogtalkradio.com/karen-rands/2014/04/22/compassionate-capitalist–angel-investing-when-you-dont-have-cash

Sign up for all the news and learning opportunities….be a part of the new generation of sophisticated investors seeking to include private equity into their wealth creation strategy:

National Network of Angel Investors member site:

Join us on Twitter:                        and Facebook

 

 

What Motivates an Angel Investor to Join an Investment Group?

Compassionate Capitalist Talk Radio: Each angel investor group offers different benefits to high networth individuals that understand the benefit of investing in early stage companies. Understanding their motivation helps entrepreneurs decide which groups to pursue as help those building angel groups understand how to attract members.

Investors will join a group for the community and social aspect as much as the business purposes.   For business purposes it is to see better deal flow, share the burden of due diligence, and have greater leverage in negotiating the terms on the deal.   Investors need to understand the structure of a group they are joining.  In some groups they all make individual decisions and others they make group decisions.   In some groups they pool their funds and have capital calls, and so the investor is very passive in the decision process but can add on their funds.   Investors wanting to join a group should understand these aspects of a group and any entrepreneur preparing to present to a group should find out what their decision process is all about.  

This radio show, podcast, explores the different types of groups and the motivations for angels that join those groups, and also what entrepreneurs should expect when pitching or meeting with those groups.

Listen Now!

Check out these investment websites: www.kugarandholdings.com, www.angelinvesting101.com, www.NationalNetorkofAngelInvestors.com

Why is Angel Investing such a Mystery to Wealthy People?

Interestingly enough, if you were to ask the average millionaire that you encountered on the street (not that any millionaires are actually average) their thoughts on entrepreneurship, capitalism, and creating wealth; you would likely get comments such as the following:

“Entrepreneurs are the backbone of our society. They create jobs and bring innovation to the market.”

“It is only in creating wealth that anything gets done or paid for.”

“I’d rather give my money to an entrepreneur with half a brain and the gumption to go out and do something with it, than some government empty suit that is just going to give it away. ”

“The people who solve problems make the biggest bucks.”

“Buy low and sell high!”

“The free market – capitalism – gives you personal freedom – to choose your future destiny.”

“I seek to invest my money where I can get a return on investment…the greatest reward relative to the risk.”

So with thoughts and feelings like this, what keeps millionaires with the capital on hand to make alternative investments and invest in early stage private equity opportunities?  It is estimated that 10% of the American population has the means to qualify as an accredited investor, that translates to millions of potential investors, yet only a few hundred thousand participate in angel investor type deals.

Our investigative team has determined that the very regulations intended to keep fraud out of the process and protect high net worth individuals is actually creating a situation where misinformation abounds.   Further, greed and fear actually limit the free market access to information about investment opportunities into private companies these potential investors should have to be able to become “angel investors”.

The Securities and Exchange Commission (SEC) regulates the sale of securities.   What this means is that for entrepreneurs to be compliant in their sales of equity in their company, they must adhere to rules regarding selling those securities as a non-public company.

1. General rule of thumb is that they sell to only accredited investors, with a few exceptions.

2. They must provide documents that clearly state the risk, typically in a Private Placement Memorandum

3. They cannot do a public solicitation through an online posting, email blast, advertisement or anything that will offer the security to the public and therefore they must have pre-knowledge of the investor, or if they work through a licensed broker the broker can sell their security on their behalf.

4.  If they are to pay a commission for the sale of that security, they can only do that with a licensed broker, with few exceptions.

This leads into the Broker side of the equation which is regulated by FINRA.  FINRA, the Financial Industry Regulatory Authority, is the largest independent securities regulator in the US whose chief role is to protect investors by maintaining the fairness of the US capital market.  They regulate the brokers that are authorized to sell and take a commission on private placement opportunities.  Typically brokers/dealers charge large upfront fees and large back-end fees for the sale, and assuming the liability, of selling that security.  They have a due diligence fee, retainer, commission and stock options. To justify those fees, they typically want to work with companies that are raising $5M or more and have revenues to manage to the upfront fee, or have cash on hand from their friends and family round of financing.

