Karen Rands’ Compassionate Capitalism radio show for entrepreneurs and investors returns to interview a special guest: Tony Erwin of Skyrocket Financial. Tony is an active member of the angel investor community in Atlanta having found fortune from his role in technology IPO and garnered success from sophisticated stock market investments. Now he helps growing companies with additional sources of alternative finance to fuel their growth with debt against assets to augment their efforts in raising business capital. Tune in to learn more about where to find business capital and investor money for your early stage business. www.skyrocketfinancial.com and www.launchfn.com Formerly SPEC Talk Radio.
Additional experience in working with investors since then that have made multiple investments, yet not lost their investment, reveals one more way to reduce the risk in these young private companies. Number 8 method is to ensure the company has a clear strategy for generating revenue sufficient to sustain growth and profitability.. Market Validation, #7, is key because you know at least some customers want to buy the product or service, but only actually becoming profitable can lead to the kind of company that will produce a liquidity event that will provide a return on the investment. The company must understand how the will get their first customers, then expand their sales force or sales strategy to grow their pipeline, while also anticipating what they will need within their operations to support that sales growth.
This particular show is longer than the others because of the rich content. The first 7 ways for mitigating risk are:
1.Intellectual Property Protection – patents, copyrights, trademark, trade secrets
2.Management Team/Advisers – experienced management from within or recruited from outside
3.Insurance – key man insurance, errors & omissions, other corporate insurance
4.Strategic Planning – what will they exactly do once they have their funds
5.Sales Validation – do they have the sales team/strategy that can achieve the expected results
6.Terms of Investment – small terms may have big impact on the angel investor down the road
7.Market Validation / Competition – having sold something or having market validation in a pipeline, joint venture, or in improving on the competition go a long way to validating the opportunity
This information is offered as part of an ongoing effort to educate High Net Worth men and women with a desire to become angel investors and are new to angel investing on how to diversify their portfolio to include private equity investments and increase their odds to produce a return on investment. This is being delivered through the National Network of Angel Investors. This particular topic will be a new chapter in the soon to be released revised edition of “Inside Secrets to Angel Investing”. Visit the NNOAI website or the AngelInvesting101.com site to sign up for free excerpts from the Inside Secrets to 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.
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.”
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.”
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
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.
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.
Intermediary – If 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:
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: