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
hold tight and watch their investment be diluted (the classic squeeze); they can scramble for leverage and payback (management fees, fees for services, directorships, shot-guns); or they can pull out. Clearly, early preparation works better than last-minute scrambling, and enables the angel to plan how best to participate in later rounds. For example, if an angel reduces his initial payout, this can leave funds in reserve to enable reinvestment at the next stage. This allows the investor to get in on the ground floor and help build the company, while participating in the terms and benefits that go along with later-round financing. It also gives the angel leverage in new rounds and keeps the door open between the angel and the VCs, which is key to cooperative investing and, in effect, bridges the gap between the first and later rounds. To reiterate, the prudent angel must be prepared for the next round of financing and has already planned the route that is most workable. CO-OPERATION CAN PROVIDE MUTUAL BENEFITS There is great value to be had in today’s market. After a couple of years of blight, even big brokerages are beginning to take an interest in small, well-run companies. In one recent deal, management, a national brokerage, VCs and angel investors were all involved at the same time. The company had positive cash flow and money in the bank. The arrangement seems to be working even though the compound annual growth rate isn’t quite at 30 per cent, which is something of a concern for the VCs. But the pricing was simply too good for the players to resist. In this case, all management needed for continued growth was funding. The investors are working together to make sure management has what it needs. None of the participants wanted this company to fall into the angel / VC gap, and took steps to ensure this didn’t happen. The lesson from this example is that the prudent angel welcomes partners who can help the investee. KEEP YOUR EYE ON TOMORROW There are two key questions for every early-stage company: “How do we attract money today to build the business now?” and “How do we make this business grow into the future ?” Angels need to focus on the same questions on behalf of their investees and keep in mind that the past is history. The world has changed, valuations have changed and priorities have changed. An angel cannot change what has already happened. If VCs have already bitten into the investment, the challenge is to find a way to make the most of the flesh that remains. The prudent angel stays focused on today and tomorrow and leaves yesterday behind. TAKE ADVANTAGE OF TODAY’S PRICING Angel investors are better off than they were two years ago, though they may not realize it. The reason is that investees are generally better managed today and more focused on revenues and profitability than ever before. Many of them are showing they can survive with a delayed or even evaporated second round.
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