This week, Pete talks to Brian Cohen, author of What Every Angel Investor Wants You to Know, about his book, and about what makes a business interesting to investors. There’s some important lessons here for everyone, though.
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Angel Investors and Raising Capital
with Brian Cohen
Dom Goucher: Welcome, everybody, to the 101st episode.
Pete Williams: Hey, PreneurCast. Hey, buddy.
Dom: It’s me, Dom Goucher, and the ever-present Pete Williams.
Pete: With a little bit of 100th live show hangover.
Dom: Yay, that was an awesome show.
Pete: It was.
Dom: I’m still telling people about that show. I’m still getting great feedback as well. It was brilliant.
Pete: Yeah. And Part Two is going to come up in the next few weeks. We have a whole bunch of extra questions that we can get to for people who submitted them on the chat and things like that. So we have got them all collected and we will be doing a Part Two as an episode in the next couple of weeks. So keep listening for that one.
Dom: Yeah, and keep the feedback coming in. Because the more feedback, the positive feedback we get about that, I may just be able to convince Pete to do another one live. Not promising anything. So the big news this week, folks, is well, those of you that are in the space of the Internet marketing may have noticed that some rather big names have been making a bit of a fuss.
Now you know that Pete and I don’t really play the Internet marketing game in the same way. We believe in the Internet as a path to market. But not as a title for a business. But this particular thing that’s going on at the moment is quite interesting because it reflects something that Pete and I do a lot of. And that is video.
Pete: Yeah. It’s very rare that hopefully people who are part of the community and are on the e-mail list. I have made a real conscious choice with our little community to not really promote or endorse other ‘education’ courses because I really do believe that the 7 Levers is the only framework people need.
Because it’s something that I continually use in every business I could start with, own, buy in, invest in. That stuff. But I had been recommending tools that we use in our businesses. And hopefully people have seen how we actually use the various tools that we have spoken about and shared to our community.
And video is another one of those ‘tools’ that we use very heavily in all our businesses from e-com to the telco business. And obviously here in the Preneur Community as well, we use video quite a bit.
Dom: Absolutely. We have spoken in the past to people on this topic. And I have talked a little bit about it. We’re going to keep this brief on the call. But basically, if you’re a member of the Preneur Community, and hopefully you are you have signed up via PreneurMarketing.com to be on Pete’s mailing list.
Or maybe you even receive Noise Reduction, Pete’s little summary e-mail every week. We’re going to be covering this training course that’s coming out soon from a couple of guys who are very big in the industry. One of the guys, probably he is the one worth mentioning because his credentials are across the board recognizable. It’s a guy called Andy Jenkins.
And Andy Jenkins, well, he was the producer of a relatively well-known film called The Blair Witch Project. So you could say the guy knows a little bit about video production. Anyway we are going to be covering this and just letting you know how this might work and apply to you as a community member.
Just in the same way that we do with any of our other talks. For example, we haven’t mentioned it for a while actually, Pete; so I think I’m going to talk about it briefly now. One of the things we used to talk about an awful lot in the podcast was Audible.
And folks, that offer is still available for any Preneur member, member of the community listening to the podcast. If you go, I’ll put a link in the show notes for you, and you can get a free trial through Audible, the Audible book company if you use our code which will be in the show notes.
Pete: Yeah, and AudibleTrial.com/PreneurCast is the URL.
Pete: Can I just interrupt you and almost demand that people go and download a particular audiobook that I just finished listening to? Or am I going to take you off-track?
Dom: I know what you’re going to say, I know what you’re going to say. But go ahead and say it because I totally agree with you.
Pete: Man, I just finished an audiobook called Start by Jon Acuff, I’m pretty sure is the spelling of his name.
Dom: That is correct.
Pete: And it is one of the best narrated audiobooks I have ever heard. And for those of you who have listened to all 101 shows of PreneurCast know that I devour a lot of audiobooks. It is a fantastic book about getting off your ass and starting a project, and pushing through the friction. But it’s extremely well-written. It’s an engaging listen.
But more so, Jon who actually is the author, articulates and narrates the book himself. It is just an engaging listen. I would highly recommend people, if they’re going to get started with audiobooks, this is a perfect way to get started. You can go to AudibleTrial.com/PreneurCast and get a free download. And I strongly suggest you make that Start by Jon.
Dom: Cool. Great suggestion. As always, folks, on this show as Pete says, we refer you things that we actually use, tools we actually use, things that we have actually tried out ourselves. And we’re going to continue to do that going forward. So just keep an eye on your e-mail. Hopefully, are a member of the community and you’re on one of those lists. You will get some more information about this great training course that is being released soon.
Pete: Can I say two really quick things? Sorry, dude, I’m interrupting you again.
Dom: Go ahead. No, go ahead.
Pete: Two things is, if you watch the videos that these guys are putting out as part of their launch, they are cheesy as heck. They are cheesy, cheesy, cheesy, which I personally am not a big fan of that cheesiness in marketing. But I endorse the training materials that they do. I think a couple of years ago, when Andy first released Video Boss, which was his $2,000 training course…
Dom: And was one of our picks two years for the End of Year Awards.
Pete: Yeah, exactly, yeah. Product of the Year. And I do stand by that. Andy is a bit cheesy in the way he markets and in the language he uses. But his training and his content is second to none. He interrupted me on stage numerous times when we shared a stage at an event in San Diego a couple of years ago.
But I don’t hold that against him too much. So that one thing is that just get past the cheese a little bit and just understand the quality of video they are producing with iPhones and how you can use it in your business. And if you’re not sure, this is the second point, how video can apply to your business, go to PreneurMarketing.com.
