I’ve had a particularly interesting week in Austin; through some events and lots of coffees, I’ve meet with a ton of founders, perhaps more than ever in 3 days alone. Interesting why?
Easily half, argued with me that startup investors are seeking revenue and don’t require an exit.At least, that’s what they’re being told.
Imagine my pleasant surprise to see come across my twitter today, JD Morris, Special partner and board member of Red Hook Capital, “Seeking Capital For Your Startup? Remember: It’s About Returns For Your Investor.”
A nice coincidence.
So, seemingly, SOMEONE keeps guiding founders to conceive of Angel Investors and VCs as the same as business investors or partners.
If we’re really going to help startups thrive, we have to draw these distinctions more explicitly because we’re confusing the hell out of people and making it harder for everyone.
In the immortal words of Gust founder and venture capitalist, David Rose, “an angel typically invests in 20-80 companies over a five-year period, with about $25,000 per company; they also tend to invest along with 5-10 other angels. An angel receives up to 50 pitches per month, and angel groups receive up to 100 submissions per month.”
Why? Someone actively and meaningful investing in startups does it regularly because they know their sector OR startups. They KNOW that 90% of those investments are going to fail. Hence, the volume of investments made AND the amount of personal disposable wealth available that they can just lose.
This is REALLY REALLY important because Angels get their return from that EXIT, on the remote chance that it happens.
None of that takes away at all from someone who has invested in 1 or 2. None of that means that a business investor or partner, seeking revenues, profit sharing, etc. aren’t perfectly wonderful sources of capital.
But appreciate that their expectations are COMPLETELY different so the advice everyone is going to get from the different TYPES of investors is COMPLETELY different.
Post seed as we’re looking to that A or B round and talking to Venture Capital firms, those “VCs” take equity in your startup and don’t get it back until you exit.
Founder’s own money
Friends & Family
VCs coming in AFTER your getting going and with Angels involved, further expect that exit. They require it, because Venture Capitalists are investing other people’s money and have to go out and raise more, by delivering returns on from those investments.
Revenue is only ONE measure of traction and merit; and it’s often not even a good one for Startup Investors because a startup that isn’t oriented to exit OR will get killed by competitors despite any amount of revenue, isn’t attractive to such funds.
Exceptions to the rules? Of course. Always. Sort of.
Best advice hopefully this encourages in everyone might be this… whenever an Advisor or “Investor” gives you advice, ask WHY – question them! If they can’t clarify why they’re giving that advice or if that advice is inconsistent with your goals, there is nothing wrong with disregarding it.
If you want to raise “Funding” (investment), appreciate that you have to deliver that return; or at least, intend to.