Broker/Dealers (BD) often have affiliate brokers, financial planners etc, that hang their license with them.   The brokers, according to the FINRA guidelines, create fear with these affiliate brokers if they are caught “Selling Away”.   So if an affiliate broker sells anything to their clients, the people whose money they are managing, that is not offered and approved by the managing BD, then it is considered selling away from the brokerage.

What Does Selling Away Mean?
When a broker solicits you to purchase securities not held or offered by the brokerage firm. As a general rule, such activities are a violation of securities regulations.
Investopedia Says
Investopedia explains Selling Away
Typically, when a broker is “selling away,” the investments are in the form of private placements or other non-public investments.

On the surface this is all good because the investor only gets products, securities, investment vehicles that have been fully vetted by the brokerage house.   They sleep well at night believing that they have placed their money in solid investment vehicles, whether private or public offerings, they really don’t focus on the difference.

As with any private equity transaction, this does not guarantee that they will not lose money in that investment.  We’ve seen that all over the place even in reputable firms like Stanford or in public stocks like Enron.

But in reality, how this plays out is that the Broker will only promote private offerings that they are being paid to promote.   And investors that want to participate in angel investing, want to “own a piece of a company” don’t get the benefit of having their financial counsel to help them  in evaluating the deal, they don’t get quality deal flow from other sources, and they don’t gain insight into how to make wise investment decisions in that area and manage to the tax implications on the return on investment.

Not all high net worth individuals think of investing in private companies as “angel investing”.  If they are readers of Robert Kiyosaki’s books (Rich Dad, Poor Dad or Cashflow Quadrant) then they likely are working on their financial IQ and working toward being Business Owners and Investors so that their money works for them rather than working for their money.   Angel investing in effect is the entire scope of the right side quadrant….business ownership through investing in private businesses.  Yes you have the greatest likelihood to lose all the money invested in an early stage private company, but you also have the potential for greatest return on investment.   Private equity investing at the early stage produces greater returns than real estate or stocks or any other asset class.

Angel Investing has the potential to create more wealth than any other asset class…at multiple levels.  It can create wealth for the investor that directly invests.   It creates wealth for the entrepreneur that is bringing the product to market and building a successful company.  It creates wealth for the newly hired employees in their earned income.   It creates wealth for all the businesses along the supply chain that service the company, build the products, and so on.

On the other hand, most real estate investment only creates wealth for the seller and those that assisted in the sale and the investor who gets a return from rental income or the upside when it is sold the next time.  Public stock investment doesn’t create wealth for anyone except for the person who is able to sell the stock for more than they paid for it.  There is a commission paid to the broker for handling the transaction.  The money used to buy public stocks doesn’t go into the company’s coffers to invest in R&D or hire new people, it goes to the seller of the stock.

So for those millionaires that “get it”….there isn’t a lot of guidance on how to determine if an early stage private equity opportunity is a good investment nor how to decipher the terms of the investment and if the return on investment will come in the best format for the tax implications and so on for that investor’s overall investment strategy.   The tax implications from a convertible note that has accumulated interest may be different from an investment that shared in the revenue (and losses) of a company; the investment made as a straight purchase of equity that is held for 18 months vs one that is held for 5 years.  And what would the impact be if you purchased the equity through your self directed 401K or as an investment made through a ROTH IRA.

Entrepreneurs that think they are doing the right thing, creating a PPM that even allows for a broker commission and only selling securities to accredited investment has NO idea that a whole source of potential investors are not available to them, actually blocked from them getting access to them.   It is crazy to think they would go to one broker to get access to their investors, pay the fees, then go to another one, pay their fees, and so on.   They typically will work with one broker for a while and then forge out on their own trying to find the individual investors.   If they go the broker route, they typically can’t go back and work with angel groups because the structure of the stock offering is set in stone.   The greed of the brokers won’t let the entrepreneur just pay the broker a commission or to have the affiliated broker take it to one or two of their high net worth clients that have expressed an interest private placement opportunities.   And because of the fear that the affiliate broker has in losing their license if they are accused of “selling away”, they won’t even tell the client about the investment opportunity and NOT take a commission.   When the licensed financial adviser knows the client wants to make real estate investments or buy a franchise, they will refer them to a source for those deals and help them to understand the implications on their financial diversification and asset allocation, and any tax and estate implications.  They don’t collect a commission, they don’t think of this as selling away, they think of it as providing full service to their client based on the client’s interest in different investment options.