There’s a blog post that we recently put up there which shows about seven or eight different styles of video that I have used across my various businesses and projects. So you can see examples of how we have used video for our e-com sites, for our telco business, for a whole range of other projects that I have been involved in. You can see the different types of video that we have used in different ways.
And I have written up why we used it, for that circumstance. What the business was. This was some good swipe and deploy ideas for anybody in any business on the blog. Actually someone reached out to us this week and is going to swipe that entire blog post and put it in one of their digital magazines, so that was exciting.
Dom: Excellent, excellent. So on to the topic of this week’s show. Because we’re going weekly, and we mentioned it last week in the Q&A; we’re moving to a weekly model again. One of the reasons we’re moving to the weekly model is because we have a great number of authors of some fantastic books who have approached us to do interviews.
Both Pete and I will be having a chat with these folks, and they are more of conversations. Hopefully, if you have listened to any of our previous shows with the authors, they are more conversations than they are interviews which we prefer to do.
This week’s conversation is with a chap called Brian Cohen. Now, I have to confess, Pete, when you presented this particular one to me, I did question it. Because Brian is the author of a book called What Every Angel Investor Wants You to Know. I said to you what has that got to do with our audience. Care to make your case, Pete?
Pete: Yeah, absolutely. I think there’s a couple of reasons that I decided to accept this. Because we get tons and tons of book requests, galley versions and draft versions of books for us to read and feel if they’re good for the show. We do knock quite a few back, probably more back than we actually take for obvious reasons.
We can only really get 26 guests a year on the show, which isn’t actually a whole lot when you think about it. One every second week. The reason I decided to say yes to Brian and his book was for a couple of reasons. This book is a bit different in my opinion to most books about raising money.
Most books about raising money are about how you, the entrepreneur, the business owner needs to go out and raise money. It’s very focused on you and what you want. And how what you need to do to get what you want, which is cash. This book is written from a different angle.
It’s written about what does the angel, the actual investor want? What are they looking for? And if you really think about it, and as you’ll probably hear in the conversation with Brian and if you do go and grab a copy of the book. And we have got some discount codes for the book at the end of the show.
So keep listening for those. But what you would find is that, and this is kind of obvious once you actually play in that field is that angels, venture capitalists, they invest in solid businesses and solid entrepreneurs. So the reason I think this fits very well with our audience is not necessarily because you guys are in this space to go and raise $5 million next month for your business.
Some of you maybe, some of you might get there, which is fine. Some of you may never get there or never want to get there, which is even better. But what Brian shares and talks about is solid business principles, and that this stuff applies; whether you’re trying to raise money or not.
The things that they look for, angel investors, when they are investing in a business, are solid fundamentals that are really important for you to grasp right now, whether you are trying to do an IPO or not. So I wanted to chat to Brian about that to hopefully give people an understanding that the stuff we talk about on the show regularly is the stuff that you need to have right now as you start your business and grow your business from one employee to 50.
But it’s also the same stuff that these angel guys look for. So it’s really important that you would have that full gamut to know that no matter what size you are, the key things we talk about regularly are important. That was part of it. The other part is also, it’s just nice to dream sometimes. I haven’t listed a company in IPO.
I have been involved in various ways with different businesses who have, but not my primary companies are listed. So I would still have the idea that I would love to take a business that I’ve got, one of them, and IPO them one day. It would be really cool. And it’s good to dream. You might never get there and it might not be a thing that actually makes sense to me at the time.
Because it’s not about the money necessarily, it’s about the experience for me. If we can vicariously live the experience with conversations, and listening and reading books like this, that might give me that saliva fill that I needed. So that’s the other angle. It’s nice to see what else is out there. I’m not saying that people should continue to try and be Mark Zuckerberg and that should be their goal. It’s an unrealistic goal for most people.
I have spoken about that on the show before, so I don’t want to go down that path too much right now. But it’s interesting to know what needs to be done if that’s where you want to go in the future. So those were kind of the two angles. One is searching for that foundation that is really applicable, that people need to really see and understand. And two, it’s fun to dream and have conversations about that stuff one day.
Dom: Okay. So that’s your pitch.
Pete: That is my pitch.
Dom: And based upon that, and one other piece of information, I said okay, we’ll give this a go. And I’ll listen to the result. The one other piece of information can be summarized like this: You had me at Pinterest.
Pete: Ah, okay.
Dom: Because Brian was one of the first investors. In fact, was he the first investor?
Pete: Yeah. The conversation I had with Brian was about it.
Dom: It comes up in the conversation.
Pete: It does.
Dom: It comes up in the conversation. So listen to the conversation and check out this. But Brian was basically the first investor, if I’m not mistaken, in Pinterest. And I thought if somebody is sharp enough to spot that opportunity, I want to listen to them. You were just saying that our show is about the general things that are applicable to everybody, however big or small you are.
And this is one of those things. You can learn something from everything. We have shown this before. We have talked about this before. I have kind of pointed out the times when you have done this, and I have highlighted this in the show. When you have shown me and taught me that we can learn from any situation.
From any business, you can learn a business lesson. And I said this on the Q&A last week that business is business. The rules are the same and have been for a long time.
Pete: Yeah, absolutely.
Dom: The technologies might have changed, but the rules are the same. So based upon your little pitch that you have just given there and that one other piece of information, I wanted to give this a go. Now we’ll come back to it after the conversation, and I’ll give what I thought about this book. But let me say this. Folks, give this a chance because Pete has a point.
This is a great conversation, very interesting. Yes, it’s focused on raising money, raising money from an investor in your business and the issues that are involved. But there is a lot of stuff in here that will ring a bell if you are a PreneurCast listener. You will start to hear things that you have heard us say in the past, coming from this guy. So well, I think we’ll just hand over to Pete and Brian. And enjoy.
