Adapted from an article originally published by the author in Inc. Magazine.
The greatest investors tend to end up in the best deals over time. Why this happens is no mystery: other investors want them in their deals because of the value they add to companies and CEOs, and the really smart entrepreneurs seek them out because they understand the value of great investors. The challenge for each angel is how to become a great investor. There is no one silver bullet - it is a multi-variable equation involving career experience, networking skills, investing experience, inter-personal skills and teaching/coaching style, your ability to see the big picture and have the right thing to say in difficult situations, and the overall level of work you put into the early stage investing game.
That said, there are some obvious sins to avoid on the way to raising your game.
Great entrepreneurs know that shunning crappy investors takes knowledge and discipline, and so they are disciplined about their selection process. Weak or inexperienced entrepreneurs go into fundraising with the wrong attitude. They approach it like an insecure person would approach dating: hoping and praying they can find somebody, anybody, who will go out with them. Solid entrepreneurs attack the investor search with an attitude of not settling for bad investors. They know it is important to select an investor who is not only right, but hopefully great for their company.
Finding quality investors will require them to kiss a few frogs. You don’t want to be one of those frogs. How do entrepreneurs spot the clunkers? They understand and remain very alert to recognize the troublesome behaviors. You want to be honest with yourself and make sure you are avoiding these behaviors.
Bad investors commit three categories of sin:
- Mild Sins, representing mere opportunity cost
- Major Sins which hinder the business
- Fatal Sins which do actual damage
The mild sins are just a bummer; no major harm. The entrepreneur could have done better so they’ve lost an opportunity for greatness. These angels provide low-value add and translate into deadwood. The mild sins include:
- insisting on a board seat but having no value to add
- failing to actively support and “talk up” the company
- sharing the upside in the company and giving nothing back in return
- being in it for the wrong reasons (bragging rights)
- insisting on allowing his/her buddies into the round when they also don’t add value
- pestering the CEO about exits, but doing nothing to help
- failing to understand or keep current with the company’s technology or positioning in order to represent the company well
- not being able or willing to introduce the CEO to other investors or customers
- lacking business fundamentals or experience with sales
- having no network or connections or networking skills to help the CEO build the team
- being a “gig-shopper” who is really just looking to join the team or find a job
The major sins are much more serious. They actually hinder the business. Smart entrepreneurs understand the need to recognize these instantly and make sure they are addressed completely before working with these angels. Key examples include:
- taking a lot of CEO time and requiring a lot of hand-holding
- being unpleasant, close-minded, inflexible and generally difficult to get along with
- lacking knowledge of how to structure a round
- lacking knowledge of how to stage capital into a company
- being unable to make up their mind on whether to invest (or what strategic course to take) and always wanting another meeting
- insisting on dilutive advisory shares or consulting fees for no, or dubious, value
- failing to respond in a timely manner to requests for routine shareholder signatures or paperwork
The fatal sins are non-starters. These will do an entrepreneur’s business actual damage, and they cannot be tolerated. Entrepreneurs know it is mandatory to identify them so that they can completely avoid working with these people. These sins include:
- giving bad advice and insisting the entrepreneur follow it
- being on a totally different page in terms of exit strategy
- lacking, honesty, honor, integrity and good common sense values
- being bigoted, sexist or likely to harass or disrupt members of the team
- spilling confidential information or being a gossip
- having and failing to disclose any sort of conflict of interest
- creating major signaling risk through a high-profile failure to invest in the follow-on round even though the company has achieved its milestones
If you cringed on any of the items when you read that list, you have work to do. Clearly there are many ways things can go wrong or right when selecting angels. Great entrepreneurs will have a mindset focused on assembling a dream team. They know they are going to spend a long time together, experience many highs and lows, and a lot of stress along the way so they make sure investors fit their needs and personality. The smart ones take the time and diligence to do the work, check references, and to be thoughtful in their decision. Go forth and sin no more to make sure they pick you.