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WHAT IF YOU HAD AN ANGEL ON YOUR SIDE?
"Terrific advice from a master of the angel investing game. Brian Cohen reveals the art and craft of raising angel money. An investment in this book will pay off a thousandfold." DR. HOWARD MORGAN, founder and partner at First Round Capital
When you connect with the right angel investor, it's like finding a new best friendyou just have to know what makes him or her happy.
Smart funding is waiting for smart founders. Raising funds is all about connecting with the investor who's right for youand What Every Angel Investor Wants You to Know shows you exactly how to succeed.
Veteran early-stage investor Brian Cohen knows how to spot a great company destined for success, and in this groundbreaking book he offers soup-to-nuts guidance for any entrepreneur seeking to launch an invention, a product, or a great new idea into a receptive marketplace.
As chairman of the board of directors of the New York Angels, Cohen is one of the most engaged angel investors out there today. The first investor in Pinterest, he describes exactly what angels want to see, hear, and feel before they take out their checkbooks:
- A clear exit strategy before the startup even launches
- Facts that turn "due" diligence into "do" diligence
- Authenticity"save your spinning for the fitness center"
- Proof that you "live inside the customer's head"
Cohen gives invaluable insight into how the most successful angels view due diligence, friends and family money, crowdfunding, team building, scalability, iteration, exit strategiesand much more.
This one-of-a-kind book provides a rare look inside the minds of people who are in the business of funding businesses just like yours.
Read What Every Angel Investor Wants You to Know to get your best shot at funding for your product after your very first pitch.
PRAISE FOR WHAT EVERY ANGEL INVESTOR WANTS YOU TO KNOW:
"Brian Cohen is truly the entrepreneur's best friend. Cohen and Kador haven distilled their first-hand experiences into an intensely personal, highly readable journey into the mind of angels that should be kept at the bedside of every startup CEO." DAVID S. ROSE, founder, New York Angels, and CEO, Gust
"Meet one of the fundamental building blocks of the entrepreneurial scene. In one easy-to-read package, readers now have the wisdom of Brian Cohen, perhaps the most well-connected investor/entrepreneur in New York." MURAT AKTIHANOGLU, founder and managing director, Entrepreneurs Roundtable Accelerator
"What Every Angel Investor Wants You to Know gives you an actionable checklist for success in fund-raising and entrepreneurship. Cohen and Kador provide an exhilarating ride for those who want to pilot their own business." REED HOLDEN, serial entrepreneur and author of Negotiating with Backbone
"Personal insights from a seasoned angel investor. An important addition to the reading list for today's entrepreneurs." SCOTT CASE, CEO, Startup America Partnership
"What Every Angel Investor Wants You to Know is a must-read for entrepreneurs and investors who want to fi nance startup dreamsan accessible, jargon-free,
practical primer." WHITNEY JOHNSON, author of Dare, Dream, Do: Remarkable Things Happen When You Dare to Dream and cofounder, Rose Park Advisors
“While [this] book is anecdotal, [the authors] discuss in depth how angels view a potential investment as well as how they evaluate its prospects. This is the book’s strength. Recommended. All levels of students, entrepreneurs, practitioners.” CHOICE
|Publisher:||McGraw-Hill Professional Publishing|
|Product dimensions:||6.30(w) x 9.10(h) x 1.00(d)|
About the Author
BRIAN S. COHEN is chairman of the New York Angels, an independent consortium of individual accredited angel investors, providing seed and early-stage capital. He is also the cofounder of Launch.it, a free newsroom for the world.
JOHN KADOR is the author of more than 20 books, including The Manager's Book of Questions, 301 Best Questions to Ask on Your Interview, and 50 High-Impact Speeches & Remarks.
Read an Excerpt
WHAT EVERY ANGEL INVESTOR WANTS YOU TO KNOW
AN INSIDER REVEALS HOW TO GET SMART FUNDING FOR YOUR BILLION-DOLLAR IDEA
By BRIAN COHEN, John Kador
The McGraw-Hill Companies, Inc.Copyright © 2013 Brian Cohen and John Kador
All rights reserved.
Angel Investing Is a Contact Sport
Listen up and warm up, entrepreneurs. You can be cool, but not distant. Success with angel investors requires more than just a great idea. It requires creating an emotional hugging relationship. Angel investing is truly a high-contact sport.
That's because you're not really raising money. If you do it right, you're raising investors who, like your family, need from the start to feel something warm and fuzzy—not just about your brilliant idea, but about you! I will describe the essential characteristics of investor raising in Chapter 7.
But for now, just be aware that there's a big difference between simply raising money and raising smart investors. That's the promise of this book. By the time you finish, you will know the techniques and have the emotional knowledge to get smart funding commitments sooner for your billion dollar idea.
