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Building a startup is hard, many are launched, most fail, few scale and even fewer “succeed” to become a world class business or at the very least create a meaningful exit.
I have been submerged in startups as an operator and entrepreneur for over a decade and what I have always found fascinating is that there is a false belief amongst founders that the people who have made the most money, correlates with them knowing the most, you would be surprised how many people I have met that completely contradict that belief, but naturally like a moth is attracted to light, money or the illusion of money has a habit of attracting people.
I also see so many self proclaimed “experts” that claim to be the personification of a “startup swiss army knife”, ready to tackle anything and everything… yet have very little track record of achieving anything remarkable themselves, be it as a entrepreneur or operator. Then there are the “investors” who are as active as a hibernating bear in the winter.
So it is very hard for a founder, especially a first time founder embarking on their first rodeo, to make smart decisions and only get involved with genuine and trustworthy people, who aren’t simply trying to give the illusion of value, under the guise of trying to manipulate the founder because they are “green”.
I mentor startups globally and reguarly hear of a variety of cowboys and charlatans who do just that and it really annoys me because many of these people are often lauded as being integral members of the ecosystem or championed for how they “help” others.
For example one of the starts I mentor (who are based in the UK) called me recently and said “Henry do you know ________?” now whilst I didn’t know that person directly, I know of him, he run’s an angel network and lets say… doesn’t have a fantastic reputation, for various reasons such as they hold events where they charge founders £100’s simply to pitch “investors” amongst other things.
However, being the kind of person I am, I don’t like to put people down based on perception or hearsay, if I haven’t met or interacted with them myself it’s hard to know what is fact and what is perception or even Chinese whispers.
So I asked the founder, why? and he said “Well this guy approached us and offered to help us raise Angel Investment” I asked him is he charging the standard rate of 5% that he is known for and the founder said yes thats what we quoted to him.
Now they are only raising £150k SEIS, and for that amount I personally think it’s very hard to justify paying an Angel Network £7.5k… but it’s not unheard of and for those of you who have been involved in larger raises be it Alternative Financing, EIS raises or even IPO’s will know that a charge around that percentage is pretty standard, but generally that is because the intermediary have great connections into “Lighthouse” names both institutionally, retail and UHNW’s, who of course create a storytelling domino effect once they are “in” so it’s often a necessary ‘evil’… but at an Angel round especially via an Angel Network, when mechanisms such as SEIS are being utilised you will often find the calibre of investor is very far from “smart money” or anything close to being a “Lighthouse” name.
So I said to the founder “So are you asking me if you should pay that % to raise?” He said “Yes, but _______ also he has said that we would need to have him as non executive Chairman for which he wants £25k per year”
Now, anyone who understands consumer tech knows that the runway a £150k raise gives you is limited and it is purely designed to get you to your next milestone, to do which you need to demonstrate impressive growth across several meaningful metrics as investors who invest at Seed stage wont expect to see you as the finished article but they will expect you to at least be moving in the right direction towards proving your hypothesis and achieving product/market fit.
So for a frugal startup perhaps it will give 12 months runway, but in many cases its a few months less. If you factor in that you are going to pay:
£7.5k to the Angel Network
£25k to your “Non Exec Chairman”
plus legal fees and admin costs involved in completing the round.
You would of spent the best part of 25% of your round to raise from average investors who are unlikely to follow on subsequent rounds, add any value or convince anyone else to invest, and a non exec Chairman who is being paid >£1000 an hour for two hours a month.
Having mentored >200 entrepreneurs and led hundreds of people during my career, I have learnt that it is far more effective to coach people to be able to work out the answer for themselves, rather than simply tell them the answer.
So I asked the founder what he thought, and he said “He gets a bad vibe about it all” he basically said the guy was very convincing and whilst he probably is quite naive what kind of confirmed his suspicions was that I had been helping him for a while, hadn’t asked him for a penny and said I would be happy to take a look at investing personally. Whilst the guy that runs the Angel Network seemed to be trying to contractually trap them to line his own pockets before he even had demonstrated his capability or value.
I wont go into the conversation any further but what it demonstrates is that founders are nervous, they don’t know what to do and they are unsure who to listen to, especially when advice is coming from “seemingly” genuine people and it is even harder to navigate “what to do” when you have a variety of people giving you conflicting advice. In layman’s terms, founders are NOT stupid, they know they answers to their questions, but they like the security of leaning on someone more experienced who has done it all before or as I mentioned above inadvertently they are also swayed by people who give the illusion or actually are gatekeepers to money. For an example of that, go to any party that VC’s or even Tech Journalists are in the house and see how people flock and behave like a teenage girl seeing Chris Brown in a concert. People gravitate to those who they “think” can help them, but quite often they are barking up the wrong tree.
My advice to founders is quite simple, if someone is asking you to pay money you haven’t got, then quite likely they are a charlatan. Any credible person, like with the example above would see they are a team of 4 founders who have all quit their job to build the startup, none are taking a salary and all are bootstrapping not just the startup, but also their lives, so to expect them to pay £25k for two hours a month with a middle aged guy, who has done nothing other than create a platform that flogs mediocre SEIS investment opportunities and also charge founders to even pitch these ‘investors’ is not just a bit punchy it is immoral, in my opinion it is preying on and manipulating the vulnerable and is no different from stealing from an old lady.
The more diverse experience a founder has, means they are better equipped to navigate these challenges and obstacles that a all founders will 100% face and if there are gaps of experience or knowledge they need to find complimentary people and fast, be it as an advisor, mentor, investor or simply friend of the company, but always tread very carefully.
Strong entrepreneurs are good at finding people who actually make angel investments. And it seems to me that people who don’t actually make angel investments, but tell the world they do, are lying or at the very least aren’t really serious about it.
I would suggest utilising tools such as Crunchbase and working out if investors are a good fit with your space, ticket size and also at the very least its a good way of seeing the track record of the investor, how well have the startups done with them as an investor or middle man for the raise?
There are tons of ‘fake’ angel investors. These fake angels are unlikely to fund your company for the quite obvious reason – they haven’t got the money to do so.
You may think, ‘why would anyone do that?’ They’re often doing this for ways to make money in that they’re looking for startups that they can jump on board with, either as an employee or consultant.
To me that bait and switch tactic is exactly what the founder of the Angel Network was doing, he preys on “suckers” and if he smells desperation or weakness he will pounce. Thankfully the founder I mentor did indeed know the answer and hearing it from me that I agreed, was enough to make him realise he needed to avoid the guy.
It does make you wonder how many startups are falling for these shady tactics…. I hope as the ecosystem grows there is more transparency and less opportunity for the Fake Angels and Real Devils and Charlatans to prey on the naive.
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