Deal-Killers: How to Turn Off Angels Investors

I'll Gladly Pay You Tuesday For A Hamburger Today. - Wimpy from Popeye

Those Deal-Killing Answers to Important Investor Questions

Every month, like clockwork, I receive three to five emails from exasperated entrepreneurs who can't understand why the angel investor, or investors, they were talking to backed out of the deal, despite giving it their thumbs-up. In most cases, the entrepreneur invested several months in answering the investor's questions, editing their business plan to incorporate feedback provided by the investor, and generally trying to build a relationship with them based on trust.

Then just when the entrepreneur was expecting the angel investor to finally pull out his checkbook, the latter either said, "I'm going to pass on this," or they simply stopped returning phone calls and replying to emails.

This leaves a frustrated entrepreneur asking, "What happened? What went wrong?"

While I can't guarantee the true explanation of why your angel investor got cold feet at the end, I can offer you a pretty good guess based on two decades of experience.

No matter how much an investor likes your deal, at some point he or she will start asking themselves, "So, how will I get my money back out of this deal?"

Now here's where the deal-killer answers come into the picture. Every book I have ever read on raising money and writing business plans advises you to answer the "exit question" with this standard line:

"Eventually we will either IPO or be acquired!"

Note my italicization of the word "eventually" here. It's to emphasize just how incredibly vague and meaningless this answer really is to an investor.

When an investor hears these words, the natural response is to get cold feet. It's really no different from hearing your unemployed brother-in-law say, "I need you to give me $10,000 and I promise to pay it back as soon as I win the lottery."

I have sat on both sides of the desk over the years. Initially, I was the entrepreneur using that pat answer and turning off potential investors. Later on, I was the investor whose eyes would glaze over every time I heard it from a money-seeker.

Savvy entrepreneurs structure their financing deals so that investors can begin pulling out their principal quickly. This typically involves a plan for monthly installments which pay off the investment principal over a fixed term much like a bank loan.  If you can show an investor that you treat the return of their money as one of your top two priorities, they will be more likely to invest. (The other priority, obviously, is to make the company a success.)

No one wants to hear vague Wimpy-style promises about anything--especially when it comes to money.

To find how to structure a deal to get around this problem, you can subscribe for free to: Subscribe Me to Startup Financing

You will need to confirm your subscription by clicking

the link in the confirmation email.

Learn how to close deals with angel investors.

Comments

[Gordon]

Excellent point. I never thought of it that way.

[Basil Peters]

Great post. I agree that many entrepreneurs scare off angel investors with their exit strategy. Even worse than your line "Eventually we will either IPO or be acquired!" is when they preface that by saying in a couple of years they want to raise a venture capital round. If they do, the poor angels will probably be stuck in the company for over a decade. These days very few angels have that kind of patience. I've illustrated this on my blog at
http://www.angelblog.net/Venture_Capital_Exit_Times.html

[Brad Swatogor]

Very helpful post, blog, and related book.

I am a first-time entrepreneur currently developing a business plan for my startup. Developing the exit strategy has been a source of confusion and stress for me. This has cleared many things up.

Thanks

[Rachel Zedeck]

It's always good to see a single piece of advice that can change the approach we take to explaining a plan while also encourage the entrepreneur to think through their entire planning.

[Chuck]

dragging a guy thru the mud for several months and then backing out ..is not someone you want to do business with in the first place.
when I get a deal I like, I tear it down and rebuild it the way i want it and tell the guy..if you can do "this" I'm in.

I just dont have the time to spend back and forth , month after month,,,and not get paid for my time.
..But thats just me,,to bad others dont figure that out..I think.