So what is the solution?

For investors, that want to be involved in angel investing and they don’t have the benefit counsel from their investment adviser they should do the following:

  1. Buy the series Learn to Be an Angel Investor…it is concise look at the history, process and structure for angel investing taken from 5 years of working with successful investors and their secrets to success and countless industry reference materials. 5 books, or one compiled “Secrets….”
  2. As part of the Compassionate Capitalist Radio Show where Karen Rands revealed the insights gained recently on why so many wealthy people don’t know about or participate in angel investing. Podcast file is include in this posting….

  3. Form a team of advisers that will help you and protect you…this includes a lawyer accountant and financial planner/wealth manager.  They should all have made angel investments in the past or at least counseled others in that arena, either entrepreneurs or investors in early stage capital.
  4. Attend a seminar that can teach you how to be an angel investor or be a better one if you have not achieved the results you hoped for in your previous investments. 

The “Freudian” perspective on Angel Investing

Becoming an “angel investor” is not for the faint of heart.   It isn’t quite as exciting as jumping out of plane at 40,000 feet or hang gliding off a cliff at 3000 feet, but when it comes to knowingly entering into an investment that by its very nature has the potential to lose every penny of your hard earned cash… that takes guts.   So here is what one needs to understand about the men and women who boldly go where mere real estate and stock market investor don’t dare to go.  Of Freud had been around during the Dot.Com bubble and the latest up/down of angel investment,  he may have applied his theories of the Id, Ego, and SuperEgo in this way.

The  motivation for sophisticated affluent men and women to become angel investors or as some might label them, early stage venture capitalist is driven fundamentally deep within to face the risk in pursuit of a perceived big reward.   The thrill seeker who jumps of a cliff to fly through the air, does so knowing there is risk, but the reward, the thrill, the adrenaline, the sense of accomplishment, the oohs and aahs of their peers that see their success….all triggers the desire to face known risk.   Becoming an Angel Investor can be compared when viewed through the Freudian theory of development.

  1. Investor Id:  What does the Id care about?  ME, ME, ME….so in the realm of money, that translates to greed—What is in it for ME. So these these folks will take the risk because it has the potential biggest return on investment and the only asset class that actually has potential to provide multiples on money within a decade of the investment.   And the bragging rights of being in some hot new thing doesn’t hurt.  Whether on the golf course or over cocktails talking about breakthrough in technology,  “Sure, about a year ago I invested in a little company that does Y” or is in a popular magazine for doing X….”Oh ya, I have some of the equity in that company…. got it for a song as an early investor.”
  2. Investor Ego:  This is where the pragmatic hat goes on and even though the investor wants to make all the money and negotiate all kind of terms to guarantee that, they realize that the CEOs need to be motivated, and there needs to be room for other investors to come on and follow on investors.   So instead of mitigating risk based on onerous terms, they will seek to invest in deals that inherently have some of the risk removed because the company has been validated.   This is where the real RISK vs REWARD trade off come.  “Without a more experienced management team to ensure you can execute, I will require a board seat.”
  3. Investor SUPEREgo:  This is where an investor become a “Compassionate Capitalist”.  Usually, only the most advanced investors reach this stage.   They have made so much money from their own entrepreneurial endeavors and from their past angel investments, that the can “afford” to be generous with their investment into entrepreneurs.   They know that many of their investments will fail and they go ahead because they really want to see that innovation get to market or to give that entrepreneur a chance to succeed because they can see the spark.   They have confidence that some percentage of their investment will hit payload and make up for everything they have lost previously.   They have pursued their professional hobby of investing with zeal by learning by doing and learning from others, so that their Financial IQ is top of the game.

Unfortunately, for those that jump in at the Id stage, they sometimes never get to the other stages of advancement because they make a poor investment, lose a lot of money, and decide to stick with the much more predictable stock market and real estate.   This is why education for investors at that very early stage of their exploring angel investing is so important.

