I do not feel the need to be a shareholder of a start-up if I want to be an angel investor. After all, there is a dream concerned here, and whether the support I provide is financial or not, I consider myself a stakeholder from day one. Of course, in order for me to believe in any project, there is a prerequisite: the income obtained by a business must be balanced with the social and environmental impact caused by it. In short, I expect the entrepreneurs to own up to their responsibility for future generations, and to address at least one sustainable development goal in their business project. I would like to share with you three important lessons I learned from the many start-ups that I have invested in this manner:
1- Dedicating time
2- Accounting and finance
3- Dividing cash investment into smaller portions
No angel investor has the luxury to say they have made an investment, and that they are only interested in their financial return on it, or that they are not bothered with what happens in between. This is particularly true if the angel investor is competent in the line of business of the start-up, or if they are experienced in management, organisation or marketing aspect. In those cases, the investor must offer support in their field(s) of expertise. This certainly requires time, and it is not always possible to solve all the problems by sparing half an hour of your time every 2 to 3 weeks. Sometimes, it requires the investor to consider investments like a second business, and to spare at least half a day or a whole day every week for them- sometimes even longer periods. The time to be dedicated depends on factors such as how skilled or experienced the entrepreneur is in doing business, the general approach of the entrepreneur, and the stage a start-up is at. What is of critical importance here is to make sure that the time dedicated to the start-up is meaningful. This means that the investor needs to have comprehensive knowledge of what goes on in the business and to allocate her/his time earnestly, which is not always possible under a heavy workload. Once, when I made an investment I was not able to gauge from the start how much of my time the entrepreneur needed. When I started my investment I thought “Well, phone conversations and Skype should suffice for certain things, and it should be enough to see them from time to time.” When, I understood that this was not the case and that the entrepreneur needed help with ways of reaching the target audience, setting product prices, and with even the smallest daily operations, it had already been too late. I urge you to think twice before you decide to make an investment if you do not have sufficient free time that you can allocate to your investment.
Accounting and finance:
If I am going to invest in a start-up I expect accounting to be kept by a highly reliable accountant, and accurate monthly reports to be sent to my part. By reliability I mean the accountant being in a position to warn the entrepreneur if need be. This is because, particularly during the setup phase, some entrepreneurs attempt to include as part of fixed assets a television they may have purchased for their home, or write as expense a suit they buy for themselves to avoid tax. The accountant should not let this kind of things to happen.
In the past when I made an investment I only asked to see the monthly balance sheet and income statement. Then, the general ledger and cash flow statements got added to this. As I invested in a variety of different projects I always find it useful to identify the reasons for significant changes through crosschecking closing and opening balances for subsequent periods and calculating the percentage of variation for each item. Such enquiries, which may be considered a simple form of auditing, act as an early warning system for delayed receivables or cash shortage that the entrepreneur may overlook while also helping the start-up to become self-disciplined. Although, commonly only the balance sheet and the income statement are monitored, I must say that monthly general ledger checks are indispensable for they provide an overall picture of the business. As for cash flow; most businesses record sales revenue or make a profit on paper; however, if they do not have enough cash to run the business or at least to pay taxes or wages the former does not mean much. The easiest way to see this is to have a look at the cash flow statement- that is of course if the accountant is able to prepare one, every month.
Dividing cash investment into smaller portions:
I am very well aware how difficult it is for entrepreneurs to find financial resources. It is not easy to have to go from door to door, asking for support for your brilliant idea, and to try to explain yourself to a large number of people who do not necessarily get your idea. It is not easy to try to gauge whether someone who promises to invest in you is reliable or not during the process of materialising and maintaining a business in financial hardship. On the other hand, finding a good financial resource after making all that effort can be considered a great success for an entrepreneur. This is all very well, except there is something extremely important here: the fact that the entrepreneur is likely to have never seen that much money in her/his lifetime before, particularly if this is their first start-up experience. This may result in a direct money management crisis for the entrepreneur. I have met entrepreneurs who did not know what to do with the money they received: some even got spoilt, wasting it away on a good-looking office or a better car. What needs to be done here is to divide the capital into portions and transfer money to the business in line with a pre-made business plan, depending on the projects to come into life, and knowing how much money will be spent on which investment item. It is even possible to tie the payment of a certain amount of the capital to certain success criteria as part of an agreement to be signed at the start. This securing method should allow the entrepreneur to breathe without providing them with too much oxygen at once while reassuring the investor, as it provides a control mechanism to an extent.
The success of a start-up depends on a large number of criteria: from the entrepreneur’s leadership qualities to setting up the right team, and from creating a business model to establishing efficient collaboration. However, it is worth remembering that when an investor becomes a part of a business, they are now a very valuable member of the team as well as a stakeholder who creates significant added value, if used correctly. I believe paying attention to these three lessons should increase the chances for success through helping investors gain their desired returns with no disappointment while ensuring that entrepreneurs protect themselves from some common mistakes.