Pete: So Brian. Welcome to the show. Thank you so much for your time.
[Pete's conversation with Brian starts]
Brian Cohen: I’m really excited about the opportunity of speaking to you and your audience.
Pete: Beautiful, mate. So let’s dive into this. The book is fantastic. But how did you come to actually putting it together? Obviously, you have got a history in the angel and VC [venture capital] world. Can you kind of touch on that to start with, and a bit on how the book came about?
Brian: Yes. A lot of it is built around the heart and soul of having been an entrepreneur myself many times, and growing up in the New York City entrepreneur community, which has gone through many, many, many renaissance periods. Particularly now where there appears to be a new infrastructure of money that’s funding a lot of entrepreneurs.
And entrepreneurs are all asking, “How do we get access to that money in a better and more thoughtful,” I like to say, “smart way.” So I started angel investing when I sold my company to McCann Erickson many years ago back when angel investing, I called it back then, “stupid investing.” And it hasn’t changed that much.
Brian: And I want your audience to appreciate the fact that angel investing, let me just slate everybody, doesn’t make anybody rich or very few people. Everybody thinks that angel investors do very well, but they don’t. So the answer to your question is it was important to me for the angel investors to be smarter by telling the story about how entrepreneurs should fundraise from them.
So it’s a book that is balanced between the two. But I learnt so much as an entrepreneur on how to approach money people. And then I learnt so much about a money person on how to develop a relationship with entrepreneurs. So it’s all about smart money, smart money, and finding smart ideas.
Not dumb money. And let me be very clear about this, not stupid, dumb money, finding dumb ideas. It’s about smart money, finding smart ideas. And that’s the genesis for the book.
Pete: Yeah, I think historically, as you said, it has been that people are just throwing money after really bad business models. Interesting ideas, but not profitable business models; and that’s obviously something we talk about quite a bit on the show. About you needing to have a very clear business model. And I think that ties up a little bit with what you write about in the book as well.
Brian: Yeah. I think entrepreneurs that I have learnt, because sometimes it sounds harsh to speak in these ways. Like, who really knows? I think that entrepreneurs today are tired of being coddled, and they want to be told what’s the right way to do things.
They don’t want to be told well, “Congratulations on being an entrepreneur. We really admire you,” and speak to you in very baby-type talk. I think entrepreneurs today are much more driven to really hear a story, to learn from a good story, gain insight from it.
And then really march to a rigor, a real rigor of thought that really gives them some way to do what they’re doing better and smarter than they have done it before. So that’s really a lot of what the book is about: rigor. Making sure that there’s clear thought to investor raising, not money raising. And that’s another part of… Yes?
Pete: Sorry. I was going to say that’s actually something that I made note of as I was going through the book, is this concept you talk about, investor raising, which is actually different to money raising. I think for a lot of people who kind of watch the movies about Facebook and all that stuff, and see this glamorous world don’t really understand how it should be done properly. And I think investor raising is a great term. Can you explain that a little bit?
Brian: Yeah. It makes you want to ask the questions of an investor that you almost feel like you shouldn’t. Have you made good investments? How much money do you invest? How often can I expect you to invest if I need you in the second round? It’s asking in-control questions.
It’s saying to the entrepreneur you are in control of the money raising. So if you’re in control of the money raising, don’t be shy. Go ask questions. Ask tough questions of the money, the people who are going to give it to you, because they believe in you. Questions like, do you believe in me and why do you believe in me?
It’s very strange when I see a lot of entrepreneurs giving presentations and just hoping that somebody is going to write them a check. I love it when they say here’s the right reasons to write me a check. Here’s why we fit together. Here’s why your money is smarter than other money that’s going to help me to grow my business. It’s certainly harder to do.
But I’ll tell you, if an entrepreneur takes control, which they don’t as much as they should, by knowing enough about me and about where I come from and what my background is and how often I invest in companies, that’s investor raising. Because then they are really learning about me as an investor rather than me about, oh, do you have some money? Can you write me a check? Very, very, very important.
Pete: And I also think from the angel’s perspective, because I have been in that situation where I have been approached and even been to these pitch nights that do happen where you get a whole bunch of people with money on one side of the room with some really nice red wine. And then a whole bunch of start-ups coming in looking at pitching their businesses.
I think from my perspective, and I would love your take on this, Brian, is when someone asks those intelligent questions beyond just how much money can you give me, and it’s all about them and their business. That they have actually asked you about what your background is and treats you like a potential partner, which is what you really are at the end of the day.
Brian: Absolutely, absolutely, positively.
Pete: Yeah. It makes you feel better about the investment too because you realize these people are actually smarter than just trying to get money out of you.
Brian: Yeah. I’m not sure how you phrased that they’re trying to get money out of you. I’m very sensitive to this. I’m 100% entrepreneur-focused. Some of my friends in the angel community don’t understand that. We have a responsibility. I’m proud to be an angel.
I think it’s one of the most honorable kind of professions you could be in because it gives me this incredible opportunity to meet some of the brightest young people. So you would take it seriously. So I love entrepreneurs who understand that it’s a balance. It’s not taking, it’s not giving. It’s sharing.
And maybe it sounds too utopian to speak this way. And I don’t know, I’m not sure how many of your listeners are going to buy into what, this perfect world of Kumbaya that I’m describing sounds. But it’s really out there. And they will best be served by believing what I’m telling them, that angel investors invest in people that they trust.
That they have a heartfelt relationship with from the beginning. That they want to give money to, not invest in, but they want to give you something. They really do. They want to give you their time, they want to give you their ideas, they want to give you their heart and their soul, not just money. And I don’t understand why entrepreneurs don’t get that too often.
