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 their money.

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Learn how to close deals with angel investors with Revenue Royalty Certificates. They are occasionally referred to as Revenue Participation Certificates.

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.

[Carlos]

Interesting post; but doesn't the monthly installment payback approach somewhat defeat the purpose of an early-stage equity investment? If the goal is to avoid a wimpy response (which you accurately described in your post), would it be sufficient to just have a clear exit strategy? For example, I'm going through this process right now and I'm getting favorable reactions from my intent to "sell the company in 3 years". Thoughts? Thanks.

[Mark Gould]

Having 4 decades of experience in closing investors (including structuring and participating in acquisitions and IPOs), I would never say that calling your exit strategy (IPO or being acquired) is "wimpy." Based on timing or the condition of the market, it may be unreal but I doubt it really is less preferable to (basically) a bond or preferred stock scenario. And the ability to pull out profits quickly may not be the most ideal answer to management. It is true that thinking your deal is good enough for an IPO may be wishful thinking and acquisition is all you've really got. And it may be true that being acquired in a share for share exchange is a most likely scenario. Thus, saying one OR the other is probably the best general advice. In other words, don't present alternatives as that can come across as a "maybe" which is what was likely the source of turn-off/turn-down.

[Ram Kumar]

Any start-up entrepreneur should have an alternative investment proposal to fall back upon if the angel investor backs out. This alternative with a clear-cut schedule can be a realistic exit strategy. In essence the angel investors should feel that their contribution is preferable to the other source and understand that there really is an alternative.

[Dave Lyons]

Are angels ever interested in exploring a re-payment plan for their initial investment or are they always interested in a lump sum repayment?

[Peter]

Yes, most will happily take payments. That's why you use a Revenue Royalty Certificate.

[Guy Chapman]

Very Good article and ver informative. We are seeking Angel investors for a large wind project and we have had some interest. I look forward to more information from you

[Jay Joyce]

Why don't investors seem to want someone who believes in their business so much that they want to keep it once it is up and running?
Sure you would end up paying the investor many times what you would have to a bank, but that's why you need an investor.

Don't they want someone who knows the business is a long term money maker & not something to cash out & run from as soon as possible.

[Frank]

How would this apply in the biotech/pharmaceutical industry where a company will most likely not be making a profit or even sales prior to an IPO or acquisition?

[Satyam]

Good post. The entrepreneur should demonstrate the willingness to 'pay back' in the model, after achieving some level of profitability.
I'd consider - if a portion of the profits are allocated for paying back investors, even after 2-3 years. Demonstrating the willingness pay back - is more important here.

[Thomas Doyle]

thank you for information I need a funding of 5k what monthly payment with interest would be sound to keep an angel interested this is a very small venture but a real one thank you