Why Angels Say 'No' to Entrepreneurs

By Small BusinessFOXBusiness

The competition is fierce for entrepreneurs who are gearing up to raise capital from angel investment clubs or venture capital funds.  The good news is investors continue to plow funds into innovative privately-held companies throughout the country.

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The bad news is too many entrepreneurs will get fast no’s from angel investors, who are more inclined to provide the first round or two of capital to startup businesses than venture capital funds. Making the rejection even more frustrating for entrepreneurs is they probably won’t get a candid answer from angels about why their deal didn’t get the nod of approval

One factor that influences angel investor decisions is their own investment track record.  You can imagine that the big money-losing deals are always a sore point in their memories. Recently, I spoke with a particularly agitated angel investor who swore "never again."  I'm sure this investor will be forever wary of any new deal that sort of looks like, sounds like or acts like another goose egg investment.

Here are some issues that angels say are on their lists of “never again” investments.

Product feature emphasis.  First-time angel investors all eventually learn the painful lesson that cool products by themselves don't necessarily lead to investment success.  Product features can be copied by competitors or become obsolete in fast changing markets.  Lasting investment gains are made in companies with shrewd branding, emphasis on customer building, and profitable product or service delivery. 

Husband and wife teams.  Investors need to count on board members and top managers to put the needs of organization before personal loyalties.  It's hard enough when stress-filled startup or early stage companies have to replace founding board members or executives or cut back salaries when money is tight. But when spouses are tied up in work-intensive companies, investors say the troubles and resentments magnify. Equally, employees and investors never win when a troubled marriage is closely tied to the company’s lead managers.

Off-site or moonlighting CEO.  Startup organizations require a high level of constant collaboration.  While certain functions can be outsourced anywhere on the globe, there is no replacement for onsite leadership.  The upshot is angels expect entrepreneurs to quit their cushy day job to dedicate 100% of their time to the startup’s success.

Bad recordkeeping.  Angel investors are more likely to be exposed to entrepreneurs who don't yet understand the importance of thorough recordkeeping than venture capital funds.  There is a long list of troubles that can come out of the woodwork of poorly administered companies including unrecorded shareholders, liabilities or litigation; questionable intellectual property ownership; unpaid payroll taxes; and more.  To get a favorable response from angels, get your company’s administration in pristine shape before asking for their cash.

Lack of management financial expertise.  Should an accomplished technologist run a company?  Not if the technologist has no understanding of basic accounting, financial statement elements, pricing decisions and no desire to learn.

Investing in common stock.  When businesses don't grow according to plan, it's better for investors to own preferred stock than common stock.  To issue preferred stock to investors, entrepreneurs have to unwind a S-corporation business structure

"Work around" is an expression software code writers say when they are confronted by a problem or recurring bug.  Now that you know what can scare off investors, make sure you don't make it easy for investors to give you the fast no.

Susan Schreter is a veteran of the venture finance community and entrepreneurship educator.  To learn how to negotiate funding from angels or venture capital fund investors, join Susan for an in-depth  online workshop  “Funding Business Growth.”  Follow Susan @StartOnPurpose  

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