Getting the right Investors is so key
The first board I sat on was a start-up called UPOC. I was an investor and a very good friend of the founder, Gordon Gould. UPOC was way before it's time as for anyone who used the product knows that it had the feeling of Twitter. Sightings from events to celebrities texted out to anyone who wanted to follow your messages. I spent a lot of time talking with Gordon at least a few times a day as well as getting his investors not to take advantage of him financially but figure out the most strategic way to use Gordons vision and intellect. At one point we interviewed CEO's and as far as I was concerned we absolutely picked the wrong horse but the board wasn't so much interested in my opinion but of diluting Gordon. I was his champion. I learned a lot from that board seat. The biggest thing I learned is that getting the right investors is so key.
There are many people jumping into the world of investing in start-ups. People who come out of hedge funds or banking do not necessarily understand the nuances of how much of an option pool there should be or how much founders stock should be allocated, fairly. The first round is important but it should be smart with thoughts about what will happen on the fourth infusion of cash.
This past week I met with someone who had been destroyed by her first group of investors. She did not get advice from anyone in the venture start-up world but took money from a group of individuals who have run major companies that are household names. She was left with so little after taking a small investment that it not only infuriated me, I felt just terrible for her. The lesson to her group should be zero of zero is zero. My advice to her is to walk away, wait the required year to not compete and begin again.
Personally, I'd rather take less on a smaller valuation to start the company on the right foot hoping that there will be growth. I can put more money in on the second round as the company grows instead of diluting the founders too much at the beginning. After all, it is the entrepreneurs who have the ideas and the energy to roll up their sleeves and grow their businesses and achieve their dreams. I'd rather help them see huge growth at the right price that we can achieve together because as I said, zero of zero is zero.
Comments (Archived):
Joanne- Great post. Hate to hear the story of entrepreneurs burned by having the wrong investors- especially in today’s market when there are plenty of opportunities to get some mentorship during the process.
so many opportunities these days to find the right mentors is exactlyright. the one thing that I love about the venture start-up community isthat everyone is interested in helping each other. the rising tide.
Nice one, Joanne. Thank you. So true. I feel it works the same way in our lives. If we consider ourselves the CEOs of ‘Me Inc’, then our advisors/mentors (i.e. our figurative board of directors) make all the difference in the world!
i like that CEO’s of Me, Inc.
Haha. Glad. And just out of curiosity as I’m new here – are you a Batman fan?
of course
Why do investors take so much of a company to ruin the operator’s incentive? Is that a rising tide argument (you’ll make so much that your tiny piece will be worth enough) or is it just short term greed equal, well, um, stupidity?
i think it might be a mixture of everything you brought up.
Hi Joanne- Thanks for the post. Do you do convertible debt or equity when you angel invest? Do you treat negotiations and legal docs differently when you are a “Friends & Family” investor vs. when you are an Angel investor or do you treat it all the same? Thanks! 🙂
i do not do convertible debt. i don’t like it. i like to place a value ona company. i understands the pros and cons but i do not like doing it.friends and family is a seed round. the first round of money, in general,to get your product to market. sometimes it is a loan, sometimes it isconvertible debt as well as others. i do not do that type of financing.i like to invest companies that have already created their product. itshows me that they can build something and get it to market. that is thefirst major hurdle. i also do not know if i can place the right bet onsomething that i can’t use and feel yet.
And this is the heart of it Joanne. I loved this post, as you know this is so near and dear to me and my company.
As an entrepreneur raising an angel round for the first time, I’m eager to learn more. It sounds like this was a case of major terms gone wrong. Another angel I’m working with has been warning me about what I would call “soft terms”. His advice is to lock in relationship terms with each investor, make sure they know what I do and don’t need from them, and to do a lot of investor expectation management up front. It seems that in addition to vetting investors for character & getting the major terms right to anticipate future rounds of financing, we need to figure out what kind of “soft terms” to put in place. Can anyone point me to any great posts/discussions online that aggregate what goes wrong in startup investments?
i have yet to see something around that but the key is having people thatyou trust and have been thru the process before. ask a lot of questions.get a lawyer who actually has done venture start-ups although they are alawyer not a biz person and remember that.
Hi Joanne, this is such an amazing post to have come across. I just finished the LSM competition in S.F. Thank you so much for filling out the Symple survey! We were thrilled to have your feedback.Anyway, my team came in second. We failed to win, because we failed to fail and pivot. I’m grateful to be at the other end of the weekend with strong signal for a successful product (we won the most viable and fundable project award).(At the beginning of the judging, Janice Fraser of LUXr even offered us $20 for the app… right then and there! “I’ve been looking for something like this for a long time.”) I left SF with two offers to explore funding. But now what? Follow an invite into an incubator? Look for a little seed/angel investing? Push deeper into friends and family?It’s the S or get off the Pot moment. Another one. Developing the product was like 20% of the work… analyzing/executing decisions is a bigger piece of the pie. Is that what angels are supposed to do, provide guidance without gutting the entrepreneur?Natasha
I think angels are there to provide advance, mentorship and help innaviagating growth. If they are going to gut the entrepreneur then why didthey invest?
Good question, but I keep hearing warnings (your blog post included) about that possibility. But then on the other hand, you almost feel pressured to get into some kind of money relationship. It’s weird. It’s like getting money validates the product/idea. Maybe it’s just Silicon Valley exuberance! It’s nice to be back in conservative get-back-to-work Princeton!
If u need money keep in mind that by taking money there are some things thatyou will have to not necessarily give up but have to negotiate
Ok. I’ll remember to wear a grey suit (tho I do look better in B & W!)