They’re just afraid. They think that the people who have the money aren’t going to be nice. But the New York start-up community particularly speaking, is one of the warmest, kindest, gentlest venture communities I could imagine. Everybody here, at least in New York, if your listeners are coming to New York to raise money, we’re here as huggers.
Pete: I love it.
Brian: We really love to reach out and just to support the entrepreneur in every way we can.
Pete: So how does that differ to the mecca of angel investing which is, Silicon Valley. How do you see the difference between both sides of the continent there?
Brian: Well I’m a big New York snob. I was born and raised here. So when people ask me questions about Silicon Valley, it certainly sets me off. I had offices there for years. I think they’re much more transactional, cliquish, if you will, in Silicon Valley. There’s great smart people out there, and I think they do their job brilliantly.
Of course, it’s been very much a part of their history to have done this for so long that the rainforests that they have got there is so much more mature than most other places. But I think for the early stages of a lot of companies that are more driven by user types of applications.
And it sounds like I’m talking about a lot of Internet applications. Certainly, that’s where a lot of the money is going. I have invested in companies, in men’s underwear, in art, in others. But they generally do have a technology component. There’s no question.
So Silicon Valley is much more transaction-based on the things that make the Internet run better. And New York is, to a great extent, about what makes you operate better with the Internet. So other places around the country have their own styles.
There’s an angel group I spoke to in Austin that is certainly doing their best to follow on the coattails of South by Southwest and all of the visibility that they get. But Silicon Valley is a good place. They have a higher degree of venture capitalists. So there’s more of an opportunity to get a Series A financing there.
New York is kind of moving upstream more. But still Silicon Valley is much better at the larger A rounds and B rounds after they have been funded by angels. And there’s a stronger cooperation among angels in New York than most places where we would tee up the opportunity of a company with early—90%of all money for seed capital comes from angel investors.
Not anywhere else. You can’t get it from anyone else. Not banks, not VC’s. Ninety percent of that money comes from angel investors. And it’s large VC’s that we work with know that. And we work closely with them to fund the companies during their larger A rounds. And in New York, that’s getting much better.
Pete: I love that breakdown. You mentioned a couple of things like some terminology that some of the community might not actually know. Things like Series A, the difference between angels and VC’s. Series B. Can you kind of explain how the whole ecosystem in venture capital works?
Brian: Yeah, my pleasure. So first it’s friends and family, or sometimes it’s friends, family and fools, they say. That’s your uncle, your cousin, your parents saying here’s some money. Get out of the house. Go and do something. That’s a huge amount of money.
It’s certainly not reported, but estimates have it at $50 billion that’s spent every year on friends and family money. Then when the company wants to get more serious and someone is looking at them on a much more professional basis, though angel investing is still somewhat of an amateur sport, it’s more professional because it’s somebody else’s money.
You have to look at it, you go to an angel investor. And that money is anywhere between now it’s lower because starting a company, it’s approaching that of an unemployed; the cost of starting a company now is approaching that of an unemployed person. Which is cheap these days.
And angels are starting down lower now, at $250,000. Up to $2 million or so because they are syndicating more with other angels. So angels are the first place you go for money between those dollar amounts. And then, and most importantly, they are spending their own money.
It’s their own check. They write it themselves. It’s literally a personal check. Though some upmarket VC’s called micro VC’s or some kind of super angels are spending other people’s money, funds.
So people give them money at venture firms and they say, “Here, go and make me a lot of money.” The bigger difference, the other difference is that, and this is really important, entrepreneurs would be best served by appreciating the fact that the only way that the system works at financing them is if there’s an exit.
If the company makes money by either being bought or going IPO, of course, and the IPO is almost never happening anymore because the brokerage firms just don’t make as much money as they used to. So they have to hope for an acquisition. Angel investors can exit the company and they can let a company be sold for a lot less than a VC because a VC has a bigger model.
They have to have a billion-dollar exit. And the average exit for a VC these days is like $100 million. So the biggest difference is that angels spend their own money and VC’s spend other people’s money. And VC’s generally are more upmarket. And the angels are taking more of the early risks upon the earlier stage of a company’s development.
Pete: So a VC is coming in after it has been funded by an angel, had a few runs on the board and really wants to scale. Whereas, an angel is coming in not just on the idea side of things. But a little bit after the idea. But it is a bit more risky. The business model hasn’t been proven, so to speak.
Brian: Yes, very much. Very, very much.
Pete: And this is something that I think a lot of people don’t realize is that and this shapes once you understand this; why the model is like it is particularly in Silicon Valley, as you said, is that angels and VC’s only really get to cash out and get an ROI generally on an exit and not on cashflow.
Brian: Correct. No one takes money out of a company that needs it. It’s a strange thing. People say, so if you invest in me, I’ll give you some dividends. And I’d say no, no, no, no. We don’t want you to be cash-starved. You’re going to need every penny you’ve got, so you hold on to it. The only way a VC and an angel makes money is a negative, a liquidity of them. That’s it. There isn’t any other way. That’s a different kind of investment.
Pete: Absolutely. Sorry, I cut you off there. I was going to say this is what you mentioned then. And you do write about it in the book that entrepreneurs need to start thinking about exiting their business when they, say they’re not investing in businesses, but exits almost. Do you want to talk about that part of the book a little bit because that was really fascinating, so that people can understand that?
Brian: Sure, sure. But again it’s just straightforward. I know it sounds antithetical, when a company comes in and says, “Sir, I need money.” And I say, “What’s your exit strategy?” And they say, “What are you talking about exit strategy? I’m just starting the frigging company.” But it is what it is.
An angel has to wait an average of nine years to have an exit, from what history has shown us. The average age of an angel today is 56 years old. So they’re going to give their money to their grandkids if they ever exit. And exits are very far and few between.