Angel investing is the only type of asset class that the investor can’t get advice from their financial planner or wealth manager regarding.   SEC will fine that trusted adviser and potentially even pull their license if they find out they advised them on a private equity investment…..or so that adviser thinks.   It really only happens if they take a commission on the transaction and does not run it through their broker dealer.   Nonetheless, most often the case is that the investor can’t sign up for weekend class, has to drudge through book written like college text books or learn by doing which early on means learn by losing.

Fortunately, as the angel investor industry has gotten more and more successful and sophisticated, the industry has taken it upon themselves to begin offering education for investors.  We have seen large conferences being offered in Boston and San Francisco.  With the advent of Georgia passing their own Angel Investor Tax Credit to encourage sophisticated investors to put money into early stage private companies, there have been an uptick in education being offered in Atlanta. Other states offer tax credits and subsequently education.

We have long been a source for investor education through our email newsletter and our “Inside Secrets to Angel Investing”. Excerpts are available when you optin. Information is available about the book and the limited time offer with 6 bonuses at http://angelinvesting101.com

How do Angel Investors Find Deals?

Within the traditional private equity investment model, you start the evaluation process with an introduction. This leads to further evaluation and a commitment of time on the part of the investor to really get to know the management team and to learn a great deal about the business at hand. The due diligence phase and negotiation of investment terms follows, leading to the consummation of the investment.

Introduction Phase

An introduction can come from many different sources, each of which has its pluses and minuses.

Friends and Family Entrepreneurs are encouraged to pursue seed funding through “friends and family.” It is a generally accepted premise that the people most likely to provide seed capital are those who have some connection with the founders or key management of the company. Someone familiar with the founder(s) and management team will consider subjective factors such as work ethic, experience and character as part of the decision to invest in the company. Generally, they are making a subjective decision and want to find reason to invest rather than not invest.  On the other hand, a “stranger” to the founders and management team will rely much more on the business plan and financial statements as the basis for his/her decision.  They will be in more of a position to make an “objective” decision and decide to invest based on the business merits. Since they are considering many opportunities at one time, they will look for flaws that will be the cause of them to pass on the investment.

IntermediaryIf you are a serious investor who is or intends to be in the business of investing, you will increasingly rely on intermediaries and advisors to screen deals and assist with the due diligence and minimize the subjective, emotional part of the decision.  An intermediary may be a lawyer, consultant or other professional service provider. The capital seeker may choose a lawyer who is perceived to have access to funding sources as part of the “value add” for working with that law firm. Similarly, a consultant or other professional, who may be engaged to develop a sales strategy, financial models or any other aspect of building a company that can be outsourced, may offer to help in the funding process, as a value add. If you are introduced to the company through this type of resource, you can use your knowledge of that resource, the caliber of work he/she provides, his/her trustworthiness, your knowledge of his/her other clients, etc., which provides better knowledge from which to proceed in your evaluation of a particular private equity opportunity.

Deal Events: Sort of like speed dating for investors, fast pitch events are popping up all over. A room full of investors get to get a snapshot of what a company is all about in 90 seconds.  From there they are to make a decision to track down that company and make an appointment to see them.  For most investors, it is simply entertainment.  For the entrepreneurs it is a way to begin to create the buzz so that when a trusted intermediary or friend makes an introduction in the future, the investor can at least say… “you know I think I saw you at XY event.”

Venture Conferences on the other hand give a company an opportunity to take 10-15 minutes to describe their opportunity in greater detail.  Investors usually take the first 90 seconds to decide if they want to listen for the next 10 minutes, and in that time to decide to they spend another hour with the company or not.

GroupThink: Investors that are serious about angel investing, but may not have the resources to do the full evaluation on their own or value the input of others from other walks of life, experiences and knowledge of deal making, find value in joining an angel group.  Although there is usually a large ticket price to participate, they get the value of saving time and money in developing deal flow and in the initial vetting of the deal.   The group usually has a screening process to weed out the non-starters from the ones with some wings to fly.

