7 Signs Your Startup Is Not Ready for Angel Investors & What To Do About It

7_Signs_Startup_Not_Ready_Angel_FundingDo you have an exciting business concept? Perhaps it involves technology that will disrupt a market or change the world. Conventional wisdom says that, after putting in a few months of hard work on your part, designing some wireframes and mockups, writing multiple lines of code and creating a short PowerPoint pitch deck, it's time to go and seek angel investors. Or is it?

Just like the seven deadly sins that can destroy the souls of those who fail to heed clear warnings, the siren song of angel investment can send even the most seasoned mariner steering his or her ship of opportunity straight into the rocky coast of failure at full speed. How can you be sure that your interest in pursuing angel capital is legitimately thought out, and not just a hallucination created by the illusion of billion-dollar valuations dancing in your head?

You can start by learning how to identify and respond to warning signs that you're not ready. Here are seven clear and unambiguous signs that you and your business are not ready to pursue or pitch to angel investors:

1. You didn't really raise a friends & family round.

Seed funding is the first step in financing any startup company. Other than your own capital and that invested by other co-founders, the next step is to raise additional seed funding from friends and family. Many startup founders don't take this seriously, but they should. A typical friends and family round should be able to raise anywhere between $25,000 and $150,000 in total -- I usually recommend a goal of $100K raised from this round. 

Why do startup founders avoid this round or paper over it? The real reason is because they are scared to ask for money from people they love and care about, or who they know can legitimately get angry and cause them personal pain if the business fails. In other words, they don't want to face the realities of risk. If you can't be bothered to present a 'great business opportunity' to people close to you, what makes it okay to present a 'great business opportunity' to complete strangers? To put it bluntly, lack of a proper friends and family round is an excellent sign that you don't really believe in your business concept. 

2. Your co-founders have equal or unclear ownership, and your team is imbalanced, uneven or unqualified.

You've got a great business concept and outstanding ideas all ready to execute. You also have one or two other people at the table working along with you. They are your co-founders, and in the spirit of equality you split the ownership equally among you. Or, you agreed with your co-founders on how to lead the company in general, but failed to actually write it down in legally binding terms. Forget it -- stop right there. You've already killed the company. So many companies (not just startups) doom themselves from day one with this classic mistake. Only one person can be responsible for the 'buck stops here' decisions in any business, and the articles of incorporation or operating agreement has to define this up-front. This isn't a fraternity, it's a business. 

And by the way, chances are your co-founders may also be disasters waiting to happen. If you were hiring for that position and were going to fund the person's salary out of your own pocket, would you really be ready to shell out that cold, hard cash to fund your friend/co-founder? Probably not. That's because, chances are, they are not as committed as you are or, honestly, they're just plain unqualified. You do need a team, but you don't need this team. Better to start with a highly qualified team of one, rather than a misfit team of two, three or four -- and have all of them owning shares to boot.

3. Your own contribution is 100% sweat equity.

Speaking of the founding team…how much actual cash did you take out of your own bank account and put into the company's bank account? What's that -- zero? Maybe it wasn't zero, but what did you do with the money you and your partners did invest? Oh, right, you used it to pay your own salaries. News flash: Paying yourself out of capital you invest in the company doesn't really count.

I often ask startup founders why they didn't invest more cash into seed funding their own company, and their answer often is that they can't, because they'd have to [fill in the blank] …mortgage or sell their house, cancel their upcoming vacation, go down to one car, upset their spouse, use up retirement savings, etc. Well, isn't that the point? Why should an angel investor risk her or his hard-earned cash on your venture when you're not even willing to stop shopping at Whole Foods and start shopping at Walmart just to help fund your 'great business idea'? 

4. You're more interested in how much you can raise rather than how much it will cost you.

So often when I chat with startup founders seeking angel investment, all they talk about is how much they want to raise, or how much they think they can raise, or how much they believe they should raise. Almost never does anyone talk about how much it will cost them. After all, this isn't free Monopoly® money -- this is high-risk capital that is being invested by other people in your business.

I used to tell people who clearly weren't ready to pursue angel investment that, indeed, they clearly weren't ready, and that they would probably not win any angel investors. Then, some of them started to secure investment anyway and I wondered why. A little digging got to the truth -- angels were leading them straight down the path to founder hell and they didn't even see it coming. 

If you 'succeed' in securing angel investment but it comes at the cost of far too much equity in the business and the cash value of the investment is far too small (because, let's face it, in desperation you asked for dollar amounts in the angel round that were a third of what you really needed), your business is already dead.

Why would an angel invest in a company and then kill it? There are a lot of reasons, but one of them is because the amount of investment they make is so small relative to their overall risk pool that it's not really a risk to them -- it's a random gamble and they are curious to see if it might pay off. Granted, they think you're a fool but you're a naively hard-working fool and maybe, just maybe, you'll get some traction. Then they will swoop in, paralyze your decision-making, hold your future investment rounds hostage, and kick you out or force you to sell too early, so they can make their share back. 