So if the ecosystem isn’t producing successes and a fast rate of exit opportunities, more money isn’t being invested back into the ecosystem for start-ups. So there must be an exit strategy from the beginning. Any entrepreneur that bakes in a thoughtful, rational strategic exit strategy at the earliest stage in the presentation is definitely going to get the attention of an angel.
No question about it. Because the angel is saying how do I win? How do I succeed? And it isn’t to push a company into doing an exit. It’s to make them realize that it’s an important part of the business cycle. If a company waits too long, too many companies come in, it’s too competitive, right? They’re not going to have an opportunity to sell.
If they go way too long and they’re too big, it’s less of an opportunity to be bought because then they are too expensive. There are many, many, many reasons for early exits. And they’re all good. Now there’s the dreamer company that wants to grow forever. Great. Most angels don’t want to invest in those because they don’t see an early exit or an exit period. That’s not good.
Pete: So things like when you are putting together this presentation for an angel, it’s obviously as important to not only talk about how you’re going to acquire customers as a business model. But how you’re going to actually acquire a person who’s going to acquire you.
That’s part of the model as well, what you’re thinking about is how do you make your business attractive and who are the potential suitors to buy you in six, 12 or is it nine years?
Brian: Oh yeah. I started a company called Launch.it, the newsroom to the world. And the first thing I did when I started the company is I called the company that I wanted to acquire me to let them know that I had just started the firm. And they should be aware that I exist. And that at some point in time, I’m going to call them to acquire me. They thought I was nuts!
Pete: That’s awesome.
Brian: They thought I was crazy! And I said, “No, no. Who’s your biggest customer?” They told me, and I went out and got them. I took them away from them and then I called them back. And I said, “Listen, I’ve got your biggest customer. I just acquired them as a customer. I’m sorry but I’ve got them. I have a better constructed product than you. Who is your second biggest customer?” And they wouldn’t tell me.
Pete: I wonder why!
Brian: But it’s a straightforward process. I know I want to build a company that disrupts the bigger company that they’re going to have to acquire me.
Pete: I love that. That’s absolutely gold. That’s the mentality, I think, entrepreneurs need to go into because so many have these blinders on about, it’s all about acquiring my own customer and not about the exit of the business. And that’s a really smart way of looking at it. I reckon that’s an awesome, awesome idea.
Brian: It is really all very logical when you think through all of what we do, once you get it, once you see it. And it’s all in the book. What Every Angel Investor Wants You to Know. Go online, guys, everybody listening. It’s available on Amazon, on iTunes, Barnes & Noble, everywhere. You can get it. But it gives you this kind of input, really actionable, thoughtful, deep advice on how to do this right.
Pete: That’s it. Well, once you know how the game is played, it’s much easier to actually do well at it.
Brian: That’s right. It’s behavioral. Everything in life is behaviors. Why does somebody do what they do? Yes, there’s a business, practical, transactional element to it. But people do things for perfectly rational reasons that are behavior-based. Angel investing is the best example of that.
The biggest reason angels invest isn’t really to make money, strangely enough, though I’m saying that they need to make it to reinvest. The biggest reason angels do it is to have fun.
Pete: They have had that exit in their own business somewhere like you did and it’s now about doing, still having that finger on the pulse in some aspect.
Brian: Yes. It is so much fun. I would listen to 50 pitchers a week. I would love to do the best I can to help every one of these young people, and most of them are young, to be better, smarter and faster. What an honorable thing to do. It’s the best, extraordinary part of my life, to be able to do this.
Pete: So how do you stumble into it?
Brian: I think a friend of mine, David Rose, was starting to do it. As I said before, I started doing it when it was called stupid investing. When people used to throw down documents in front of you called red herrings when a company was thinking about raising money.
And it didn’t have any practical term to it. It was like, “Oh, wow, an opportunity to put money into a company. It became more formalized with the advent of angel groups with wisdom as mine and a lot of bright people. So I joined the New York Angels group.
And now as chairman of that group, we have grown to be the most active angel group in the United States, presumably, if not the world, in the number of investments that we make. I hate to call them deals. I don’t think entrepreneurs like to be called deals.
So I would prefer to call them investment opportunities. That’s how I did it. I got a friend of mine who started doing it. I was doing it, but I didn’t know I was doing it. And then angel groups formalized it.
Pete: Beautiful. So obviously it’s well documented that you were one of the first, if not the first investor in Pinterest, which we’ll get to in a moment. I want to hear that story. But what was your first investment?
Brian: Oh my. The first one was a minisupercomputer company called Multiflow Computer. My son is actually named after the computer that we named, called the Trace Computer. I named our son’s name and my partner and my company called Launch.it, the newsroom for the world.
His name is Trace, Trace Cohen. So that was my first. And that was a huge, huge failure. But then again most of the greatest successes are failures. So I learned a lot from that, and then I did a few more on my way to even worse failures. And now I realize it had to become much more of a practical, a business with best practices.
I grew up doing bad investing in angel investing. And I now have developed a much more profound professional approach to it that I teach other angel investors to be smarter about what they do as angel investors. So it was a natural evolution.
Pete: Awesome. So can you talk about the whole Pinterest investment deal scenario?
Brian: Yeah, there’s this great fascination with Pinterest of course.
Pete: It’s hot at the moment.
Brian: Yeah, angel investors have to lean in. Sheryl Sandberg stole my words, “lean in.” But they have to lean in to the community that they’re in. It is not economic development. A lot of angels in local, small worlds, small regions, they say, “I’m going to invest just in my community.” And that’s community economic development.
If that makes them feel good, that’s fine too. But they really have to look for really great investment and not just the best of the investments that they have got. So as a result of my addiction to this, I go everywhere, I go to all the presentations. I hear everything I can. And I ran into the founder of Pinterest, Ben, and he was at NYU.
