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    9 Replies Latest reply on Oct 21, 2009 3:30 PM by DomainDiva

    Turning Down Money From An Angel Investor

    Tracker

      A client prospect answered a question that I ask to gage where they are at in the process of raising money for their business.

       


      Question: "Have you turned down any funding offers in the past six months?"

       


      Answer: "Yes, a private investor offered $500,000 for 50% of the Company and 100% of the online rights giving us a 50% profit royalty. In this case, I felt it was the wrong angel investor with the wrong thought process looking to play on our need for capital, which is not someone I wish to work with long or short term."

       


      This is from an entrepreneur, who has developed multiple products for a specific niche, that seems to do a better job than the competing products but those products are from much larger well-capitalized competitors. Let's look closer at the entrepreneur's situation:

      • They formed their company 4 years ago and have generated less than $75,000 in revenue, in total, over that 4-year period.
      • Over that time, they have lost/spent to twice that amount.
      • They have been looking for capital since they formed the business (without success).
      • They still have not penetrated their target market.
      • They have serious competition (who has a lot more money and marketing muscle).
      • They need capital.

      Given the above points to consider, why would they turn down the money?

       


      I understand the emotion that went into their decision. They felt that the investors had an advantage on them and was trying to carve out too fat of a deal for themselves.

      Not an uncommon thing with angel investors and venture capital. This created an emotional response. But sometimes, in business, you have to take emotion out of the equation.

       


      As an entrepreneur, creative person, inventor or developer of products there is basic question you need to answer:

       


      Do you want to own a business or do you want to make money?

       


      Most of us will acknowledge that owning, managing and building a business takes time, effort, commitment and money. Very often, a lot of each is spent over a long period. Just being in business does not guarantee you will make a profit or any money from it. Not everyone has the skills to be a successful entrepreneur.

       


      Think about it.

       


      If you are a creative person, inventor or product developer (or a savvy marketing person who can identify a niche and contract out the product development and retain ownership of the product) ... are your skills best suited to start, manage and build a company?

       


      Or are they best used to create and develop products?

       


      Here's another question to answer or consider:

       


      Is it better to have 50% of something with value potential (and $500,000 in your pocket) ... or 100% of something that has yet to develop into any value for you (and may not develop without capital)?

       


      In my opinion, if you can create multiple products, putting forth the time, energy and money that goes into the part of the business that does not pertain to creating the products ... is a dilution of your best value.

       


      In this case, the investor apparently has the business background and ability to execute and get the product rolled-out and in the marketplace better than it has to date (or why put $500,000 into it). They can do something that the entrepreneur has not been able to do yet. They bring that value (along with the money).

       


      There is more to check out, and specifically there are many ways for the entrepreneurs to protect themselves so that the situation is not a "predatory" one. But a licensing deal like this client prospect passed on would probably be the smart move to accept given their circumstances and that they do have several products developed and have future development capability. By accepting the deal, they can make money without further financial exposure.

       


      This is something I discuss with clients and client prospects to help them prepare for such decisions: Bottom line (and this is a very important thing in business) entrepreneurs and start-up/early-stage business owners with products they have created as the basis for their business, need to think things through when making decisions about bringing in an angel investor and answer the questions:

       


      Do you want to own a business or do you want to make money?

       


      Is it better to have 50% of something (with financial backing to make it valuable to you) or 100% of something that has yet to develop and without capital may not turn into any value for you?

       


      The answer to these two simple questions can dictate the success and financial rewards of your venture.
        • Re: Turning Down Money From An Angel Investor
          Iwrite Pioneer
          I want to own a business (advertising agency). I have a vision and a plan that I can only execute as an owner. I recognize that I will have to struggle in the beginning but I believe that if I realize my vision, I will have an agency that makes money and is true to what I believe an advertising agency should and can be.

          I understand that this will mean that one day I will be doing more of the things I have to do and a lo less of what I love to do but it is the price I have to pay to create what I see. I'm not looking to have 1,000 employees and multiple locations. I want to build a culture of great work that delivers strong results.

          Nothing worth having comes easy.

          I do enjoy your posts because I have to think when I read them. This made me think about something I have been debating - taking on partners. I realize it is going to be hard to find someone who shares my vision because it is different. And I really enjoy breathing life into this agency.

          Am I being emotional? Maybe, but I have thought it through. So, I am acting rationally. I think.
          1 of 1 people found this helpful
            • Re: Turning Down Money From An Angel Investor
              Tracker
              Thanks Iwrite. I enjoy your posts because they show that you do think about things and that contributes greatly to the value of this site and its forums for Q&A and discussion. I've had partners and also gone solo in different businesses I've owned and started over the past 27 years ... its a tough choice that does require a lot of thought before bringing in partners. If you do being them in, never let them compromise your vision for your business--stay the course with what you said and "build a culture of great work that delivers strong results".

