Over the last two and a half years, I made fifteen angel investments with my own cash. Although I have made a decent number of investments, I don’t consider myself an “angel investor” because I don’t search for companies to invest in; I don’t lead financing rounds; and I don’t know how to read term sheets.
When I first started investing, I did it because I wanted to make more money. But I started enjoying investing in startups because it was teaching me a lot about entrepreneurship.
For the last nine years, I have been an entrepreneur and have heard both good and bad stories about investors. But I never really understood what investors went through until I started investing my own cash into other people’s companies.
Here’s what I learned about entrepreneurship through angel investing:
Entrepreneurs have a tendency to embellish
I can’t even count the number of times I have run into entrepreneurs who embellished. And it isn’t just bad entrepreneurs who embellish; good ones have a tendency to do it too.
The worst is when they tell you that everything is great and that the company is doing really well, but a week later they mention that they’ll be out of cash within the next thirty days.
If you are going to be an entrepreneur, be a straight shooter. People respect that, and, in the long run, you’ll gain the trust of your team members, customers, and even investors.
Don’t account for revenue until it hits your bank account
The biggest mistake that I see entrepreneurs make is that they account for revenue before it hits their bank accounts. Why would you tell your investors that you are going to make $60,000 this month when the month just started? Wait till the end of the month to count your money.
Plus, if you start accounting for revenue that hasn’t come in yet, you can get yourself into a really messy situation, especially if you start spending that money before it comes in. If you want to tell people estimations, that’s fine, but don’t forget to mention that it is an estimate, which can vary drastically.
The best way to keep your investors happy is to be transparent
Most of the companies I have invested in never give me status updates. It’s nice to hear how your investments are doing every once in a while. It doesn’t matter if it is bad news or good news. I just want to know what’s happening.
When my business partner and I raised money for KISSmetrics, we decided to be transparent with our investors. Every week, we send them a weekly update of our progress.
Sometimes, our updates are positive, and sometimes they aren’t. When we have bad news, we make sure to talk about what we have learned and what we will do to avoid making the same mistake in the future.
If you ever raise money, your investors know that you are going to make mistakes. They aren’t dumb. So, be transparent with them.
Plus, it never hurts showing that you are progressing as an entrepreneur because if you need more money, ideally you’d want to be able to go back to those same investors.
What’s best for your investors is typically what’s best for you
When people give you advice, they aren’t giving it to you because they want to see you fail. Believe it or not, the advice they give is supposed to help you succeed.
Granted, sometimes their advice is wrong, but at least they are trying to help you. And who says that you have to follow through on their advice? They are just making suggestions.
So, stop thinking that investors are in it for themselves. If your company does well, not only are your investors going to make money, but – chances are – you will too.
And, yes, sometimes what is best for your investors isn’t what’s best for you, but those cases are very rare. You’re always going to hear horror stories, but you have to keep in mind that there are two sides to every story.
Companies can turn around; you just have to have faith
Funnily enough, the companies I invested in that I thought would be home runs are starting to look like they might not be. And the ones that I wasn’t very sure about are starting to do really well.
This doesn’t mean that the good companies are going to go bankrupt and the bad companies are going to be the next Google; it just means that you have to be patient.
It can take five, if not ten, years for a business to grow big, so don’t start counting your chickens before they hatch. And if things aren’t working out the way you expected, just give it some time because time really does solve a lot of problems.
Entrepreneurship is a numbers game
Out of the fifteen companies I invested in, one has already failed, but the rest are still up and running. In the next year or two, I expect a couple more to fail, a few to at least return the money I invested, and one or two to be home runs, which will make up for all my loses and still leave me with a surplus.
If you are going to be an entrepreneur, don’t expect all of your businesses to do well. What’s probably going to happen is that your first few businesses are going to fail because you’ll make a lot of mistakes, and your next few will do well.
The longer you stick with being an entrepreneur, the more likely you are to succeed. Just stick with it, and keep learning from your mistakes.
Ugly businesses are sexy
I haven’t invested in something as big as Twitter, Foursquare, or Facebook, but I have invested in a few companies that are really well known although I don’t consider those businesses sexy.
Why? Well, it’s because they usually have a ton of competition, and they don’t always have a clear path to monetization from the start.
I personally consider businesses that no one cares for as sexy businesses. Quinstreet, Omniture, Hubspot, and Salesforce are examples of businesses that very few people talk about, but they are printing money.
You’re in business to make money, right? If you want to make money, you’ll have better odds of doing so by starting a business that you can monetize from day one. And, yes, that won’t give you the glory and fame that you would have achieved had you created Facebook, but your odds of creating a company like that one is slim to none anyway.
Business ideas are a dime a dozen, but great entrepreneurs aren’t
I’ve learned the hard way that business ideas are a dime a dozen. Every time I invested in a cool idea, and not the entrepreneur, it ended up losing me money.
I don’t think that investing in a great entrepreneur guarantees that you’ll make money, but it will at least give you a better shot.
Great entrepreneurs have a tendency of treating their investors’ money better than they treat their own money. They try not to waste it, and if they lose it, some even try to pay it back.
And when things go south, they don’t jump ship and leave the investors hanging. They stick it out until they can either turn the business around or until they drown with the sinking ship.
As an entrepreneur, you need to understand when to spend money and when not to. You also need to understand that you have to execute fast. And when things aren’t working out, you need to pivot. Most importantly, you have to be loyal to your business because even if you don’t have investors, your team members are still counting on you.
As an entrepreneur, you shouldn’t be close-minded. Stop looking at things from your perspective only, and start looking at things from your investors’, or even your team members’, perspectives.
You’ll be surprised to see what you can learn.