It was a business plan competition. I met him, and as the story goes, it was the opportunity to hear his pitch. I fell in love with him and his ideas, and his dreams. And I believed in him and I gave him his first investment, which is a beautiful thing, as I say.
Pete: Something you said then really struck a chord. You said you met him. You fell in love with, well, not fell in love with his dreams, in him. Out of the four or five things that you articulated there as why you invested, only one of them was actually about the business.
Brian: That’s correct. That’s correct. Because most of the time, the company is less about the business and more about the person who is running it. Some percentage, 75% of the time the company isn’t even doing what you invested in, a year later. They have learnt so much about their marketplace. They have got new insight.
So they iterate or pivot it. I like to say iteration is the new innovation. So they will iterate it, and iterate it, and iterate it, and iterate it, until they get it right. Ben’s insight and his ability to describe what he was doing, how he was doing it. And I grew up reading Spiderman comic books, so I have a Spidey sense, a tingle. And to me, I felt it. It was tingling off the radar.
So call it luck perhaps but in this case, it was clear, absolute, without question. I thought the world of Ben. And he knew it too. And that’s why he wrote that beautiful foreword for me in the book. I don’t know if you had a chance to read it. But every time I read it, it really does make me cry. Because that’s what angel investing is all about. The belief you have in someone.
Pete: Exactly. Absolutely. Yeah, I think that’s huge. Is there any other important factors besides obviously the entrepreneur painting them, not painting themselves in a false way, but as the investment. What other things are important when you decide as an angel to invest in a company? What should people think about when they are trying to put their pitch together or start a conversation?
Brian: Well, as I said, don’t forget the exit. Now in the case of Pinterest, there never needed to be. That’s the thing, that was a category on its own. That was a lottery play. So when we think about angel investing, when I teach it, there are businesses that are long-term. You’re just in there for the long-term.
And then there’s ones that are very specific and practical, and you can identify somebody who’s going to buy you. So I think it’s a really important, I certainly want to know that you know your customer well. I’m a marketing guy. And as a marketing guy, I want to know that you know your customer better than the customer knows themselves.
I’m going to torture you about how well you know your customer, how much time you spend with them. And I’m going to really want to make sure that you know the marketplace. That you have asked the tough questions of yourself before I have asked them.
The worst answer that I get that I immediately know that I’m not interested is when I ask a question and the entrepreneur looks at me and says, “Now that’s a good question.” Well, if it was such a damn good question, why did I have to ask it and you don’t have the frigging answer?
So it’s really important that the entrepreneur has really done the rigorous analysis of their business and their customer. So that they have made a list of every question I could possibly have asked and they’re prepared. And if they’re not prepared to have the best of answers to the questions or just a good and reasonable answer that they have asked of themselves.
That’s a signal to me to walk away. I really want to know they know their business. And of course, if they’ve got a team, what’s the relationship they have? What teamsmanship, how well do they work together?
Pete: Yeah. Because you see that all the time. Kevin Rose is obviously a bit of a poster boy for this whole angel VC world with Digg, and now working for Google Ventures. The team was the big reason Google obviously acquired Milk, his latest startup, not for the app. The app is gone, the business is gone. But just for the team members, that they can actually incorporate it into their other projects internally.
Brian: Right. That’s right.
Pete: Yeah, the team is huge.
Brian: That’s right. Well, yeah, and Google is kind of like that. They acquire talent, they don’t acquire companies anymore.
Pete: Yeah, exactly. So let me switch this up a little bit and help upskill some of these listeners as well. So when an entrepreneur is actually out there talking to angels and having opportunities to get funding, there’s a few questions around that that I would love to get your thoughts on.
Firstly, how do I actually know they are ready to take some outside funds? Is there some internal questions or a checklist, or mental mind play that people can think through to actually work out, yeah, you know what, I am ready to go out and find some funding.
Brian: Well it’s certainly a number of issues depending upon certainly the business. There’s this fascination that people have with bootstrapping, like it’s a badge of honor. I think it’s bizarre. I think if you need money, you know it because it’s written into your business that you need it. You need to hire the right people, you need to market the product.
You are at a point in time where you are building out either your sales team or a better development team, and you don’t have the money. It’s a critical analysis moment. Do you need it and when do you need it? It shouldn’t be, “I don’t know. We’ll see. It doesn’t feel right.”
If you’re so wishy-washy when it comes to thinking about money, you’re not running a business well. You’re just not. Now there’s no question that if you wait longer. But it’s a strategy to raise money until you do have that wonderful word we all use: traction. You’re going to get a better valuation. There’s no question.
Because you’re de-risking. The longer you take to build your business to get and bring on more customers, you’re de-risking it for the investor. So there’s a better chance that the company is going to succeed. So it’s a strategic question. It’s not a big jousting with fog, ‘I don’t know what I’m supposed to do.’
You are thoughtful about money. Money is a strategic asset for your company just like any other asset, ideas, people. But the money fortunately or unfortunately fuels a lot of that. So you have to know early stage if you’re getting the money, latter stage if you’ve got the traction to get a better valuation.
Pete: Absolutely. So what, in your experience, through the New York Angels, which, as you mentioned, you’re chairman of. What is the average funding time? So from someone going because this is a concern for a lot of people if, there is that fine balancing act between bootstrapping and getting money when you need it.
If you realize that you have to pay the bills on Friday and you have got no cash in the bank, turning around to an angel and saying, “Hey, can you put money in” three days later is not going to happen. So how far out should people start thinking about this if they have got a good business plan? Which, as we spoke about earlier they should have. Obviously, they need that to get funding.