              Regards,
              Dennis
            • Re: Turning Down Money From An Angel Investor
              DomainDiva Ranger
              I turned down money from a VC when they wanted me to ditch the technical, legal and financial people, ie: the entire team, and they also wanted me to sign a contract giving them 100% ownership of the technology. I said no, was funded not long afterwards by a friend and we have crawled to market, but we made it and we have a great little SaaS product.

              Sometimes using only your head does not make much sense either. When looking for an investor after a 4 year operating period, why were they not looking for someone who could make the brand stronger and be a real partner? (Just my 2 cents worth...)
              1 of 1 people found this helpful
                • Re: Turning Down Money From An Angel Investor
                  Tracker
                  Great two-cents! That is an excellent point to share in this thread. There are what I call "Vulture Capitalists" or "Venture Cannibalists" ... predatory types that absolutely should be declined with any offer that is not a fair exhange of value.

                  Being an entpreneur/business owner is tough, as many of us know from real-world in the trenches experience. The important decisions about bringing on partners, the cost of capital (and often the "consequences" of capital) take a lot of thought and sometimes deep soul-searching.

                  Thanks for the feedback,
                  Dennis
                • Re: Turning Down Money From An Angel Investor
                  JasonTees Wayfarer
                  I agree with your points. So often, I come across entreprenuers who believe they have the next big idea, and they think that a good idea is all you need to succeed. There are so many examples of thriving businesses that bring in talent to take their business to the next level. The best example I can think of is Google. Sure, the two founders came up with a cool search algorhythm, but once they became a hit, they began to being the brightest minds in the world. That's how they innovate and grow.

                  Most of use have a defined skill set, which means we are good at some things, and perhaps aren't well versed in other areas. This is especially true in small business. And the more complex the business or product set, the more likely it is that you'll need to being in some competent help.

                  All the inventors out there need to understand that while an idea or a concept has value, so does having a partner (financial or managerial) who has expertise in areas like engineering, production, distribution, marketing, finance, etc.

                  Regards,
                  Distressed Loan Advisors
                  JasonTees.com
                  1 of 1 people found this helpful
                    • Re: Turning Down Money From An Angel Investor
                      Tracker
                      Jason,

                      Very good points you make as well. Often its not the "new" or "novel" idea that forms the foundation for a businesses success. As John D. Rockefeller, Sr. said (and I may not get this exactly right but you'll get the gist) "I've found that success comes from doing common things, uncommonly well". And one of things that is common to all successful businesses ... is an entrepreneur/founder who realized that where his/her capabilities were lacking ... it made sense to bring in someone who had strength/experience in those areas. Delicate decision making comes into play to make sure that the partner you choose is the right one to work with ... and that they are in fact, the right one to support your vision for your business. So this "common" decision, for it to work out with the best result ... needs some "uncommonly" good thinking before making the decision.

                      Thanks,
                      Dennis
                        • Re: Turning Down Money From An Angel Investor
                          DomainDiva Ranger
                          Everyone on my team is technically and artistically smarter than I am. I am the fearless leader but I have team members that just are totally amazing with their knowledge and skill. It also helps that we run the little start up like a large corporation, Board of Directors, meetings the whole bit. No one person is in charge we are a real team.
                      • Re: Turning Down Money From An Angel Investor
                        wordperfect Scout

                        A great post, thank you, it made me think also.

                         

                        Yes, there is an argument for both sides of the coin as DD points out, but right now, as I have mentioned in another thread, we are in the process of having to rethink our direction and in fact, continued business.

                         

                        One option is a partner, either a Venture Capitalist or not, but for the past few months we have been torn between keeping what is "OUR" business or letting someone with fresher ideas, skills and thinking not to mention money join us. In our HEAD we know this is silly as we offer an Angel Venture Marketing service, but when it comes to your own company, it is reasonable for emotions to creep in. A little bit like hand rearing a turkey for Christmas dinner, but as the end of the year and the chopping block draw closer..................

                         

                        I guess this is part of the challenge and excitment of running ones own business, and we are all wiser in hindsight, which is as they say, 20/20

                         

                        But again, thank you for helping to crystalise my concerns and thoughts.

                         


                          • Re: Turning Down Money From An Angel Investor
                            Tracker
                            You're welcome. As you'll see ins the posts above from others and my replies to them. It is important to think through all the ramifications and consequences (both potentiall good and potentially bad) that comes with raising capital from investors and/or bringing in equity partners.

                            I'm glad that this thread of "conversation" has evoked some good feedback and promoted how important it is to really think through the decisions that you make about bringing in partners and/or investors for your business.

                            Best wishes to you as you continue through that process.

                            Regards,
                            Dennis Lowery
                            Adducent, Inc.