Editor’s note: Jim Roberts was the founding executive director of the Blue Ridge Entrepreneurial Council and the Blue Ridge Angel Investors Network. He advises communities about entrepreneur development as a source of economic development.

CHAPEL HILL – A recent study commissioned by the Kauffman Foundation and the Angel Capital Education Foundation shows that patience is one of the keys to success in the fast-paced world of startups and angel investors. Of course, patience is not one of the most-used words in describing your typical Type A, emerging-growth entrepreneur.

The study stated that angel investors get a much better return on their investment when they are patient with deeper due diligence, invest in industries they truly understand and spend more quality time actively participating in the company.

Of course, these findings will frustrate the inexperienced entrepreneurs who already feel angel investors are too slow to move and make an investment. “Time is money.” Entrepreneurs will think they are missing opportunities while the competition will have time to catch up to the innovation during the time it takes investors to pick apart their business plan. (There are arguments for and against the value of being first to market vs. being the fast follower and letting another competitor educate the market. See Vonage vs. SunRocket in the VoIP space.)

The entrepreneur should learn about the importance of preparation from the study and see that the “smart money” investor is a much better partner to have involved in their new business. If investments succeed more often when angels take more time for due diligence and give more quality time to get actively involved with their industry experience, eager entrepreneurs need to learn to attract this smart money. The study shows that angels who spend more than 40 hours in due diligence average a seven-time multiple on their investment.

I understand both sides of this story, of course, as I have been the entrepreneur eager to raise money and I have run the angel network where I wanted to protect the angels from making bad investments to keep my built-up trust and credibility.

I was shocked the first time I saw an entrepreneur turn down a $50,000 investment offer from a potential angel investor. This entrepreneur knew what he was looking for, as he had two previous exit events. The entrepreneur later raised the full first round from one strategic investor with a vast amount of industry experience.

On the other hand, I have seen the angels go into “paralysis through analysis” and wait to make an investment into a promising young company. The company died on the vine due to lack of capitalization after burning through personal resources .The investor seemed to get a sense of satisfaction from saying, “See, I told you that company would not make it.” This is especially hard if the entrepreneur is new to the area and not connected or networked into the local entrepreneur resources.

This study also shows the importance of angels having a portfolio of investments. I have seen angel investors make only one investment and then judge their interest in angel investing based on the outcome of that one investment. The industry standard is that an angel should have at least five investments in the portfolio.

Entrepreneurs are often eager to take any capital they can bring in the door at any cost to keep the doors open. Taking money from unaccredited, unsophisticated or inexperienced angel investors is not usually a winning strategy.

Inexperienced angels might have much less patience and begin to haunt the entrepreneurs by frequent phone calls, e-mails and requests for meetings to discuss the timing of their return on investment. I have heard several entrepreneurs tell the story of returning the investment money simply to stop the constant communication from the inexperienced and unaccredited investors, who are terrified by the prospect of losing their investment of $25,000 or more.

Experienced angels know that their investment may take from three to seven years to have an exit event, such as an acquisition by a bigger company or an initial public offering. Accredited and sophisticated angels understand the risk, but try to minimize the risk by making smarter investments where they can make a contribution toward making the company more successful. (They also tend to have more personal resources that allow them to sleep at night if they were to lose the $25,000 or more investment.)

Behind this Kauffman study is an important lesson for the entrepreneurs: be prepared for the needs of potential investors to address the fear they have of losing their investment.

  • Just like a bank loan, get to know the investors before you need the money.
  • Get the right service providers involved such as well-connected, but also very competent, legal and accounting firms. (They know the best angels.)
  • Create a tight business plan with enough flexibility if the market changes.
  • Attracting the right management will in turn attract the right investors.

 

"Management, management, management" was one of the most common comments. The other is that they will invest in an a team versus an idea.
-Or they invest in the jockey, not the horse.

Of course, entrepreneur support organizations such as CED, TAG and Creative Coast are a great place to network with potential angels and other entrepreneurs. The SBTDC, with the “Are You Investor Ready” and “Power of Angel Investing” events, does a good job preparing both the entrepreneurs and angel investors.

Jim Roberts was the founding executive director of the Blue Ridge Entrepreneurial Council and the Blue Ridge Angel Investors Network. He advises communities about entrepreneur development as a source of economic development. Roberts, a new resident of the Triangle, recently started a new blog about Leadership and Entrepreneurship at http://biznsalez.blogspot.com/. Jim can be reached at jimRroberts@yahoo.com.