My basic view of angel investing is that I'd rather back a good business that recognizes how to satisfy a customer than some ill-defined long-term vision. There's a clear difference between a good business and a good investment. The difference is always the entrepreneur. While I also expect a financial return, I believe that with the right leadership and great execution, the financial returns will come.
There are broadly two types of angel investors. There are those who make the limited occasional investment, and then there are those like myself, and many of my associates at the New York Angels, who invest together and speak with one voice. We're committed to the startup community we're serving. By investing in more startups, we develop better instincts to make the best investments.
Founders have a tendency to think that all money is the same. That's not true. Money attached to an angel who is prepared to stick with you over the long haul, and is in a position to get you even more money, is infinitely better than an isolated check that has a number of zeros with no real number in front. You see, it's not the money that's really doing the heavy lifting for your startup; it's your choice of the smart angels who are investing in you, not just your company. They want to feel an emotional connection—in some sense, bragging rights that they found you first.
Angels really resonate with entrepreneurs who focus on choosing the right investor before the money. The other day I sat down with a founder I had just met, and I asked him what business he was developing. His reply startled me.
"It's the travel business you just invested in," the founder said.
"Wait, I invested in your business?" I was momentarily confused.
"No," he said. "You invested in my competitor's business."
Of course. I had recently invested in a travel business, and the founder knew that. And my response was, Wow, I'm impressed that I'm being tracked by this guy. "How did you know about my investment?" I asked.
"Nothing was easier," he said. He studied the New York Angels website, its profile on Gust, AngelList, and TechCrunch (see Chapter 10) and basically talked to everyone who crossed his path. The angel community is a small world. He did his homework. Now, I was pretty much locked out of investing in his company by virtue of my commitment to his competitor, but I'd be lying if I said I didn't have a twinge of regret that he didn't get to me first.
Here's a little secret many startups eventually learn for themselves: angel investors are generally less valuable for the wisdom of our advice (though it comes in handy from time to time) than for our contacts and introductions to people who can be really useful as the business develops.
YOU CAN'T BE SUCCESSFUL AT A DISTANCE
Let me say it another way, and this time I'm talking to both entrepreneurs and investors: you can't be successful at early-stage investing at a distance. The founder and the angel need to stay close, and not just during the courtship phase of the relationship. The mentorship that founders so desire and the mentorship angels are willing to offer really defines a mutually beneficial relationship.
Gabriel Weinberg, a Philadelphia-based angel investor and CEO of the search engine DuckDuckGo, learned this lesson after investing in 10 startups. Initially, one of his investing practices was to be location-agnostic. He felt that with the Internet, the physical location of the founders was irrelevant. After three years, he came to see this assumption was a mistake, concluding that it's much better to invest in startups that are near his base, the better to provide mentoring, support, and overall contact.
By contact, I mean that the angel spends significant time with the founder(s) and their team. The angel must really engage with the world that the team is in. The angel has to appreciate this world in a visceral way, not only for the benefit of the investment du jour, but to help sharpen the angel's instincts for emerging opportunities. It could be regular face-to-face contact with ongoing phone calls in the early stages of the business. In the end, it's up to the entrepreneur to determine the need and frequency of contact.
KNOW WHAT YOU'RE GETTING INTO
I'm always glad to support the dreams of entrepreneurs by offering my experience, mentorship, and financial investment. All I ask is that you be absolutely sure that you are interested in raising money. Because if you're not sure, the process will only create mayhem for you. Raising money from angel investors can be a lengthy, maddening, and often disheartening process. So be careful what you wish for because you might get it.
That's when—assuming you are successful in raising sufficient investment to fund a company—the excruciating fun begins. You will then find yourself in partnership with investors who effectively own a piece of your life. They will have opinions, rights, and the standing to question decisions you make. Perhaps, even more important, you will have a fiduciary responsibility to them, which means that you can't simply wake up one day and say, "Guess what? I'm bored with all this, so I'm just going to try something else for a while." Instead, your only exit strategy will be to make the startup such a success that another company will eventually come along and buy it for a lot of cash. Until then, be prepared to exist with unrelenting pressure and frustration. So, do you really want the money?
YOU ARE IN CONTROL
I want entrepreneurs to know they are in control and act like it.
Control is not the first thing that most first-time entrepreneurs believe they have. So when I speak at colleges or business schools, I usually start by getting my audience to consider that they really are in control. I've been known to address a group of entrepreneurs by asking them to repeat these words after me: "I am in control." By the giggles and embarrassed looks, I can see that this message does not go down naturally.
There's nothing more powerful or attractive to a smart angel investor than entrepreneurs who own the idea, own the execution, and recognize the tools and resources they need to succeed. They don't just look to achieve success; they see success as inevitable. They are more focused on what they have already created than what they still need. This ownership is what I mean by control. I believe that sense of ownership and control should be complete and absolute.
