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Are all angel investors ruthless?

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sahil_merchant_iconMost of mine are. Ruthless that is. And I think it is a damn fine thing.

Once again, I don’t pretend to be generalising across the spectrum of angel investors, trying to draw conclusions on the basis of my ten or so.

The beauty of writing a blog called “The Entrepreneurial Truth” is that I am writing my truths. You can question their applicability to your lives, but you can’t question the authenticity of my subjective experiences. If these experiences are useful to you, then this post has been worthwhile.

The various angel investors who have backed mag nation have wanted to see real pain from me at every step in the journey. While at times I have bemoaned a perceived lack of heart, they are just being smart. The pain they have demanded has manifested itself in two ways:

  1. Begging and borrowing from family and friends
  2. Extending myself financially beyond what is wise

Begging and borrowing from family and friends

There is a term in the VC world called “Three Fs”. It refers to Family, Friends and Fools. The logic says that if an entrepreneur is not able to raise money from these three sources, then why should professional investors get involved.

It is not pleasant having to ask family for money, and even less so with friends or colleagues. Most angel investors I’ve met have held The Three Fs in high esteem. So much of the success of a new venture depends on the people behind it, as opposed to the idea underpinning it. And while investors might have a good feel for the latter, it is hard to judge the former. Who better to rely on than the people who actually know the entrepreneur – his/her friends and family?

I raised over $5 million for my seed round from various angel investors. Well, I got commitments for over $5 million. I ultimately brought in $550,000 in funds. Around 9/10 of each dollar raised didn’t eventuate (there is another blog post itching to get out on this point). The money that did materialise all came from family, family connections and colleagues. Only after this did I manage to successfully raise from investors at more of an arm’s length.

My business has also borrowed a substantial amount from my Mum. It was the only money she had. She subsequently got divorced and had to move in with me because she had nowhere else to go. She can’t buy a house because her funds are locked into my business. The investors don’t care about this. From their perspective, this money might as well be mine and they won’t let it out. The pain keeps me focused. It shows that I am fully committed to making it a success and getting us all an exit.

If I am ever in the position to be an angel investor and you come looking to me for funding, I too would want to see that you have gone through the ignominy of having to beg and borrow from everyone you know. It shows that you are desperate – willing to leave no stone unturned for your success. And if they have not backed you, neither would I.

Extending myself beyond what is financially wise

If I was working in the commercial world, I would probably now be earning five times what I currently earn. With six mouths to feed, my investors know that I do not do it easy. Yet I keep on showing up to work every day, working 18-hour days and busting my balls for a business that I genuinely believe in. Well, I have to believe in it. There is no way that I would be doing what I am doing if I didn’t.

All my life savings are in mag nation. For every new round of funding that has occurred, I have participated, even if only for a small amount compared to the other investors. And when I no longer had a cent to invest, I borrowed from my professional investors to further invest. Whatever my funders think of me, they have no doubt that I believe in what I am doing. Some people say they are passionate and believe, but actions speak louder than words.

None of this would be considered smart by those of you more risk-averse than I am. Objectively speaking, it probably isn’t very smart. Calculating the odds of success and the likely Expected Value of the path I have taken versus the corporate path I was on, my former life was undoubtedly the smarter wealth-building strategy.

However, the objective of this post is not to examine my choices, but to dissect how I have raised external funds. Showing pain has been a fundamental part of my success (where success in this case is defined as raising professional capital).

I am highly aligned to the success of mag nation. There is little chance that I will lose motivation mid-stream, take extended holidays or quietly run personal expenses through the company. In many cases, pain has its uses.

My angel investors have demanded their pound of flesh, and so they should. The fact that I have been willing to give it highlights just how serious I am about what I’m doing. It doesn’t guarantee success, but it does keep me focused. When the sharks are circling, only the really committed will dive into the water.

Sahil Merchant is founder of mag nation. Follow him on twitter: @sahilmerchant. His launch post can be found here.

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