Entreprenurs & understanding angel investors.

Utah considers itself an entrepreneurial state. Perhaps so. There seems to be no end of 20-somethings who have fallen in love with the two guys in a garage idea. But before Salt Lake turns into Boulder or Boston or the Bay, we’ll need more entrepreneurs who don’t quit after their first exit, and clean up the investment opportunities.

Entrepreneurs need to understand the psychology of funding sources. 

For entrepreneurs this means more than a little self education. Startup entrepreneurs who have been around a while know how this works.

William Borghetti, the CEO of Sendside Networks, tumbled me to this saying that I use constantly with new entrepreneurs. “This is farming, not hunting.”

By this he means that in order to gain the trust that’s necessary for an investor to give you money, time is one of the critical components. Unfortunately it’s mostly overlooked by novices who are trying to get the money and everything else done right now. But time’s necessary to understand, not only who you can take money from, but who you don’t want to.

(Not all money is the same. I actually heard an ‘Angel’ in a group discussion of a company comment about his plan to take advantage of an entrepreneur who he considered unsophisticated. And he’s not alone, there never seems to be a shortage of ‘mentors’ who think that they spew wisdom with every breath and want to be paid. These guys should be avoided like Typhoid Mary. I’ve seen this play out a number of times and it never works out for the entrepreneur. But the mentor’s happy to take credit for everything the company does form now on.)

More importantly, entrepreneurs need to understand a investors position. As an entrepreneur you’re looking to accumulate wealth. If you’re an investor, the first thing you’re thinking of is protecting the wealth you’ve already got. (Insert a fool and his money are soon parted here.) In addition to keeping wealth you’re looking at a limited amount of funds (all funds are limited) to invest and an unlimited opportunity to put that money to work.

So every entrepreneur is in the position of not only competing with all the investments open to an investor that are ‘safe’ (stocks, savings accounts) but with every other entrepreneurs deal. The investor is not looking at your deal and determining if it is a good idea to put money in there. An investors’ looking at your deal to determine if there’s any possible better place to put that money. Here’s the disconnect that happens with so many novice entrepreneurs who are thinking that they have a good deal so it’s worthy of investment. Entrepreneurs see this as investors being dismissive, aloof, and slow. But what’s really going on is that the investor is weighing his options and waiting in the hope that the next Google or Sendsides going to come along. Why? Because once that money’s in the company there’s no ability to get it out.

Another common problem with entrepreneurs who are looking for money is the naiveté they have when they’re obviously thinking that getting the funding is the big exit, the cash-out, the pay off. It’s not.

Getting funded is remarkably like getting a cash advance from a loan shark.

Entrepreneurs who think they’re going to take funding and give themselves back pay for sweat equity are not operating in any reality that I’m aware of.

I’ll insert a note here that Utah’s capital markets leave much to be desired. There are few resources open to entrepreneurs with the existing funding sources although this is changing. The angel groups and other investors are partly to blame for some of this with onerous preferences built into deals that actually work to the determent of both the entrepreneur, company, and investor. There will never be a way to raise additional outside rounds with some of the screwed up cap tables I’ve seen.

Utah ’s entrepreneurs need to get much smarter about trying to raise money. As an entrepreneur you should be trying to get close to other entrepreneurs who are ‘in the know’ rather than potential investors. Entrepreneurs know who to look to, who’s an ass, what that persons reputation is and where to go. Angels won’t tell you this because they all know each other. It’s the entrepreneurs that you need to look to for the straight talk.

Remember this; High net worth does not mean they’re actually worth much.

Read this post in Launch Magazine.