WHY be an Angel Investor: High Networth men and women decide to get involved in angel investing for a variety of reasons…

1. personal success in building a company or being a part of a successful exit in a company gives them the burning desire to help another company succeed and participate in that process.

2. greed and desire to create untold wealth can only be realized through entrepreneurship and they realize they increase their odds by owning a piece of multiple companies that have the potential to be BIG rather than putting all their money and efforts into one dog that may or many not hunt at the end of the day.

Biggest RoadBlock for the Passive Investor: Ironically, although the SEC has a mission to protect investors by regulating the how information is shared by public companies when investors need to decide to buy that stock and by private companies in the information they are required to provide to communicate the inherent risk involved in making that investment.   Reality is that for the high networth person that has moved in sophistication beyond real estate investing or trading on options and creative margin trading in the public markets, or just wants to diversify into private equity investing as an asset class, they are VERY limited on who they can go to to get needed counsel on finding good deals and vetting those deals.   The person they have trusted to manage their money on the stock market, IRA, and retirement planning,  has been told by the SEC:  DO NOT advise your client on private equity transactions unless you personally stand to gain financially for that trade by collecting 5% or 10% of the money the investor invests.  And if we find out that you have been providing advice to your client about angel investment opportunities to help them protect their overall portfolio, then we will call that Selling Away and revoke your license and ability to make a living in your chosen field of work.

Learn more about that specific topic with this informative podcast:

Next Steps:

After the deal has been identified, then the courtship begins.   This is when you get to know the management, begin due diligence to determine if all they say is true or has merit.  Ultimately an investor decides to marry the deal because there are like minds, belief in success and the terms match the requirements of the investor from a long term wealth creation and preservation.

More info on the process of becoming an angel investor can be found at:

How to Be an Angel Investor

To get more content on this topic and to learn how to RUN with the BIG Dogs when it comes to building big companies, join the facebook community Business-Investor-Grow

Selecting The Right Employees and Building Strategic Partnerships Wisely

Karen Rands, during her Compassionate Capitalism show will engage her featured guests on a topic important to all start up and growing companies. When a start-up founder realizes he or her needs to build a team, bring on expertise to compliment their own skills how can they identify those people, confirm they will enhance their business and at the same time, protect the business they founded. They need to know what skills are needed on his/her team, identify the right resource, then negotiate for that person to join the company and protecting the company long term.

This is important for investors considering an investment in a private company.   When a company first starts out, they have limited resources and limited management structure, but as the organization grows, they add people, skills, resources.   Building effective teams and the leadership of those running the company is critical to the company’s success.   In the case of a key person coming on board, either as an active investor — an “Exec with a Check”, or when a key resource is brought in that may share in the equity as part of their compensation, it becomes all that more critical to make sure that there is a good mix for the personalities and to protect the company legally in the event it doesn’t work out as planned.

Guests are Kenneth Darryl Brown of E3C (www.BetterSalesandProfitsNow.com) and Hugh Massie, CEO of DNA Behavior (www.BusinessDNAResources.com) to discuss how a CEO can learn about their leadership and communication strengths and understand what to look for in potential team members. Bob Van Rossum, President of MarketPro, (www.marketproinc.com) the nation’s leading executive search and contract staffing agency specifically focused on marketing, interactive, creative and advertising talent will discuss identifying and qualifying a potential candidate for the management team. Glenn Garnes, Relationship Marketing Center, will discuss protecting your interests when bringing on partners…the subject of his new book:”Let’s Not Be Partners, Things you Must Do Before You Tie the Knot (“not”). Sure to be a dynamic show for all aspiring entrepreneurs.

Listen Now!

Check out these investment websites: Karen’s twitter page: @Karen_Rands, www.kugarandholdings.com, www.launchfn.com, www.nbai.net, www.kyrmedia.com,  www.entrepreneurblogspace.com and www.dothedeal.org

Listen, Learn, Enjoy and Share with a Business Associate!

Building the Perfect Board To Attract Investors!

Board of Advisors and Directors can be critical to the success of a company…in attracting investors and maintaining investor confidence.

