In the latest in his series for angel investors, Jordan Green examines the “fast investment is good investment” myth from the perspectives of both the entrepreneur and the investor.
The current fad in early stage investing is “digital media” or “social media”. Generally, this means any business which is built around a website or mobile application.
A big differentiator of this class of business is that, typically, they do not have technology innovation. Most often their intellectual property and associated competitive advantage are based in the innovation of the business model.
Occasionally there is a clever algorithm in the mix too. This means that the validation is not about whether some technology works but, entirely about whether the value proposition will fly in the marketplace.
Many of our young entrepreneurs glean their understanding of business, market and investment from vicarious or direct experience of Silicon Valley or Silicon Alley. However, Australia is not the USA. Our culture, business environment, market structure and consumer behaviour are all quite different.
Assuredly there are similarities but, in thirty years of doing business in all these markets and many others, I have learned that it is the differences rather than the similarities which underpin the biggest opportunities.
S, we encounter entrepreneurs insisting investors make instant decisions about investments because the entrepreneurs think that that is how it happens in Silicon Valley — ipso facto that must be best practice.
(Entrepreneurs — beware the investor who goes with that flow as he or she is just as likely to make the same quick decision to cripple or abandon your business.)
Those eager entrepreneurs refer to the latest news item about a deal done over coffee and a napkin as evidence that that is the way to do a deal. Such examples are often far from recent and the oft overlooked reality is that the deal made the news precisely because it is a rarity, even in Silicon Valley.
Rapid investment decisions require entrepreneurs, business opportunities and investors who are all well prepared for the investment decision.
The parties must understand the game — e.g. professional investors will not engage in negotiations to radically change the deal. A quick investment decision is predicated on ready acceptance of a reasonable deal.
Consequently, a deal poorly prepared by an entrepreneur or with a poorly prepared entrepreneur is unlikely to attract a quick decision to invest.
Entrepreneurs should not be asked to sell more than half their company unless the investor is delivering immediate material revenues.
Typically, companies seeking fast investment decisions should be ready to deliver rapid growth — i.e. reach millions of dollars in revenue within 6-12 months.
For an investor to sensibly make a fast investment decision, he should have:
- a proven track record as an early stage investor;
- deep experience in the target market of the opportunity;
- relevant market knowledge which is globally current every few hours;
- a lot more money to invest than this opportunity requires;
- a healthy acceptance of failure balanced by a credible expectation of success;
- ready-to-go investment documents which treat the entrepreneur fairly while securing suitable protections/rights for the investor;
- a very specific network of contacts that can AND WILL deliver market access and further investment for the entrepreneur; and
- an established modus operandi for interacting with and supporting the entrepreneur.
The reason for having a lot more money is not because the investor will pour it into this company. That’s a possibility but, much more relevant to making a quick investment decision is that if the investment quantum represents a very small proportion of the investor’s wealth then it is an easier risk to take.
Getting $50,000 from someone who has a $1m of wealth is much harder than getting $100,000 from someone who has $10m of wealth.
For an entrepreneur to sensibly make a fast investor decision, he should have:
- a proven track record as an entrepreneur;
- experience taking investment from this type of investor;
- a willingness to accept reasonable investment terms;
- a strong, passionate vision to grow AND sell the business;
- clear strategic focus for the venture;
- a venture with strong market validation;
- a team that is compelling in its ability to execute;
- in-depth knowledge of the target market;
- valuable insight into the customer;
- demonstrated the habit of learning from failure; and
- a credible, comprehensive plan for execution and managing success.
Further, most rapid investment decisions are done between parties that have met before and/or are readily validated. Entrepreneurs need to know who the investor is and what to expect from that investor.
Investors with very private profiles can be difficult for entrepreneurs to trust and understand quickly. The same is true for investors and their ability to rapidly validate entrepreneurs. Entrepreneurs who need to keep secrets are difficult to know and trust quickly.
Next time you hear someone bemoaning how long it takes to make an investment decision from either side of the table, stop and ask yourself if the time is really too long or if the expectation is unrealistic?
Most early-stage investments fail but almost none of the rapid investment decision ventures succeed.
An investor who makes good, fast, investment decisions is almost always an aggressive fast failure investor. Their risks are sensibly measured and carefully monitored so when things stop going well they are equally quick to stop the drain.
An entrepreneur who makes good, fast, investor decisions is almost always a rapid business builder. They understand their opportunities, respond quickly to change and manage scarce resources well.
Good investment decisions are usually the result of a good relationship between the investor and the entrepreneur. Relationships take time so it is only reasonable to expect investment decisions to take time.
A good strategy for both entrepreneurs and investors is to start working on the relationship well in advance of needing to make an investment/investor decision.
Jordan Green is an internationally sought after thought leader and speaker on early-stage investing. Founder of Melbourne Angels and co-founder of the Australian Association of Angel Investors.