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How Angel Investors Provide “Smart Money” to Entrepreneurs

by Suites Capital
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Article adapted from Seraf: Portfolio Management for Early-Stage Investors


When entrepreneurs seek out angel investors, the majority are looking for financial capital. Very few entrepreneurs understand the importance of finding smart investors who will invest in both Financial and Human Capital.

At Launchpad, one of our core philosophies revolves around this issue. We aren’t interested in making investments where our only value add is cash. If we don’t have expertise in our group that can help an entrepreneur succeed, we won’t invest.

Ham practices what he preaches. He works closely with many of the companies he invests in, whether as a board member, board observer or just to help out. Having sat on many startup boards since 2002, he understands the kind of Human Capital that angels can provide. And, he witnessed when angels do more harm than good. 

What roles do you think angel investors can perform for a startup company?

I like to classify the roles that angel investors take on with a startup in the following three categories. The list starts with the most casual of roles (the mentor) and ends with the most committed of roles (the corporate board member or director).

  1. Mentor
  2. Advisory Board Member
  3. Corporate Board Member

If you could give an entrepreneur advice on working with angels, what would it be?

Communicate, communicate, communicate! Entrepreneurs need to understand that a good angel investor is more than just a walking/talking wallet to keep his company well-funded. If you select your angel investors wisely, you can augment their financial capital with their human capital. So, how do you get the most out of your angel investors’ human capital? You communicate with them on a regular basis. We advise CEOs to send out quarterly reports to all investors (and love it when they do monthly). The focus of the report is a business and financial update, but it’s important to ask something of the investors. For example, if you are looking to hire a new VP Marketing, do they have any candidates. Or, if you are trying to make inroads into a large company, do they have connections to that company. Even something as simple as requesting that they share a recent piece of content on social media – the key is to keep them engaged.

What are some things angels should be careful never to do?

In Christopher’s article on the Key Sins of Angel Investors, he categorizes 25 key mistakes angels make in three levels: Mild, Major and Fatal. I won’t repeat what he says here, but I do want to call out a couple of points he makes. First of all, angels need to be careful about wasting the time of an entrepreneur. Time is a precious resource for startups, and if you are draining this resource, you are doing more harm than good. Second, entrepreneurs starting their first company have a limited understanding of raising capital for their business. Just because you’ve made 20 investments doesn’t mean you should take advantage of a naive entrepreneur!

Should entrepreneurs have different expectations of impact investors and what they might do to support the company?

To answer this question I am going to have to start with a generalization. First off, formally organized impact funds are still a relatively new source of financial capital. Second, a significant percentage of impact entrepreneurs are more interested in the mission than in business. So, they tend not to be overly sophisticated in business and finance. This combination leads to a situation where many impact entrepreneurs don’t know what they are getting into when they work with an impact investor. 

It’s important for impact investors to educate entrepreneurs on the expectations for how to best apply financial capital to

achieve the impact goals the investor and company are looking for. A proactive investor will find the primary impact within the company and help the entrepreneur focus on expanding that impact. To do just that, an impact investor should help the company define and track Key Performance Indicators (KPIs) that measure the most important outcomes for the target stakeholders. And, the measurement and reporting of these KPIs should be organized in such a way as to not overly burden the entrepreneur with significant extra work.

Providing a well thought out KPI reporting framework that supports the achievement of real impact for stakeholders is just one of the many ways an impact investor supports the company. Furthermore, many impact investors help raise awareness for their portfolio companies by promoting their causes through philanthropy, social media and community engagement.

Talk a bit more about board seats. What kind of commitment is a board seat for the angel investor?

As a director, you are making a significant human capital commitment to the company. Although you aren’t an employee of the company, you are expected to commit your time and expertise to the company. My general expectation for a board seat is that I am committing around 100 hours per year to the company. I break that down as follows:

  1. 6 to 12 Board meetings/year with 1 hour of prep and 3 hours of meeting time (24 to 72 hours)
  2. Weekly or bi-weekly phone call with the CEO at 30 minutes per call (13 to 26 hours)
  3. 10+ activities for other meetings, candidate interviews, fundraising calls, etc. at 1 hour per event (10+ hours)

Board meetings are an obvious commitment for all board members. Good board members read all the board materials in advance and come prepared for the meeting. Between board meetings, I like to stay informed, and so I will arrange for a weekly 30 minute phone call with the CEO. It’s scheduled for the same time every week, and gives the CEO an opportunity to ask for my help on tough issues in real time instead of waiting for the next board meeting. And finally, unscheduled events happen with startups. Such events include a job interview for a senior member of management, a compensation committee meeting, or a discussion with a new potential investor.

So that covers the human capital commitment. But what about the financial capital commitment? Since you are an angel investor in the company, you have already invested some of your money. As time goes by, the company will need to raise additional funds. In many cases, board members are the first to commit to new rounds of financing. So keep that in mind as you stage capital for your investment in the company.

As a board member, what topics do you focus on when you are speaking with the CEO?

On my weekly phone updates with the CEO, I like to keep it really simple. I start by asking for a quick status update on the business, but I don’t dig into the nitty-gritty of the company’s daily operations. I spend most of my time discussing the following three topics:

  1. Team
  2. Finances
  3. Strategy

When talking about the “Team”, I want to make sure the CEO is spending a significant percentage of her time hiring the right people (“A” players), building a strong company culture, and keeping the organization focused. In our weekly conversations, I am always listening for bottlenecks that might indicate it’s time to bring on a new team member. Sometimes it’s as simple as hiring an assistant to offload some of the non-critical tasks on the CEO’s overburdened desk. Other times it’s when the company reaches an inflection point where it’s important to bring on board a full-time CFO to make sure the company is receiving the right metrics to help operate and grow the business. The conversation about Team is the most frequent topic on my weekly CEO call. I can’t remember the last time I didn’t discuss it in one form or another.

With “Finances”, the key topic revolves around not running out of money. Startups burn through cash quickly. The biggest mistake a board and CEO make is to not be prepared for replenishing the bank account in time. As a director, you need to make sure the CEO recognizes when the company will be out of cash and then work with the CEO to ensure it doesn’t happen. Conversations around Finances are episodic. They are held frequently during periods of fund raising, and then they go away for a quarter or two when the company’s bank account has sufficient cash to last out the year.

The final topic, “Strategy”, is a bit more nuanced. In my case, I think of strategy along the lines of the company’s “North Star”. For me, a company’s North Star is the beacon by which it navigates. Once you find your North Star, you stick with it and make sure the entire company understands where you are going. I want to make sure the CEO is communicating on a regular basis with the ENTIRE company to keep everyone on course. As a director, you can help the CEO by acting as a sounding board in defining and refining the company strategy. Remember it’s not your job to create the strategy and make the CEO follow it. Conversations on strategy occur on a fairly regular basis.

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