Brian: Yeah. You ask very, very good questions. The issue of time is somewhat dependent upon the preparation of the entrepreneur. I’m always fascinated when they say it takes too long to raise money. The biggest reason it takes so long to raise money is if the entrepreneur doesn’t prepare himself to raise the money.
And yes, it is true that there are some angels that aren’t prepared to write checks. So this goes back to the point I said before. If the entrepreneur is ready and in control of their business; they’re asking the angel, “Do you write checks? Are you prepared to write checks? How long does it take for you to write those checks?”
They’re in control. They’re asking all those tough questions. If the angel is hemming and hawing about it, they should just walk away. They shouldn’t waste their time. There are some angel groups like New York Angels. We have our early catalyst fund. If it takes longer than 30 days to fund a company, we’re doing something wrong.
Or there’s some difference in expectations on either party about meeting due diligence answers to questions that are still needed to be answered on both sides of the equation. But mostly in the case of the angels as to what they want to learn about the company before they invest. Generally, it could take a VC three to six months depending upon the frothiness of a marketplace.
With angels, it could be two to four months. But angels do a lot less due diligence. I call it D-O diligence rather than D-U-E diligence. That it’s more do the diligence to do the investment. Not to find out reasons not to do the investment. So I’m more of a provocateur about making the investors happy sooner rather than later.
But a lot of it is dependent on the entrepreneur, their preparation, their organisation. They should know, it’s all in the book What Every Angel Investor Wants You to Know. If you come prepared and you say, “I’m ready to do due diligence.” Here’s all of what you’re going to need. You will do us a lot faster investment, no question of that. You will get your money faster.
Pete: Absolutely. So what are the things besides the willingness to write a check that entrepreneurs should be looking for when going to an angel? One of the things I always believed was that at the end of the day, what a good angel or a VC should bring to the table for the entrepreneur is actually more than money. And it should be the connections and the experience that they bring to that relationship.
Brian: Oh, absolutely. More VC’s are turning to angels to help them with their young companies. Because a lot of the mentorship comes from a lot of those angels. So yeah, you’re absolutely looking for some street smarts. But in the end, most of the time they are looking for connections.
It’s hard for a VC to be full-time engaged anymore because well, particularly if they’re investing a lot with other companies. There’s just not enough time. So in the end, most of the time it’s who do you know? How can you find customers for me? Those are the big questions.
Not you can help me strategize. Those are there to help. But it’s harder and harder for a lot of these VC’s and angels to be around, particularly the good ones that are spending a lot of time investing. It’s a real challenge.
Pete: It’s the introductions, it’s the introductions to people who can help you get clients.
Brian: Yeah, it’s introductions.
Pete: Or who can help you get media exposure, all that stuff.
Brian: That’s right, that’s right.
Pete: So let me ask you one final question probably, Brian. This is the question I ask pretty much every guest we have. And it is what’s the one question around angel investing and raising money that I haven’t asked you that I should have? It always throws people.
Brian: Oh, boy. That you should have asked me?
Pete: Yeah. What are the things that you think people should know that I haven’t asked and given you an opportunity to say? Is there anything else around angel investing or just being smart about getting your business model together?
Brian: I think that it’s good for your listeners to know that angels really don’t take things. They give. If you hear an angel say take, walk away. If you hear, its language: I want, I want, I want. Walk away from that stuff. They’re not good angel investors. I’m a word person, my friend.
And when I hear words that are about taking and not giving, that’s a good signal immediately to go and find someone else. And in line with that, the next best word that you can hear besides the word yes is the word no. So push the angel to make a decision. Yes? No?
No? Great, thank you so much. Thank them profusely for saying no. Then it’s not going to waste any more of your time. And don’t work with angels or talk to anybody that had bad words about taking. Only words about giving.
Pete: I think the biggest thing that I’m hearing from our conversation is that as an entrepreneur, you shouldn’t be supplicating to these money people. They are more than just that.
Pete: But one question I do have that you just mentioned there when you said the word take. And I’ll use a different word. Is there an average or an expected type of equity arrangement for the exchange of money or anything?
Brian: No, no. Before you even finish the question, the answer is no. Angels don’t do it that way.
Pete: It’s a question that a lot of people have, don’t they? That’s what they think. Well, how does this work? How much equity do I have to ‘give up’ for this?
Brian: No. No, no, no, no, no, no. A company needs money. Whatever they need, there’s not a sense of control. That what you’re describing is I need to take. Now with angels, they don’t need to take anything. If they have the opportunity of investing in a company that’s going to help them grow. That’s all that matters. That’s it. It’s not about any percentages.
Pete: So do you find though that there is that an average, that you do, I’ll say the word exchange again. Because this is a big thing for me. I don’t want to give up ownership of my business, 51% to this angel. Is it generally 20%, 30%? Obviously, it does vary based on the amount of the investment.
Brian: Well, yes. If you were looking at what is the rule of thumb relative to the way it works out, generally it’s about 20% that an early-stage entrepreneur should expect to sell his shares in his company.
Pete: Yeah, there you go.
Brian: No one gives, no one is grabbing. It’s not a land grab.
Pete: It’s an exchange. It’s an exchange of value.
Brian: They are selling, that’s right. Twenty percent or 25% of the company.
Pete: Beautiful, mate. Well, Brian, thank you very, very much for your time, buddy. I know you are super busy and with so many bits and pieces obviously, all the projects you are involved in. And any new companies that you are going to buy into that you have seen recently that we should be aware of?
Brian: Any new companies that we are investing in that you should be aware of? Oh, my. We have so many interesting companies now in the agriculture area that are trying to produce better crops, smarter cattle. We are looking at interesting innovations in that area.
Pete: Very cool.