You are in control. If there's only one insight you take away from this book, I ask that it be this: you are in control. This book is really a road map to show you how to be in control. The sooner you accept that reality, the sooner you can leverage the control you have to move your startup forward.
Too many entrepreneurs give away control, and too many angels are willing to let them do it. It's tempting for angels to invoke the Golden Rule—"he who has the gold makes the rules"—and thereby cop an attitude that angels have all the power and the founders have none. This attitude is not only plain wrong but counterproductive, as smart angels soon discover.
In fact, it's the entrepreneur who has the power and control, and the sooner both parties recognize this, the better. Nothing happens until you make it happen. You do all the heavy lifting. You're going to develop the product, hire the talent, call on customers, and run the business. Angels merely enable the process. I emphasize the issue of control whenever I interact with entrepreneurs because it so central to initial and subsequent funding.
The world has changed. You have been empowered in important new ways, and it's essential that you seize your power. It takes nothing from me when you do seize power, and, in fact, it benefits me in the long run. That's because when you are in the driver's seat, you know better what you are doing and have a plan where this level of control is in the service of ownership. I like to get founders to incorporate a stake in ownership and control as soon as possible. I want you to own the process, the success if it comes, and the failure if it doesn't. I have seen that accepting ownership early forces entrepreneurs to be smarter about the questions they ask, more disciplined about how they apply the answers, and less tolerant of wasting time. It leads to better outcomes for all concerned.
One better outcome: more pointed questions for me. That forces me to up my game. When founders are in touch with their control, it also saves time.
Why is it that when it comes to term sheets, founders are content to wait for whatever angel investors deign to provide? Terms sheets are not written in stone like tablets from on high. I actually like it when entrepreneurs help drive the process by outlining their own term sheets up front without waiting for me. I'm absolutely fascinated to see what they think the valuation and other terms should be. It's a revealing exercise to see what a team's expectations are and where the line starts. It's like the entrepreneur is saying to the angel investor, "Hey, I have some responsibility and control here. It's not just a one-way street. Let me tell you where I think we can start." Of course, it doesn't always mean I'll immediately agree with the numbers. But I know it speeds up the process, because now I'm much clearer about expectations, and we have something specific to talk about at the outset of negotiations.
For me, this is just sound business. But I must warn founders that some angels might still be taken aback by such chutzpah. Then again, such investors would likely prove to be weak investment partners, anyway.
ANGELS TO AVOID
Some angels don't fly as high as others. Be wary of unscrupulous characters posing as angel investors. Here are some of the more common varieties.
Shark angels. Be leery of angel investors who want to take. Angels should be givers, not takers. Investors who ask you for a job are thinking only of themselves. Stay away from them.
Angel brokers. Brokers will ask startups to sign a fee agreement for introductions to actual investors. Some brokers may provide a needed service, but I advise you stay away from them. Frankly, with the online tools available today (some of which I describe in Chapter 10), startups should be able to find angels. Demonstrating that ability goes a long way, in my mind, to showing me that the founders are smart and disciplined. In any case, I won't invest in you if you've used an angel broker. I want my money to fund your intellectual work. It's distasteful to see a portion of my investment go into a broker's pocket.
Controlling angels. Angel investing seems to attract a number of formerly successful businesspeople who think they are smarter than you. They are usually overbearing and hypercritical of every decision you make. Don't be intimidated into bad decisions.
FOUR ATTRIBUTES OF FUNDABLE STARTUPS
Fundable startups need four attributes to impress angel investors. They have to have a capacity for growth and be scalable, profitable, and sustainable. If you have a startup that has all four of these attributes and you can demonstrate that you have a reasonable shot of not totally screwing up the execution, most angels will beat down your door to write you a check.
Capacity for growth means simply that the business has what it takes to keep growing. A lot of startups that come to me can't pass this test. Usually it's because there's a lot of confusion about what's a product and what's a company. I often see awesome ideas and a great solution. But what I have to tell the founder is, "What we have here is really a product, not a company."
Scalability is related to growth. A scalable startup is one that starts with a business model that can take an innovative idea and, by leveraging the power of technology, achieve essentially unlimited orders of magnitude of productivity. Expedia and Twitter are examples of scalable businesses because the costs of serving one million or 100 million customers are essentially equal. In contrast, there are many fine and profitable businesses—restaurants, dry cleaners, hairdressers—that are not fundable because they don't scale well. A hairdresser can serve only a fixed number of clients per day, and there is little technology can do to alter that fact.
That said, scaling is very difficult. A lot of highfliers such as Groupon and Zynga still can't quite get the formula right. Transforming startups from baseline to sustainable, scalable, profitable business models takes inordinate work and not a bit of luck.
