The Angel Investors" Ten Commandments
The Angel Investors' Ten Commandments
By
William Cate
Angels get their wings clipped regularly. It isn't long before losing angels lose their wings and stop flying. The reasons for the angels' investment loses are usually a combination of high risk speculation and the failure to follow one or more of the commonsense rules that avoid massive business finance loses.
If you want to fly like an angel, here are the Ten Commandments you must obey.
I. Thou Shall Require a Written Business Plan.
It should be clear, concise, specific and focused on the proposed speculative investment. It should lack boilerplate, cashflow projections and pages of industry data.
II. Thou Shall Investigate the Business Plan.
This means confirming every major specific claim in the business plan. If you find one inaccurate material statement in the business plan, you should assume that there are at least ten more lies that you missed. Any misstatement of a material fact should preclude your investing in the Startup Company. It isn't vital that the COO received his ME (Masters of Engineering) Degree in 1992 or 1993. It is material that he has the degree from an accredited university.
III. Thou Shall Require the Entrepreneur to Pay Your Due Diligence Costs.
Swindlers or flakes are offering speculative investments. Requiring that they pay your reasonable costs of verifying their claims tends to reduce the number of crooks or nuts that target you as a pigeon. If you don't charge your Due Diligence costs, the swindlers have nothing to lose by lying to you. If you catch the lies, they lose nothing. If you don't catch their lies, they get your money. Charging for your investigation means that they have something to lose if they are lying. Few crooks will risk their money if they know they might be caught in a lie.
IV. Thou Shall Invest in Industries that You Know.
A medical doctor risking money in a gold mine speculation will certainly lose the risk capital. That same medical doctor speculating in the development of a medical product or service is far less likely to lose their risk capital. The reason is the Doctor knows nothing about the mining profession, but knows a great deal about medicine.
V. Thou Shall Not Throw Good Money After Bad
If you lost $300,000 in a bad investment, it won't become a good investment by your risking another million dollars. When in doubt, don't continue to risk your money in the venture.
VI. Thou Shall Rewrite the Investment Offer
Your investment in the Startup Company should be made in phases. The entrepreneur should define the phases and the expected results from each phase of your investment. If the expected results don't occur, you should have the option of stopping your funding of the company. Your wings are not as badly clipped, if you lose $50,000 rather than $300,000.
VII. Thou Shall Not Pay Excessive Salaries and Benefits
Know the average salaries and benefits for management staff in the industry and the geographic area that your startup company will begin their operation. Aim to pay 20% below that average wage. The difference should be credited as sweat equity and justify part of the management teams' ownership of the company.
VIII. Thou Shall Require Significant Investment by the Management Team in the Startup Company.
All Startup Companies have series problems in their early stage of development. If the Management Team isn't at serious risk of losing everything they own, they will lack the incentive to resolves these problems. If they don't have full faith in their dream, you shouldn't be investing in it.
IX. Thou Shall Regularly Visit Your Investment.
Drop by and buy someone lunch. Go to the Trade Shows where your Company is an exhibitor and visit their booth. Get a feel for the day-to-day operations of the company. Get a feel for how your company is progressing and what problems they are facing. This practice tends to avoid investment surprises.
X. Thou Shall Expect Cashflow within 12-18 Months
While cashflow in 3-6 months should be preferred, you shouldn't invest in companies that require more than 18 months to achieve revenues. They may be developing the best thing since the PC, but if it will take them more than 18 months to get it to Market, you can't afford the gamble.
The alternative to being an angel is to play the Stock Market like the Pros. If you are interested in learning how the Market Professionals play and profit from the stock game visit: [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/id39.html. We've grafted this strategy to the Venture Capital Club format. You can learn it without joining the Global Village Investment Club.
By
William Cate
Angels get their wings clipped regularly. It isn't long before losing angels lose their wings and stop flying. The reasons for the angels' investment loses are usually a combination of high risk speculation and the failure to follow one or more of the commonsense rules that avoid massive business finance loses.
If you want to fly like an angel, here are the Ten Commandments you must obey.
I. Thou Shall Require a Written Business Plan.
It should be clear, concise, specific and focused on the proposed speculative investment. It should lack boilerplate, cashflow projections and pages of industry data.
II. Thou Shall Investigate the Business Plan.
This means confirming every major specific claim in the business plan. If you find one inaccurate material statement in the business plan, you should assume that there are at least ten more lies that you missed. Any misstatement of a material fact should preclude your investing in the Startup Company. It isn't vital that the COO received his ME (Masters of Engineering) Degree in 1992 or 1993. It is material that he has the degree from an accredited university.
III. Thou Shall Require the Entrepreneur to Pay Your Due Diligence Costs.
Swindlers or flakes are offering speculative investments. Requiring that they pay your reasonable costs of verifying their claims tends to reduce the number of crooks or nuts that target you as a pigeon. If you don't charge your Due Diligence costs, the swindlers have nothing to lose by lying to you. If you catch the lies, they lose nothing. If you don't catch their lies, they get your money. Charging for your investigation means that they have something to lose if they are lying. Few crooks will risk their money if they know they might be caught in a lie.
IV. Thou Shall Invest in Industries that You Know.
A medical doctor risking money in a gold mine speculation will certainly lose the risk capital. That same medical doctor speculating in the development of a medical product or service is far less likely to lose their risk capital. The reason is the Doctor knows nothing about the mining profession, but knows a great deal about medicine.
V. Thou Shall Not Throw Good Money After Bad
If you lost $300,000 in a bad investment, it won't become a good investment by your risking another million dollars. When in doubt, don't continue to risk your money in the venture.
VI. Thou Shall Rewrite the Investment Offer
Your investment in the Startup Company should be made in phases. The entrepreneur should define the phases and the expected results from each phase of your investment. If the expected results don't occur, you should have the option of stopping your funding of the company. Your wings are not as badly clipped, if you lose $50,000 rather than $300,000.
VII. Thou Shall Not Pay Excessive Salaries and Benefits
Know the average salaries and benefits for management staff in the industry and the geographic area that your startup company will begin their operation. Aim to pay 20% below that average wage. The difference should be credited as sweat equity and justify part of the management teams' ownership of the company.
VIII. Thou Shall Require Significant Investment by the Management Team in the Startup Company.
All Startup Companies have series problems in their early stage of development. If the Management Team isn't at serious risk of losing everything they own, they will lack the incentive to resolves these problems. If they don't have full faith in their dream, you shouldn't be investing in it.
IX. Thou Shall Regularly Visit Your Investment.
Drop by and buy someone lunch. Go to the Trade Shows where your Company is an exhibitor and visit their booth. Get a feel for the day-to-day operations of the company. Get a feel for how your company is progressing and what problems they are facing. This practice tends to avoid investment surprises.
X. Thou Shall Expect Cashflow within 12-18 Months
While cashflow in 3-6 months should be preferred, you shouldn't invest in companies that require more than 18 months to achieve revenues. They may be developing the best thing since the PC, but if it will take them more than 18 months to get it to Market, you can't afford the gamble.
The alternative to being an angel is to play the Stock Market like the Pros. If you are interested in learning how the Market Professionals play and profit from the stock game visit: [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/id39.html. We've grafted this strategy to the Venture Capital Club format. You can learn it without joining the Global Village Investment Club.
