| Entrepreneurs struggle with the idea of seeking | | | | are angel investors that are in the business of |
| outside capital and for good reason. An entrepreneur | | | | investing. They look at many deals in the expectation |
| must weigh the risk vs. reward for taking on | | | | that they will find 1 that meets a specific criteria to |
| investment capital. There are 2 types of companies: | | | | be worthy of the risk in the investment. They are all |
| Market Participants and Market Makers. Market | | | | to aware of the risk in angel investing. Because they |
| Participants are those entrepreneurs that want to | | | | have chosen angel investing as a method to diversify |
| buy a franchise, open a restaurant...you get the idea. | | | | their portfolio and increase their wealth, they most |
| These companies can make a good living for their | | | | likely have made at least a few investments that |
| owners but do not usually bring innovation to the | | | | they lost all their money. Therefore, they aren't as |
| market or grow very large to produce a big return | | | | easily influenced to invest based on an emotional |
| on investment. The Market Makers on the other | | | | buzz that an investor that has an affinity connection |
| hand are the companies that make the headlines. | | | | to the deal, or as a friend and family investor might. |
| They have invented a new product or way of doing | | | | The fact is, sometimes investment capital can sink an |
| things that has potential to move markets, change | | | | otherwise healthy business. It isn't "free money". The |
| lives. They have the potential of being very big or at | | | | entrepreneur who takes on outside money from |
| least big enough to be acquired by another company | | | | investors is taking on a fiduciary responsibility and |
| that can continue the momentum. | | | | accountability to those investors to produce a |
| Both types of companies will often seek outside | | | | specific result. All is hunky-dory if the company took |
| capital to get started or to grow their business. And | | | | on the correct amount and has properly planned so |
| in both cases, entrepreneurs need to have the right | | | | they can execute and produce the promised results. |
| expectation on what the expectations and | | | | So knowing when and whether to ask for money is |
| responsibilities are to that investor or investors. They | | | | part of the maze one navigates as a new business |
| types of investment they attract may be different | | | | takes shape. If the entrepreneur has over committed |
| but in all cases, the investing party generally expects | | | | the potential of the business in a misguided attempt |
| to get a return on their investment. Unless the | | | | to "sell the opportunity" then the problem with |
| entrepreneur is leading a non-profit charity, the | | | | funding becomes in how investors looking for |
| investor rarely knowingly gives money to an | | | | milestone growth rates (or a quick ROI) can influence |
| entrepreneur with the expectation that the money is | | | | a company's direction in the early days of operations. |
| lost, gone forever. The very notion that they have | | | | This can place undo strain on a business while it's just |
| enough money to invest large sums into another | | | | figuring out how to survive. In some cases, if |
| company means they are savvy enough to usually | | | | investors don't give a business ample time and space |
| make money when they invest. | | | | to figure things out, or if the company didn't raise all |
| The types of investors that invest in Market | | | | the capital they really needed, the business maybe |
| Participants are investors that aren't the typical angel | | | | forced to take unnecessary risks resulting in lost |
| investors looking for big returns. They are "silent | | | | capital without the market results. Similarly, the |
| partners" in an entrepreneur's business that usually | | | | entrepreneur may make unqualified assumptions or |
| know the entrepreneur well. They believe the | | | | spend money in the wrong places in an effort to |
| entrepreneur can succeed and will work hard. They | | | | show investors that they are making progress. |
| generally are looking for a steady flow of income | | | | The recommendation here, before taking on |
| from the investment. They'll share in the revenue or | | | | investment capital, an entrepreneur should be certain |
| in effect be the landlord in financing the construction | | | | to do 3 things: |
| of the franchise. They may have an earn-out | | | | 1. Assess your level of competition and uniqueness in |
| provision to their investment over time so as the | | | | the market and determine if you are a market |
| entrepreneur succeeds and the investor gets all their | | | | participant or market maker. |
| capital investment back, the entrepreneur begins to | | | | 2. Make a thorough plan to determine how you would |
| gain greater share of the company. The risk with this | | | | get to market without capital to begin generate |
| type of investor is that they typically aren't as | | | | self-sustaining cash flow |
| "savvy" as the stereotypical "angel investor" or | | | | 3. Determine if outside investment capital is absolutely |
| venture capital firm. They do not have an | | | | needed, what is the exact use of funds for that to |
| expectation or a tolerance for the company not | | | | reach key milestones that would grow your business |
| generating cash flow very quickly. They can make life | | | | faster and more profitably than the plan you |
| miserable for an entrepreneur that doesn't have | | | | developed without money. |
| experience running a business and falters, and avoids | | | | Then based on the outcome of this exercise, the |
| communication with the investor to get guidance or | | | | entrepreneur can identify the right type of investors |
| help to make the company profitable. This type of | | | | for the business and adopt the mental attitude |
| entrepreneur can be blinded by the money and desire | | | | necessary to start the grueling process of finding |
| to get their business started, and not consider the | | | | investors, selling them on your business and closing |
| personality and business style of the investor. The | | | | them on the sale of the equity. They will be |
| "silent partner" can rapidly become a very vocal and | | | | forthright with the investors to establish a clear |
| active participant in the company. | | | | expectation on what will be accomplished and how |
| Investors that invest in Market Maker type | | | | with that capital so that the win-win can come not |
| companies are what the industry typically calls | | | | only from the experience of having the investors |
| "Business Angels". Yes they are angel investors, but | | | | involved but in the successful outcome of the |
| to more clearly differentiate from the angel investors | | | | business to create wealth for the founders and the |
| that are called "friends and family", business angels | | | | investors. |