Startups: Why Investors Aren't Writing You Checks

Written By: Dharmesh Shah June 26, 2006

As a follow-up to what was a very popular article titled “Why Your Software Isn’t Selling”, I thought I’d reuse that conversational (and slightly humorous style) to look at another issue many startup founders deal with.  The inability to raise investment from angel investors.

Once again, I’ll use a conversational style with a hypothetical founder.  Note:  This article is not based on any specific founder (this will become obvious as you see the extreme positions I have the “character” take).  Also, I mean no disrespect to the startup founders I have funded or otherwise explored opportunities with.  All of you have been very clueful.  It’s those other startup founders that I’m really talking about here.  J  [Please remember that this article, like the prior one, is intended to be mildly humorous.  Don’t take it too seriously].

Why Aren’t Investors Writing Me Checks?
Founder:  For some reason, and I can’t figure out why, I haven’t been able to convince an angel investor to agree to invest money in my new startup.  Despite the fact that it’s an amazing investment opportunity and is sure to make them a bunch of money.  I thought angel investors were supposed to be smart and savvy.  They sure don’t seem that way.

Dharmesh:  Well, before we go too much further, a quick note:  What you need is not an agreement to invest money, you need an investment (i.e. a check).  The difference may be subtle, but you can’t pay bills with an agreement to invest money.  But, moving beyond that, a lot has to do with whether you’re talking to the right angels.

Founder:  Of course I am.  I’ve done my homework.  I’ve looked through lists of local angel investors and found those that have experience in my particular space (building a next-generation Web 3.0 company that leverages anti-social networks of people that don’t like each other).  I’ve made contact with many of these angels.  Most didn’t even respond back to me.

Dharmesh:  Well, most angel investors can’t afford to spend time looking at every deal that comes their way.  As such, they tend to focus on ideas that originate from people they know or ideas that are referred to them from people they know and trust.  

Founder:  I thought that’s what VCs did and that angels were different.  Aren’t angels supposed to be actively seeking investment opportunities?  If they’re just going to sit back and wait for their colleagues to refer deals to them, what makes them different from VCs?    In any case, I read about this behavior somewhere too, so I found a couple of people that I knew that were connected to angels and had my business plan send to them through that route.  This way, I could get through the spam filter and check the “came in through a referral” box and make the angels happy.  

Dharmesh:  For the record, few angels will have the time to read a business plan.  Also, sending a business plan without first making contact and determining if the individual is interested may be jumping the gun a bit.  The goal of the referral is not to have your plan go through someone else’s email account (so it gets noticed), but genuinely get someone to look at the idea and look for a “fit”.  But, putting that aside, you have to remember that angels are indeed different from VCs in some key ways – but they’re not totally different.  Some of the VC behaviors exist for a reason, and angels are investors too – just on a smaller scale.

Founder:  Ok ,fine.  I had one of those referrals too where one the successful entrepreneur that I’m neighbors with actually did read the business plan and refer me to a few angels that he thought might be a good “fit”.  Even in this case, I’m still not really getting much uptake.

Dharmesh:  Well, you have to also remember that angels look at investments for a number of reasons – only one of which is making money on their investment.  They want to live somewhat vicariously through the entrepreneur.  They want to be able to contribute to the startup’s efforts.  They want to actually enjoy their involvement – and tell their friends and family about the exciting things their startups are doing.

Founder:  This is not a problem at all.  I have a world-changing idea that any angel would be excited to brag about to his wife and kids.  On the involvement front, I’ve already started asking potential angels for advice, access to their key contacts, help with forming partnerships and their involvement in closing some key management hires I need to bring on.  Trust me, they’ll be involved.

Dharmesh:  Well, when I say involved, I’m not really suggesting you treat them as a non-paid consultant and overstay your welcome.  Angels really want to establish some chemistry with the people they’re doing business with and their involvement, though important, needs to be limited to what time they want to invest.  If they wanted to do real work and be that involved, they’d be starting their own companies again.  Also, on an unrelated note, don’t assume that all angel investors are men with kids (stereotypes are a subtle signal that may not resonate with all investors).

Founder:  Fine, Fine, Fine.  I’m getting mixed messages here.  First you tell me they want to be involved, then you tell me they don’t want to invest that much time.  Not sure which it is.  But anyways, this still doesn’t explain why they’re taking so long to make a decision and write me a check.  This opportunity is not going to be here forever.  I can’t get started until some cash comes in the door.

Dharmesh:  I think you may be confusing your urgency with theirs.  Angel investors are rarely in a hurry to write checks.  Every startup founder believes they have a great idea and great investment opportunity – and angel investors have no way to figure out whether you’re the one that happens to be “the next Google”.  Odds of  success on angel investments are not that high.

Founder:  Clearly, their success is not going to be that high if they can’t even see a great opportunity when it’s staring them in the face.  What do you suggest I do?

Dharmesh:  Well, I think it’s going to take more conversation to really figure out your problem.  We may need to continue this over a cup of coffee next week.

Founder:  Next week?  I can’t wait until next week.  What can you do for me today?

Dharmesh:  What I can do for you today is to advise that you revisit your plan and create a “Plan B” that assumes you’re not going to succeed in raising outside funding.  Bootstrap.  Get the idea further along.  And, most importantly, read up on how angel investors work.  I don’t think you completely understand them yet.  Also, we’ll need to talk about deal terms.  You may be asking for too much money, or your price may be too high.  [Listens to founder for five more minutes about how the “price” is really very, very low given how big the opportunity is…]

…to be continued.

Wanted to cut this off here.  There are a few more concepts that I want to cover, but the article is getting too long, so I’ll save the rest for a “Part II”.

Summary of My Point:  Angel investors usually invest for a myriad of reasons (only one of which is return on their investment).  They work in cycles and are generally pretty busy people (even those like me that are not yachting in the Greek isles for 3 months a year).  The single most important factor in raising angel investment is that the angel has to like you.  This is even more important than liking your idea.

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