The investor landscape has changed dramatically since six years ago, when a group of former Sun Microsystems colleagues and I formed Jambok, a social collaboration and learning site now part of the SAP Jam platform.
In those days, angel investors were the earliest-stage investors who typically would provide you with seed money to get your product ready to go to market and through proof of concept with a few customers.
Enter: a new level of startup investor
With changes to investing law, including crowdfunding, startups find many more options available for seed funding. In a sense, angel investors have increased in sophistication to the level of what used to be a Series A round and a new level of investor, usually under $50,000, has entered the market. Startup entrepreneurs in the early stages, prior to customer traction, may find themselves with dozens, if not hundreds, of investors. I recently met one entrepreneur at an accelerator who had more than 900 seed investors.
That’s a big number, redefining the limits of a party round. It’s easy to imagine the CEO spending all his or her time managing investors. One potential seed investor I talked to said he expected the CEO to return his calls within two hours at any time of day or night. “I mean it,” he said. “I have insomnia, so I will call you at 2 am and I expect you to answer or call back immediately.” Thankfully, we didn’t need his money that badly. On the other hand, I had five seed investors for a recent venture who were all professional and value-added partners.
Three criteria to qualify investors
Here are some questions to help you decide when the money you raise and the investors you take on will be truly beneficial for your startup.
1. How much time are you willing to spend managing investors?
What is the lost opportunity of that time with regards to customers, product development, or market creation? In my second venture I was willing to do a biweekly one-hour status call and 3-4 meetings a year with investors, plus email communication on important events. At one point we moved to weekly calls when we were at risk of running out of funding before product introduction, but then moved back to the regular schedule. All of those calls and meetings took prep time as well. This may be a heavier load than most CEOs want to invest.
2. How sophisticated are your investors?
One of my startup friends just spent nearly a year pulling together a $450K round of investment, only to abandon it at the last minute. He decided to scale back and not take any new investment because he felt the investors lacked the sophistication to understand the enterprise market. His investors were doctors, lawyers, dentists, ranchers, and others – all enticed by a high-tech enterprise software solution. But after the umpteenth time of explaining that his customers were companies who bought the software and that individuals could not simply pay for the product from an app store, he decided enough was enough and changed tactics.
In my own experience, I had investors who were very sophisticated and could actually fill in roles temporarily, like chief marketing officer. I was lucky to have people invest and donate valuable time, but this was a rare investor. You might also find that new investors have an unreasonable expectation on equity arrangements, leaving little room for the founding team to financially enjoy what hopefully will be a successful venture.
3. Can you help educate your potential investors?
Many local accelerators and schools have angel investment programs, and there are also some good conferences and books that can help. My investors all agreed to attend a Lean Startup conference with us so that we shared a common language and understanding. For example, when we had a pivot or pursue decision, we all knew the key criteria for that decision: customer behavior. Having a common understanding of what will drive decisions can dramatically decrease the time managing investors.
When you’re in the midst of raising the money to make your dream come alive, make a key infrastructure investment, or to ensure your venture will live on, it’s tempting to celebrate every “yes” from an investor. Before you accept, however, consider the implications on your time and energy, and whether the investment and investor will hurt or help you in the long term.
Karie Willyerd is a workplace futurist for SuccessFactors, an SAP company, coauthor of The 2020 Workplace, and the former CEO of Jambok. She also was the chief learning officer of Sun Microsystems until 2010. Her new book, Stretch: How to Future-Proof Yourself for Tomorrow’s Workplace, will be available in late October. @angler
For more startup strategies, see How to Adapt Your Products to Emerging Markets.