Frustrations of an Angel Investor #4 – Some Angels rush in where fools fear to tread

Where one leads, others follow. New start-ups are therefore desperate to get one or two substantial initial investors, especially those that they can “name drop” to motivate others to invest too.

This has led to a proliferation of “assistance”, some clearly very professional and helpful, but much of it just parasitical.

The growing numbers of Angel Funds attract investors by appearing to amortise risk. They do due diligence to filter the start-ups, and investments are pro-rated across multiple companies to reduce risk. I’m sure there are really good ones, but I’ve been discouraged by meeting some where the due diligence is clearly minimal, and some of the companies in their portfolios appear to be chosen on the basis of quantity rather than quality. I suppose they’re relying on investors trusting them blindly.

Crowdfunding, perhaps best described as bringing evangelism to money-raising, brings this “follow my leader” mantra to its zenith, as it also encourages many smaller investors who (despite meeting the criteria) honestly cannot afford to lose their money.

Most initial business valuations are frankly ludicrous. A typical example would be asking for £500,000 for 20% of the shares – i.e. valuing the whole business at £2.5 million. But at that stage the business is just a concept in the minds of a few individuals. So any valuation is wishful thinking. All too often, the “decks” that I receive show revenue projections that appear to have been developed to justify the valuation, rather than the reverse.

The angel funds and crowdfunding platforms have a vested interest in maximising valuations, as they take a percentage of the monies raised. The next stage, Incubators, typically take a small percentage of the shareholding in return for their advice and perhaps some shared office space. It’s naturally easy for start-up entrepreneurs to agree to giving away a few percent of the business in return for such substantial funding with no personal risk.

Those businesses that get past the first year or so move to “Accelerators”, where the valuations are further increased, the next stage of funding sought, and some more shares are given away in return.

Despite the majority of start-ups eventually failing, the shareholdings that the Incubators and Accelerators have in the remainder that succeed can prove highly valuable – certainly well in excess of the value that they have contributed to the businesses.

Others making money from start-ups are the accountants, lawyers, website developers and other professionals that some mentors encourage them to hire. Whilst such services can be essential, my experience is that much cheaper options exist. I’m convinced that, in some cases, the fees extracted significantly contribute to business failures.

But let me stop finding fault, and start to be positive. There are many good start-up businesses out there, and many good people who help them succeed. I’m trying to be one of those good people too, and not just invest money in businesses I can believe in, but invest my time and provide practical help and advice too. I don’t want anything for free, and I don’t want any start-ups to pay more than they should for anything, or give away stock that they don’t need to.

So my offer is free, no-strings, no obligation mentoring to any new start-up where I like the Business Plan and that isn’t likely to quickly frustrate me (by reading these articles, you know how that works!). I’m fortunate to have some spare time. I’m not trying to sell anything. I want to put my experience to good use. I’ve started and run businesses in several countries and all of them succeeded. If you’re a new entrepreneur, and you’d welcome some help from me, get in touch. And, you never know – if it’s a really good business idea, I might even invest money too!