Angel Investors More Powerful Than VCs

This is the best time for Angel Investors to partner with entrepreneurs, since the early stage investment community is going through a radical change. VCs find it very challenging to relate to early stage ventures and their Founders, and these VCs are more likely not entrepreneurial. Angel Groups who used to promote entrepreneurialism have been acting more like traditional VCs. Individual Angel Investors with strong business skills and extensive operations experience are in the ideal position to bring about the financial and operational revitalization needed to create new businesses.

Many retired successful business people and downsized seasoned business professionals have experience and money to help a new company get off the ground or mature it to sustainability. These same people also naturally understand how to participate in operational decisions without the desire to micro-analyze a spreadsheet for every decision because they know what it took for them to get where they are today. Younger companies face too many issues that require gut instinct from experience. Only a few people truly fit the mold of understanding what it takes to be an entrepreneur, and only a few more have the money and sense of opportunity and excitement to participate in the rebuilding of businesses across the world.

Angel Investors understand what it takes to be an entrepreneur and are excited to be a participant in the company, whether that is as a Board Member, Advisor or even an Employee. Without just focusing on metrics (unlike most VCs), the Angel Investor realizes the importance of entrepreneurial strategy and execution with focus, discipline and adjusting to the many bumps in the road that are crucial to achieving the desired business results.

This is a unique time to essentially erase all the complex techniques associated with early stage investing and go back to basics to invest in entrepreneurialism, innovation and seizing of business opportunities where we work together to build a valuable business. Most VCs will probably not agree with this theory, especially when it is common practice to jockey for all forms of investment terms that will benefit the VC at the expense of other investors. VCs' investment terms and practices are based on their experiences and are designed to protect their investors, and to maximize returns. This may be a short-sighted view and may have unintended consequences for the overall start-up business culture. If, through the structuring of follow-on investments by VCs, early stage investors get squeezed out and have poor returns, then there will be—not too surprisingly—fewer early stage investors and fewer entrepreneurs who get financial and mentoring support needed when just getting started.

What is wrong with Founders simply adding up invested capital and sweat equity to determine the value of having a new investor join the company? The Founders (and existing investors) determine what extra value the new investor may bring to the company and then negotiate a new valuation. Voting rights should be equal based on the equity ownership, and possibly a few guidelines are set such as Board Membership and Super-Majority requirements for critical decisions such as the acceptance of new investors. Then a new investor comes aboard and the process is repeated. Hopefully the valuation of the company will always go up, but it should be an equally proportionate opportunity for whenever the company requires additional capital at a reduced valuation. Everything such as expenses and salaries should be agreed upon, at least by the majority, in order to grow the company. The attractiveness of this approach is that everything is fair for everyone and stays within the spirit of entrepreneurialism.

If you truly believe in this approach, you will find that distance and money between entrepreneur and investor may not be as big a barrier as one would expect. Most industry experts will tell entrepreneurs that Angel Investors must be within a short driving distance to their business and will only invest token sums of capital in the tens of thousands of dollars to a new venture. Now is the time to break boundaries and create new opportunities, including within the investing community. The right opportunity and management experience allows you to raise hundreds of thousands from investors who can be separated by more than a thousand miles from the business itself, through both state and country.

Proving this theory was not necessarily my intent, but I have been fortunate to benefit from the philosophy while surrounding myself with Angel Investors from Minnesota, New Jersey, California, Florida, Canada and Britain and who have contributed almost $2 million to my venture with investments between $100,000 and $350,000. None of these individuals knew me before investing and all of these people are sophisticated business persons who are making our early stage company, MyOnlineToolbox.com, thrive. This process began before the financial meltdown, continued during it, and it continues now that we are entering a recovery. While many people propositioned me with complex negotiating tactics, the other co-founders and I found it in the best interests to simply make it fair for whoever joins our team. This includes flexibility for when someone joins the investor group, what money they bring to the table and what extra value their experience brings to the table.

It's the equivalent of building a family where a husband and wife decide to have many children over the years. Isn't the newborn baby as valuable to the family as the seven-year-old sibling? However, perhaps the seven-year-old already has some money saved for college while the newborn doesn't. It is rather easy to convert this to valuations and splitting up value when building a company while still maintaining the importance of each individual who makes up the group. It is really that simple and is an approach that has been applied to our early stage company in order to eliminate traditional distance and investment amount constraints.

One believer of this approach is David Collin of New Jersey, an Investor in early stage companies for 40 years and having worked in the investment business for 30 years. David says, "'I have always enjoyed the early stage investing process, starting with the belief in the concept or product, trusting in the abilities of the founders and seeing a path for future financing which currently has become the most difficult aspect. However, having all investors on equal terms has allowed me to take a rather active continuing involvement in the company's evolution."

Another believer is Simon Hunt of Britain, an Angel Investor with over two dozen investments. Simon's belief is that while he is investing, he is also getting involved in the management. Simon comments, "Angel Investors are now putting large monies into opportunities that VCs will not touch. Everything is becoming very flexible for the existing team to embrace participation from new investors. Angel investors can have strong influence over improved financial controls and even the introduction of new management team members that sometimes means replacing company founders."

Even another believer is Ron Thompson of Canada, a sophisticated Angel Investor for more than ten years with a significant number of venture investments and participant in syndications among early stage investors. Ron states, "It has been a rewarding experience participating in MyOnlineToolbox—both with management and the other investors. Without a doubt, this is a unique venture where the resourcefulness of management and the collaboration with investors is proving the importance of adaptability and leverage to move the business forward."

One of our initial Angel Investors is Mac Lewis of Minnesota. He has led several early stage companies, taking one public and has also been an active investor in early stage companies. He comments, "When looking for investment opportunities, one naturally likes to see a large potential market and an idea or plan with sustainable differentiation. But with an early stage investment, the most important ingredient is the energy, passion and capability of the entrepreneur and the founding team. Regardless of location, I look for an entrepreneur who has the personality and interest to collaborate; nothing is more frustrating in an entrepreneur than unwillingness to actively listen and solicit input. Building a Company is not an individual sport. Brian started with a founding team that included a prospective customer—providing great guidance in the prioritization of capabilities in MyOnlineToolbox—and he has continued to build a team of investors, advisors and contributors that are focused together on growing the business."

Bill DuPriest of Florida worked for large public companies for many years, and following that was a co-founder in a business that grew to ten million dollars in sales annually. Bill never invested in an early stage company and was intrigued after learning about MyOnlineToolbox (while reading Forbes). Bill says, "It was rather easy for me to decide to invest in this opportunity after speaking to the co-founders and investors. The fairness amongst all investors and the opportunity to have active participation made it very attractive for a fast decision."

I have been very fortunate to have assembled the team of investors who have supported me and the other co-founders of MyOnlineToolbox.com. There have been plenty of business development issues as well as financial challenges, yet our investor group has always been solid. I wonder how many entrepreneurs are not successful at raising capital because they are trapped in the old ways of strategizing for capital. I also wonder how many Angel Investors are sitting on the sidelines because they do not know where to start, look at only local companies or do not realize that a little more capital puts them on par with many other forms of investors. The theory is to stay focused on the entrepreneurial spirit and look to grow a company with easy attractiveness for existing and new investors to support your goals. I know this will continue to be the same for me as we look for others who believe in our opportunity and think beyond the old ways of limited distance and capital to be a participant. When the company succeeds, it will be a win-win opportunity for all.

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1 Comments

  • Claes MIkko

    Brian, thanks for an great article! You should really start tweeting and spread the word.
    Br,
    Claes Mikko