Bridging the Communications Divide
Over the years of transitioning from an entrepreneur to an investor, I realized there is a communication divide between the two. As an entrepreneur, I was busy starting, running and raising capital for science and technology ventures for 11 years. When seeking funding, I would hear “we don’t like your valuation”, when really what investors meant was “we don’t think you’re the right product-market fit to return my capital”. In retrospect, it seems obvious—but this is the type of information investors use to de-select deals, and it rarely gets conveyed to the entrepreneur, who is often left wondering what they could have done differently.
At Community Equity Partners and Angel Capital Group, we see between 500-1000 deals annually. There’s no way we could read this many business plans, so we use heuristics to winnow the field. Heuristics are mental shortcuts that solve a problem in a quick way and deliver acceptable results. In our industry, we can review ventures within 15-30 minutes to narrow that 1000 to 50, then spend meaningful time researching (about 2-4 hours) to reduce the selection further to 8-12 ventures. We will spend 40-60 hours on these companies, and we average about 10 companies a year. In addition to the time spent reviewing companies, our organization and team are also spending 10-20 hours per month with companies we’ve already invested in, helping them succeed. I don’t believe anyone is telling entrepreneur at the accelerator level that they are seeking business partners—not just funding—when looking for investment. This is where there is communication breakdown: expe3ctations are not properly set to begin the conversation.
It’s not that we don’t want to help entrepreneurs—it's more than they aren’t ready for our diligence process yet. As investors, it’s not our role to become a source of education for entrepreneurs, but the role of accelerators. We exist to invest in companies ready to scale their business, so we select for that characteristic. This way, we can spend the time we have on the entrepreneurs who best fit our profile.
Unfortunately, entrepreneurs who are under-prepared can easily become defensive or dismissive of investment if they feel that investors or groups are being condescending. The truth is, investors are being bombarded by entrepreneurs asking for money—once you’ve established yourself as part of an investment network in a local community, you get pitched everywhere! Angel investors aren’t trying to be arrogant, they’re just being practical. We see too many deals to dig into all of them, and 15 minutes is more than enough to decide to dig in, or pass. We filter, and focus—and entrepreneurs should be doing the same. Just because an entrepreneur doesn’t like your deal doesn’t mean it’s not a good deal—it just doesn’t fit that investor’s profile.
Entrepreneurs who are receptive to rejection and feedback are rare. All too often, actionable feedback is met with anger, frustration and dismissal. Individual investors fear the backlash of turning down entrepreneurs, so often use standardized language, and that can often feel impersonal or removed from the struggle a company goes through to find funding: deepening the divide in communication.
As a business seeking funding, it’s important to realize angel investing is a luxury, not a business for most investors. Investors don’t need entrepreneurs but are investing because they enjoy the process or are excited about an idea. People invest in people in markets they like and understand. This statement is the key to success in pursuing funding: an angel investor must like you, your market, and understand that market, before he/she will put money in. You wouldn’t pitch a food truck deal to a science and technology investor—it would be a waste of your time and theirs! In effect, your investor is becoming a business partner, and they want to invest in people they want to work with, especially since they’ll be putting in significant time and money into your venture.
We say no more often than we say yes. It’s not personal, it’s pragmatic. Expectations need to be set properly for both parties. Entrepreneurs might want to succeed, satisfy the investor’s expectations and create life-changing wealth for themselves, but they need to know that the bar is high to get high-risk capital! Inside every great angel investor beats the heart of someone who wants to give back by investing in companies that will have true impact. This means we need to say no 98% percent of the time to help that 2%--the 10 companies we review per year that are ready, willing for feedback and prepared for investment—succeed.
To secure Angel investment, entrepreneurs need to learn how to talk to investors, become competitive in the larger market, and understand that investment isn’t free money, it’s about better than average returns. Any good investment advisor can get you market-level returns with little to no effort (and less risk) than angel investment. Investors are seeking better than market returns on ideas that are check-ready and likely to succeed.
In the Southeastern US, we don’t have the density of capital, opportunity, entrepreneurs or qualified mentors to make the spray-and-pray model of Silicon Valley work. We must focus on finding the right package: team, technology, business acumen and ready-to-scale, before we engage. That’s a tall order for any company, but it’s a must for angel investors, who will be among the first to believe in a project and are investing in a long haul process. Investor Jean Peters once said, “investing in a startup is more akin to adopting a puppy than buying a lottery ticket.”
Sign up for our newsletter in our footer so you know when our next Mind of the Investor workshop is coming up. This workshop allows us to speak directly to both investors and entrepreneurs so they can understand why investors say no, and give entrepreneurs the skills they need to stand out in a sea of requests. Designed to help companies understand the communications gap and find ways to bridge it, we believe this form of collaborative discussion will be the solution. In most of the communities where we have chapters, we’re creating angels and entrepreneurs from scratch, building ecosystems that provide routes to success by setting the right expectations on both ends and giving them all the tools to succeed. We want local angels to have the opportunity and desire to invest in local deals.