While friends and family may help get startups off the ground, the majority of entrepreneurs needing a larger and more professional financial investment turn to angel investors for help.
New York City's Brian Cohen has been funding startup endeavors as an angel for nearly two decades, having invested over $53 million into more than 70 early-stage technology companies. In addition to currently serving as chairman of the New York Angels and founder of Launch.It, Cohen was also the first investor in the popular social networking site Pinterest.
"Let's be clear, 90 percent of all money for startups comes from rich people called angels," Cohen said. "Where else are they going to go? There isn't any other place."
BusinessNewsDaily spoke with Cohen, who recently penned "What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Billion Dollar Idea" (McGraw-Hill 2013), to find out what he looks for in an investment and how entrepreneurs can make a strong impression on investors in order to secure their company's financial future.
What made you think Pinterest was worth investing in?
The founder. Pure and simple. It's not about the idea. Everyone's got a good idea; it's about the execution. When I met the founder (Ben Silbermann), I had all of these bells and whistles going off in my head and I thought he was quite extraordinary. Certainly, the idea and the development of the approach he had was compelling, but it is always about the founder (that piques my interest). Who is going to drive success and, more importantly, who is going find where success lies? Who is going to be smart enough to smell the opportunities by being close enough to the customer to iterate or even pivot to a better opportunity so they are meeting the customer needs better and I believed he would be.
What types of businesses do you feel make for the best investments? Why?
They are all startups. I like companies that are very early. Other people are less risk adverse than that. I like the risk. It is a rush to get in early and get in first. There are types of investments that make it a better investment. Angel investors are not in the investment business; they are in the exit business. When they make an investment in a company they have to see clearly where the exit is coming from because that's the only way they are getting anything out of it, that is their liquidity. When I make an investment in a company I want to know who is going to acquire it. The fact is, if I can know and have a better idea strategically that somebody is creating this company and this is the company that is going to want to buy them — that's a win. That's a real win. And that can be in anything.
What types of traits do you look for in the entrepreneurs you partner with?
Can they execute well and do you think they can deal with adversity and challenges. Because that's what being an early-stage entrepreneur is all about. For me, I get to know the founder. I want to see what they are made of and how they can handle challenges. I will challenge them in my interview and discussions about their business. If they get flustered, I know immediately that there is probably a problem.
What are some things entrepreneurs do wrong when asking angel investors for money?
They don't know their customer. I ask very basic questions about their customer and what their customer is thinking and they don't have the answer. They haven't done enough homework about the behaviors of their customer. If they don't know their customer intimately, I am not interested. Also, how well do they know their market? If someone is going into the car market, I am going to ask them about the size of car tires and I am going to ask them about the number one color of cars. I am going to ask them what they know about the market that goes beyond the ordinary because I want to know that they are as curious about their marketplace as they should be. A lot of them also aren't very good at knowing their (financial) numbers. Where is the revenue coming from? That is a no-no, when they don't have a command of their numbers.
What is the one thing you hope entrepreneurs say during a pitch meeting?
That they really believe in something. That they believe they have something remarkable and that they can share that belief in a way that makes it easy for me to understand why they believe that way. If you believe it, then we are on the road to working together. The other issue that I think is interesting is that they think selling me on their product is important. No. I am in the business in investing in them. Don't talk to me as if I am their customer. Make sure you talk to me as an investor. I want to know how I am going to make money on this.
Once you partner with an entrepreneur, what do you expect of them?
To call me when they need me. And, of course, to follow best practices when running their business. That's all. You fund them and let them go. When they are ready, they will call you and ask you questions. The worst thing that happens is when an angel investor decides he knows something better and wants to get deeply involved and everything falls apart. They think they know, but they don't. They aren't living in the day-to-day lifestyle of that entrepreneur. They just don't know what they are going through.
In addition to the money, what other benefits do entrepreneurs get from partnering with an angel investor?
The number one thing is contacts, opening doors to customers. Yes, it could be the supportive knowledge of the marketplace and the strategies and all of that kind of stuff. But in the end, the primary added value of bringing on an angel investor is that they can open doors and that they can introduce you to potential clients.