This next series will be on raising angel funding, and some practical tips. It will not, I am afraid, be the series of blog posts that most entrepreneurs want--some magic formula that ensures angels will flock to invest. Rather, it has a few things I have learned.
First, some information on my "success." I have led angel funded startups for nine years now. During that time, my companies have raised over $10 million in angel funds, from about 60 or 70 different angels. These companies have launched five products, garnered about 60 patents and applications all over the world, built unique-to-the-world production lines on two continents, had 60 product placements, about 80 converters and distributors selling our products and had three world championships won by competitors using our products. The bad news is that the $10 million in angel funds was leveraged against about $3 million in debt and only resulted in about $4 million (so far) in revenue, though of the five products three of them are still alive, and to my knowledge sales continue to grow. Most of you who read this know that I now have nothing to do with the Innegra products, and that most of the angel capital was lost when that company was put into bankruptcy in 2011, a year after I was forced out.
Another important point is that I have never raised a dime from "angel groups," though I have made a number of presentations. I'll explain my thoughts on this in a later blog post.
Trust
Raising equity is nothing more than selling off a part of your company to gather the money to start the company.
"Sales is all about getting someone to TRUST YOU enough to GIVE YOU MONEY to SOLVE THEIR PROBLEMS."So how do you get someone to trust you enough? This is the part that is both very simple and extraordinarily difficult. Simply put, you do it by being trustworthy and building credibility in every aspect of your business.
I had a bookkeeper once named Janna, who was the "mother" to everyone in the company. She remembered everyone's birthday, organized our Christmas parties, cooked snacks for the guys on the line, did all the little things that made our company more like a family, and, yes, also made sure everyone got paid. I returned back from Christmas one year to find that she had hung a sign on the wall in my office. "It is what it is." Had the gift come from anyone except Janna, I would have taken it as a left-handed compliment, or perhaps even an insult. But from Janna, I am certain that it was just what it said: a statement I made all the time which was my shorthand for "I'm not going to lie or candy coat anything. Rather, these are the facts and this is how we are going to deal with them." It gathered a few snickers behind my back and even just left of center, if the distance were far enough. But between me and Janna, we know it is a cornerstone of my character: that I would rather do almost anything rather than propogate a lie.
This philosophy, this wide open transparency, has to be built into everything about the company. Here are some examples:
- Accounting: I sign checks. I do not write them, or know where they are kept. I am assured that where they are kept is locked. At least two people reconcile our bank accounts every month, and two others look over the financials.
- Products: We gather as much data as we possibly can, try to understand it, and use this data when presenting the product to customers or to investors. Where we don't have data, we state that we don't have data, and then tell our opinion or intuition.
- Team: I get help from the best people I can, whether they be employees, consultants or business partners. Everyone knows who the team is, and we celebrate them, and new additions. It is hard for me to hide my enthusiasm about the team, because of how grateful I am for the level of talent I get to work with and the way they lift the company to new levels.
- Access: Every investor has always had direct access to any member of my management team, without me present. These meetings are encouraged and have happened too often to count. I have no idea what was said in these meetings though I often ask "how did it go?" and get whatever answer they chose to give. I have also had investors watching production equipment running, observing tests, and occasionally talking to customers. This last is one that I am hesitant about, which I'll explain in my post about angel groups. In general,though, transparency forces integrity.
- Accomplishments & Disappointments: Every quarter I publish a list of accomplishments and disappointments for both the Board and for investors, segregated into four areas: technology, production, sales and finance. There is good and bad every quarter, and we deal with it in board meetings and investor calls. I once had a board member who interpretted my pathological optimism as me never sharing bad news. Correcting him was easy, "I give you four pages of bad news at every board meeting," and I had a stack of paper to back it up.
- Investor Calls: This is recent, but we now host investor calls every quarter where we go over financials as well as most of the other information that was discussed during the recent board meeting. These calls are recorded and hosted on a private website that every investor has access to so they can listen and re-listen at their leisure.
- Candid & Vulnerable: This is important: a startup is risky, and any CEO worth his Wheaties is scared to death about certain things. When the question is asked, and it will be, you have to tell them what you are scared of, and what you are doing to mitigate the risks. Early on, I lost investors simply because I was trying to hard to sell, rather than stating the ugly facts and how we were dealing with them.
- Track Record: Be honest about your track record. Mention the team's successes without bragging, and take responsibility for your failures, being certain to say what you have learned from them. I often tell the story of the demise of Innegrity to potential Dreamweaver investors, and then describe how we have structured Dreamweaver strategy from the very start to build in what we learned. I'll joke, "We're going to make a lot of mistakes, but at least it's going to be a whole new list, and not the same ones!"
One last thing: Trust builds trust. There is nothing that speaks to the credibility of a company or a CEO more than having a group of people who already trust you, and who do so enough to have their own skin in the game. This especially can only really come from building a trustworthy and credible company, for otherwise those who trusted you once will start to disappear if you don't.
Another last thing: Credible and trustworthy companies sometimes fail. Never pretend they don't.
One, really final, last thing: I have made mistakes in every point given above. It is how I know them to be true--not because I am smart, but because I was once (well, several times) dumb. I, for one, do not read blogs and believe what they say, so the only way for me to learn that a hammer can smash a thumb is by getting a smashed thumb. Because of this, especially in a startup, there also has to be some level of forgiveness for mistakes built into the system. It's not that you have to be perfect in everything, or that you have to get everything right or never find out that you were wrong. It is more that you have to put being credible in front of winning a particular investment, in front of winning a particular sale to a particular customer; it is more that the means do not justify the end, and this has to be there in every decision, every email, every handshake.
I'm not perfect in this respect, and there are people who have spend a lot of time hunting down and examining my flaws, and pointing them out to me in excruciating detail. Where they have found them are areas where I have failed, where I have smashed my thumb, and so am now able to write about it. All I can do is acknowledge them, admit that I am not proud, and say, "It is what it is." And then find a way to deal with it and make sure it does not happen again.
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