5. Acquiring customers is something you'd rather 'fund' than 'do'.

Ask yourself this simple question: Do you get as excited and pumped about selling your product directly to customers as you do about pitching angel investors? Let's face it, lots of startup founders get far more excited and energized about going on road shows and pitching investors than they do about actually selling product. 

Whether it's for angel investors or venture capital, startup founders see the process of securing investment capital as a roller-coaster ride that, while demanding and taxing, is just a-w-e-s-o-m-e! You get to pitch in front of high-powered people with money and a great 'aura of succcess' about them, and you know that just as soon as you secure some funding they will accept you into their cool club of smart, accomplished, successful people.

And then there's actually selling to customers. Customers aren't glamorous. Customers complain. Customers require you to pick up the phone (sometimes proverbially, sometimes literally). And this is why so many startup founders would rather fund sales and let someone else do that work, since it's 'below them'. 

The purpose of a business is not to generate buzz, secure angel funding or create exciting road show 'buddy adventure' stories you can tell your friends later over drinks. No, the purpose of a business is to…sell something of value to somebody. That somebody is called your customer. Your customer actually knows what they need, and they are more than happy to tell you. Your customer actually has real problems, and they are waiting for you to solve them. And at the end of the day, they are the only people you should care about.

6. You built it, and they didn't come.

Let's suppose you secured a decent-sized seed round and in your excitement you went ahead and built a great product. You hired engineers, a user interface designer and a whole bunch of other experts and contractors and built a first-class product. The only problem is, no one showed up to use it. Oh, sure, your investor pitch deck shows the logos of prominent brands that are 'on board' (i.e. your mid-level manager friends at those companies agreed verbally to give it a spin for free but have no intention of actually using it), and you took all of the people who signed up for your free trial and counted them as 'customers' in your metrics. But let's be real: You have no customers (or just a few on a good day). 

In short, you built it…and they didn't come. So now you feel ready to go to those angels and ask for money so you can take this incredible product and get it to the market with a great marketing budget built on their funds. It's a sure thing, right?

Actually, there are only two possible sure things. First, there's a real possibility that no one really cares about your 'innovation' and that even if you did have the money to promote it, no one would come anyway. Second, there's the equal possibility that you and your team are incompetent at identifying and responding to market opportunities, which means that any money angels gave you would just be wasted. Game over.

7. You actually believe the phrase "angel investor".

What all of this is leading to is a sobering reality wrapped up in the quasi-religious fervor of technology startup culture. We call these people 'angel' investors, and we often call the lead visionary of a company the 'evangelist'. I hate to break it to you, but we are not saving souls here -- we are pushing products and selling solutions.

The phrase 'angel investor' should be perceived for what it is: a statement of irony. Some angel investors really are highly qualified experts who care about their portfolio companies and want to see them succeed. Others are hobbyists who treat angel investing like a trip to Vegas and nothing more. Still others love the power rush of owning someone else's idea and having control. 

And even if you do get investment from the best angels, remember that their job is to see the company become successful -- not to see you become successful. They may feel it is imperative to the future of the business to set you aside, dilute your ownership further or even kick you to the curb. And how could you blame them?

Bottom Line: Are you a startup founder or a startup entrepreneur?

The world is filled with startup founders. Startup founders are in love with their own idea; generally ignore warning signs in the marketplace; fail to pay attention to execution; avoid selling to actual customers; and are primarily concerned with securing other people's money so they can make their dream come true. 

What you need to be is a startup entrepreneur instead. Startup entrepreneurs are concerned with building a complete business, not just launching part of an idea. They are hesitant to share ownership with anyone (co-founders, angel investors, etc.) because they know that they need to build a company that will be sustainable. They would far rather sell to customers than pitch to investors, because their passion is in solving the problem the customer has, and in being rewarded in the marketplace for doing so. In other words, they're real, live, grown-up business people.

Done properly, sales is the exchange of value -- a customer pays you money in return for your company providing a valuable product or service. Presenting and pitching for angel investment should be selling, but in most cases it's not -- it's begging. 

If you see signs of any of the seven deadly sins discussed here -- STOP. Re-evaluate everything…your vision, goals, business strategy, product or service plan, leadership team and your own business skills. Desperate people make dangerous decisions, and you can't afford to be desperate as you begin asking other people -- most likely total strangers -- to invest in your business and start owning it (and, to some extent, owning you).

Remember, the point is to build a viable and successful company -- one you can be proud of and one that you own, or control as much of as possible. There is probably a great place in your business plan for angel investors…after you square away the fundamentals discussed here. Success in business is all about timing, so use these key points to help you prepare fully so that when you do seek outside investment, you're in as strong a position as possible to achieve success.

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Image Credit: ImagineCup (Flickr @ Creative Commons)

Topics: Focus Area: Strategy, startup, entrepreneurship, startup strategy, business growth strategy, angel investors, raising startup capital, startup capital, CEO Readiness Series

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