Profitable means that revenues exceed operating costs.
Sustainable means that profitability will be ongoing for the next period, and there are no obvious obstacles to that condition. The most experienced angels have learned that the best startups to invest in feature high technical risk and low market risk. Technical risk imposes costs on startups; market risk causes startups to fail. In other words, smart angels look for startups that are highly likely to succeed if they can really deliver on their technical promises.
The problem is that the Internet startups that most angels like to invest in feature the reverse pattern: they usually have low technical risk and high market risk. That is, there is usually very little risk that these startups can't deliver their product. The chief issue is whether the startup's product is of value to a large enough customer base that the startup can acquire at affordable costs.
It's an exciting time to be an entrepreneur. Two global forces are intersecting to facilitate the creation of new businesses. First, innovation has never been easier, faster, or cheaper. Second, the pool of wealthy people has gotten larger, injecting an ever-growing group of relatively young, curious investors looking for thrillseeking opportunities to help build new businesses and further expand their own wealth. This combination represents a perfect storm for savvy entrepreneurs.
It's not bad for savvy angel investors, either. There's something compelling about the fact that many of the people who have most benefitted from the economic gains of the past decade—think about the young millionaires of Google, PayPal, and Facebook—are the ones funding the prospects of the next generation.
Historically, innovation has been an expensive slog. Thomas Edison required more than three years, a large team of researchers, and 3,000 discrete experiments before he refined the incandescent light bulb in 1879. James Dyson developed a very powerful bagless vacuum cleaner, but it took him over 200 prototypes and five years. The development of Mosaic, the web browser credited with popularizing the World Wide Web, took over a year. Both development efforts required huge investments in time and capital. Innovation progresses, as always, by trial and error, but when trial cycles require a great deal of time and money, innovation pays the price.
Today, thanks to developments in open-source tools and cloud-based infrastructure, the cost of trial cycles is approaching zero. Startups that formerly required millions of dollars in capital can now be built quickly, sometimes in hours, by small groups of highly productive teams using digital tools for very manageable sums. As the cost of innovation decreases, so does risk, which, in turn, increases the pool of capital available to finance the next round of ever-cheaper innovation, unleashing new waves of human potential and creating another generation of high-wealth individuals who, in their own turn, will help co-create another cycle of innovation and prosperity. Now that's what I call a virtuous cycle.
Innovation and access to capital represent an explosive combination, but there's yet another factor that makes this period of innovation so powerful for smart entrepreneurs. We all know the digital revolution is exploding. Facebook now has more than one billion users. If Facebook were a nation, it would be the third most populous nation in the world. There will be more cell phones than people in the world by 2016, according to Cisco Systems. Mobile tablet sales are outpacing PC shipments. Increasingly, we are seeing a massive addressable audience for digital innovation. The operative word here is "addressable." It's a word that angel investors love because it means startups have a good shot at actually defining and capturing a market.
The cost of attempting digital innovation has never been lower, the pool of capital available to fund innovation has never been larger, and the economic value of a "winning" digital innovation has never been greater. No wonder the market for "disruptive" digital innovation is blowing up.
The current surge of entrepreneurs will create many viable businesses, with happy customers and growing revenues. But only a tiny sliver of them will strike the magical balance of talent, insight, effort, and luck that produces fundable startups. Angel investors all over the world are hoping that your startup will be the exception. The following pages represent a road map for entrepreneurs to position their startups to get the best from angels and for angels to get the best from entrepreneurs. When that happens, everyone's the winner. Let's get started.
Excerpted from WHAT EVERY ANGEL INVESTOR WANTS YOU TO KNOW by BRIAN COHEN. Copyright © 2013 by Brian Cohen and John Kador. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
1 Angel Investing Is a Contact Sport 1
2 Early Stage Investing and Why Angels Are Your New Best Friend 13
3 Let's Get to Know Each Other 27
4 What I'm Looking for in an Entrepreneur 47
5 What I Look for in the Pitch 69
6 Every Business Starts with a Belief 89
7 Investor Raising vs. Money Raising 107
8 Don't Hurt the Ones Who Love You 117
9 Going Belly to Belly with Your Customer 125
10 Due Diligence and Do Diligence 133
11 Accelerators, Incubators, and Crowdfunding 143
12 It's All About Teammanship 155
13 Getting to No Is Just as Important as Getting to Yes 167
14 Iterating the Startup 173
15 Baking in the Exit from the Beginning 181
A Due Diligence Checklist 191
B The New York Angels Term Sheet 197
C Five Indispensable Tools Founders Can Use to Do Due Diligence on Angels 201
D Own Your Venture Equity Simulator 211
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Brilliant advice for would-be entrepreneurs everywhere!