In this recorded replay of the SPEC Talk Radio Segment: Building the Perfect Board to Attract Investors, we’ll hear from experts in this field. Famed Author, Calvin K. Clemons (www.theperfectboard.com and www.clemonsmgmt.com), Industry Expert, Marjorie Singley-Hall (www.aboveboardadvisors.com) and Rona Wells (www.boardddirectorsnetwork.org) contribute and as usual a lively discussion followed.

Click to Listen to the Broadcast Now: SPEC Talk Radio – Building the Perfect Board To Attract Investor

Listen, Learn, Enjoy and Share with a Business Associate!

Key Points made in this Broadcast were:

  • Where to find potential board members
  • How to set proper expectations
  • Role of a Board Member
  • Difference between a Board of Directors and Board of Advisors

Tune in every Friday at Noon to SPEC Talk Radio – the Southeast Private Equity Community Radio where investors and entrepreneurs tune into hear insights and inspiration from investors, entrepreneurs and strategic advisors.   Previous broadcasts are also available at www.kugarand.podomatic.com

What is the best way to get started Angel Investing?

This question comes up now and then.   You may not even realize what you want to do is “angel investing”.   Sometimes when sophisticated investors are trying to grow their wealth they will talk about being a “silient partner” or “owning a piece of a lot of differnt companies” or even “loaning some money to a company that is just getting going and then having a little bit of stock after they pay me back”.   All of those conditions are variations on angel investing.  Very similar to deciding to invest in any new class of asset, when you decide to start investing in private companies you need to do a few things:

