the mensch factor

There is so much money being tossed around these days for new ventures that it is a little crazy…and frightening at the same time.  I am talking about the angel community who tend to be investors in the first round of capital in a start-up company although sometimes that cash does come from VC's depending on a variety of things. 

Everyone has a different strategy on how they invest or what they invest in.  I have a few personal rules.  One of them is to remember you are invested in the entrepreneur and the idea.  The original premise is certainly one I need to believe in and get behind but overtime those ideas evolve and sometimes completely pivot but the entrepreneurs remain.  Like buying a house.  The house may change but the location always remains the same. 

Another rule is I don't do convertible debt.  Sometimes I bend those rules when there needs to be a bridge loan but at that point I am already married to the entrepreneur and the deal.  Reality is more transparent.  I don't like convertible debt for a few reasons particularly on the first round of capital.  If I am doing an investment in a business that company has more than likely already launched and hopefully shown some traction.  The foundation has been built and there is a value on that.  Convertible debt is a bit of a wild card for an investor and great for the entreprenreur.  It can be good for the investor but not always.  I like things that have value the same way I like fixed costs but that is for another blog post.

This past week someone came to talk to me about their business.  At first blush they were thinking about convertible debt.  I explained to them why I wouldn't do it.  In addition to the reason being that it isn't always good for the investor is that when first time investors jump into the game early putting their money behind an entrepreneur there is always a risk of failure.  The entrepreneur is risking it all and quite frankly so is the angel investor.  We are getting into the game together from the onset and if together we believe that the upside is going to be good then it will be good for all of us regardless of that initial investment. 

The entrepreneur, who is a seasoned business person, looked at me and said now I get it.  It is about the mensch factor.  Honestly, for me, he hit the nail on the head.  I loved his analysis.  So in the future when anyone asks me why I don't do convertible debt I am just going to say it has to do with the mensch factor.