C HAPTER 5: B RIDGING T HE G AP : H OW T HE P RUDENT A NGEL C AN S URVIVE T HE D OWN -R OUNDS
These figures illustrate how risky it is to place one’s trust in an entrepreneur’s earliest projections. As early-stage investors, angels often get swept up in management’s enthusiasm. Instead, they need to put their financing on a more cautious footing and ask themselves: “If these sunny projections don’t materialize, how am I going to protect myself when the company goes back to the market for more money?” MONITOR THE INVESTMENT FROM THE OUTSET The prudent angel will ask for best and worst-case projections at the outset and assiduously track results against them. Angels need to know when the company’s course deviates from expectations, and when it does, be prepared to take the necessary steps. These may include a further personal investment, joining the Board, helping with marketing, finding a purchaser for the investment, writing-off the investment, finding additional angel investors or providing stronger incentives for management to deliver. THE ENTRY OF THE VENTURE CAPITAL INVESTOR Let’s assume the angel investor has retained his investment. A few years have passed and the early, enthusiastic, hockeystick revenue projections are a distant memory. The company has built a solid foundation and is now attracting interest from venture capitalists. This is great for the company and may help it to realize its goals. However, angel investors must be aware that their situation changes with the entry of the VCs. Once in, the VCs need to make a quick exit in order to provide a constant flow of income to their investors. They also need to leave some value in the company for managers to ensure the necessary incentives are in place to continue growing the business. However, as noted above, early-stage investors can easily get squeezed out. Having provided the initial capital for growth, the prudent angel is alert to the ongoing need to protect and build his investment. Fortunately, there are several mechanisms available to help him. These include averaging down, the use of formal debt instruments of various sorts, guaranteed pay-outs, management fees, finders’ fees, shotgun clauses triggered by share dilution and representation in the form of directorships, among others. THE GAP In truth, new businesses rarely begin generating revenue momentum — or VC interest — until the third or fourth year of operation. This may be too long for many angel investors to wait, as the risk is simply too high. Consequently, there is often a gap between the time when angel investors should or must get out and venture capitalists are ready to come in. The result can be a stalemate in which all parties withdraw from the game — VCs because they can’t get the requisite returns within the requisite time frame, companies because they don’t like the terms of investment and angels because they don’t want to risk more money. Ideally, the prudent angel identifies the need for more money early on, and works with the investee to pinpoint and attract a venture player whose terms are mutually agreeable. Unfortunately, the reality in today’s environment is often rather different and angel investors must be prepared for it.
37
Powered by FlippingBook