  1. Read up on it.  The Learn to Be an Angel Investor series of books (www.learntobeanangelinvestor.com)  is a good foundation since it is a compilation of many text book type books on angel investing written for entrepreneurs but interpreted for the investor by the author, years of experience in seeing the decision process in the works by experienced angels, and raw research on the Internet and elsewhere.  If you haven’t read Robert Kiyosaki’s, “The Cash Flow Quadrant” or “Rich Dad’s Guide to Investing” then you should.  Get access to a glossary.  There is one in the Learn to be an Angel Investor series, but you an also look up terms on “investopedia”.
  2. Attend Seminars and Workshops.   Although there aren’t a lot of seminars available regarding angel investing, there is the occasional Conference or panel discussion regarding angel investing.  The best one coming up is the Southeast Private Equity Conference (SPEC) in Atlanta on April 28th and 29th (www.sePrivateEquity.org).  This conference will have a number of break out sessions of specific interest to investors.  Also, you’ll have an opportunity to network with a 100 other investors and to learn from them and their insights.   SPEC Talk Radio, every Friday at Noon, will cover elements of the conference and new announcements http://www.blogtalkradio.com/Karen-Rands  The first episode contains an interview with SPEC keynote speaker Wes Moss and Karen’s insights into why early stage investing isn’t being impacted by the looming recession.
  3. Decide the type of returns you want to receive.   Just like real estate investing, you need to decide if you want a recurring revenue stream, a “flip” in a few months, or a long term big capital gain.    The recurring revenue stream happens when you invest through a royalty financing plan, debenture that pays interest only for a period, or into a legal entity that passes revenue through to owners (LLC, S corp).  A “flip” occurs when you provide bridge financing or contract financing that pays you back in a fixed period of time plus high interest, and sometimes has a sweetener with warrants for equity or actual equity.  The long term big capital gain is when you purchase the private shares at a low valuation and must wait until the company is bought or the shares are made available for public sale at a higher valuation.
  4. Determine your annual amount to invest.   It is OK to start your first year with the decision to only invest $50,000.   You might be able to invest that in two deals and at least hedge your bet by having two that might hit or offset a loss in one.  But, if you emotionally plan to invest $50,000, you should have the ability to actually invest $200,000.   Most angel investors allocate a portion of their portfolio or plan that as one class of asset liquidates (real estate for example) they will move that money into private equity to facilitate the diversification.   Or if they are an executive in a company. a partner in a law firm, or sales executive, then they may allocate their corporate/sales bonuses to go into private equity.  Once you are comfortable with the process, then progress up so you can be making multiple $50,000 investments in a year.   Then when one of those hits, you can diversify that return into private equity AND a long term, moderate risk asset.
  5. Gain access to high volume, quality deal flow.   The reason you want high volume (not hundreds, but dozens) is so you have choices.  If you only get to see deals your close circle refer to you, then you are limited in the variety of industry, stage, and type of offering. Or if you only look at deals your accountant or lawyer brings to you, then you eliminate the potential for the “wow” factor.   Sometimes you see an entrepreneurs presentation and go “wow!”, but it doesn’t have the strict industry or stage that you told your lawyer you wanted.  You would have missed that deal.  You want to know about deals your friends are investing in so you can also participate with them, assuming you trust their judgement.  However, by belonging to an angel investor club, you gain access to a volume pre-screened deals.  This will save you time by your not having to personally do the initial read on the plan to see if it has merit or meet individually with a company until you want to consider that opportunity seriously, and you  have the variety necessary to cherry pick the best deals. Ideally you can belong to a community with other investors that hold regular meetings in order to manage your time regarding reviewing opportunities and managing your investment budget.   Attend private equity conferences, in your region and in other regions that have a national draw.  Both the SE Private Equity Conference (SPEC) in April in Atlanta (www.seprivatequity.org), and the tri-annual New York Private Equity Conference in New York City (next is March 27th) put on by Starlight Capital and Segal & Associates (http://events.starlightcapital.com/events_list.asp) will have companies from across the country.  Don’t be afraid to invest in a good deal that is outside your back yard, just be familiar with the other local investors and the quality/experience of the management team.
  6. Narrow your focus on stage and industry.   Although you should stay open to every industry and stage so you can maximize your options and ultimate diversification within the class of private equity transactions, it makes it easier to get to a “short list” if you know you don’t want to invest in life sciences or high tech, for example.   On the opposite end of that is only belonging to an investment group that invests in one industry like technology or only companies that already have $500K in revenue.   Limiting your access to deals to a specific industry makes you more susceptible to economic influences within that industry.   The Dot-Bomb had the most impact on investors in the tech sector, not consumer goods or life sciences.    Only considering companies that have a half million in revenue is a way to minimize risk because you know the company can at least sell something.   However it is a false security blanket.  In no way does it guarantee that the company can become a $10M company or get to a liquidity event.  And by having that bar, you set yourself up to investing at a higher valuation than a company that is pre-revenue, you may miss out on a deal that goes from angel round (pre-revenue) straight to VC round with $1M in revenue. There are other ways to mitigate risk and ensure the company can execute than having a sizable revenue milestone as the mark.
  7. Finally, don’t go it alone.   If you aren’t in an angel investor network or club, then make sure you at least have 2-3 other friends that want to invest in private companies so you can have others that you can use to help evaluate the deal and won’t be evaluating from a pure financial or legal aspect but because as business people and sophisticated investors, they have the potential to co-invest.

Hope this helps.   Just like doing anything the first time, there is a certain risk of the newness and uncertainty and then the thrill of actually doing it.   First Love, First time riding a bike, first time traveling out of country…..first time making a private equity investment.   There may be pain along the way, but the journey and the end result when it works is worth every bump or bruise.

To get the full list of Free or Near Free resources, go to www.launchfn.com and click on the Information section.

Get your 5 Free Investor Tips Now! Go to www.getinvestormoney.com

Check out these investment websites: www.kugarandholdings.com, www.nbai.net, www.kyrmedia.com, and www.entrepreneurblogspace.com

An Un-venture Capitalist

In researching for other blogs to connect to that serve insights and information to angel investors, I found Jesse Rasch’s blog. His blog entry from March 07: UnVenture Capital: An Alternative Approach to Startup Investing; contained timeless insights regarding the difference between angel investors and venture capitalists. Further, Jesse shares his criteria for making investments. Since we work with a lot of angel investors who are new to the process, his experience and insight is invaluable.

To get the full list of Free or Near Free resources, go to www.launchfn.com and click on the Information section.

Get your 5 Free Investor Tips Now! Go to www.getinvestormoney.com

Check out these investment websites: www.kugarandholdings.com, www.nbai.net, www.kyrmedia.com, and www.entrepreneurblogspace.com