Brian: We are looking at robotics. Again robotics was dead for a long time. I love sensor technologies. We are living in the Internet of things world today. So there is just so much. It’s endless. I told you, I have the best job in the world. I get to hear, listen and think and find and work with some of the brightest young minds. So whatever the angel investor wants you to know, I think it’s going to help your audience better raise smart money.
Brian: Smart money.
Pete: I love it. Thank you so much, Brian.
Brian: You’ve been very kind for a lovely thoughtful interview.
[Pete's conversation with Brian ends]
Dom: So folks. That was Pete talking to Brian Cohen, author of What Every Angel Investor Wants You to Know. And I have to admit that Pete was right.
Pete: Now don’t edit that out. That’s going to stay there.
Dom: I’m not going to edit that bit out. All right, okay. But seriously, I was listening to that and I was thinking, you know what, this is like when I looked at The Lean Startup. I looked at The Lean Startup and I thought, what’s that got to do with me? But when I read The Lean Startup, the lessons in it are totally applicable to everybody.
Now it’s easier to make the reach to say, something like Built to Sell, which I think a lot of people could understand because it’s all those lessons about working on your business, not in the business. All these things that are easily identifiable as being general business lessons.
But when you look at The Lean Startup, you could easily put it back down again. And as I have said on a number of occasions, recently I have read it again and I re-recommend that book. But within full values of Brian’s book, I find similar to The Lean Startup for that reason.
The things he talks about are those business lessons. And even the little things I love. He made a comment in there that I picked up on. And he said when an angel investor asks you something and you don’t have an answer, that’s a bad thing. But what’s even worse is that you actually say that’s a really good question.
Because you realize, it’s like yeah. This guy wants to know that you know about your business. That to me is the same as the 7 Levers. The 7 Levers, the first thing we say, and I have literally said this to somebody today. A PreneurCast listener contacted us through support [at] preneurgroup [dot] com and they mentioned the 7 Levers. The first thing I said was start by measuring. You cannot manage what you aren’t measuring.
As we always say. And that’s exactly what Brian was saying with that. It’s like an investor wants to know that you know everything about your business. So I was pulling all these things out of that interview, that you were asking him these questions. It was interesting anyway. I loved the story about the Pinterest.
I loved the different things that he has been involved in. I love his ethos. This idea of the angel investor, this giving back and supporting start-ups and things like that. So I actually enjoyed that. I was surprised. I put my hand up. I really wasn’t expecting to enjoy it.
I really was expecting it to be all about billion-dollar deals and IPO’s and stuff that’s personally, it has got nothing to do with me. But it was actually really interesting. So that was cool, mate. I really enjoyed that.
Pete: Awesome, man. And we have got some discount coupons too, which is very cool. The publishers have reached out and wanted to make it easier for everyone here to actually get a copy of the book. So if you go to PreneurMarketing.com/AngelBook, that will redirect you through to McGraw-Hill, the publisher’s website where you will get a very, very nice discount on the book.
So make sure you check that out, to grab a copy of the book and get it at a very healthy little discounted price. We do highly recommend everyone grabs a copy of the book because it is definitely relevant to a lot of people in various stages of their business.
Dom: Now comes the really painful part for me because we had a deal, didn’t we, Peter?
Pete: We did have a deal, Dom.
Dom: We had a deal. Peter said that if he was right…
Pete: Peter said? Oh, this is serious. Peter said. I don’t think you have ever called me Peter on this show.
Dom: I have, but only when I’m being serious.
Dom: Peter said that if he was right and if this was relevant and good valuable content to our audience, that this should be the start of an additional offer that we do on the podcast. Something that we have talked about recently. And we were going to start it at some point. Peter said because he was so certain that he was right that we should start it on this show.
So as Peter was right, yes, I just said it again, Peter was right. Folks, if you send us proof of purchase of the book, this book in this case, What Every Angel Investor Wants You to Know and even go through the discount code at PreneurMarketing.com/AngelBook.
If you send us proof of purchase of that book, you will get an invitation to the next Preneur Platinum Live Q&A Call. Now this is normally a closed group. It’s a paid membership that Pete and I run for the Platinum members of the Preneur Community. And we hold these calls every two weeks.
It’s an open forum for you to ask any question, just like we did on the PreneurCast Q&A last week. Those are things that we don’t run very often. But these are every two weeks as one of the many things that we have in our Platinum group, but the Q&A calls are considered to be one of the best things. And if you were on a Q&A call last week, hopefully you will agree that our Q&A calls are pretty cool.
Pete: Sorry, I was going to say with the Platinum calls, we actually also share screens and show exactly what we’re doing in our businesses. So if you’ve got a question about something that we’re actually doing and want to see exactly how we’re implementing that tool and tweaking it; if you want us to review your website on one of those calls, we can pull that up and do a bit of a quick hot seat or a spotlight. So it’s very, very directive, these Platinum calls as well.
Dom: Absolutely. Yes, it’s different to the way we did the podcast Q&A. It’s much more interactive. And also, it does, as Pete said, includes a lot of behind-the-scenes stuff because that’s one of the main components of the Preneur Platinum group. It’s a place for us to share the behind-the-scenes of the projects that we’re working on, all the decisions that we make, and the results from our testing and everything.
It’s stuff that you wouldn’t normally get to see, so it’s a pretty cool thing. It’s really simple. If you send us proof of purchase of this book, then we will send you the details so that you can get on the next available Preneur Platinum call.
Pete: Yeah. Just forward your receipt to support [at] preneurgroup [dot] com and the team will give you that invite. You will be able to hang out with Dom and I as well as pick up a really cool book at a nice substantial discount from the publishers.
Dom: Yeah, yeah. I’m really grateful that you didn’t make some joke and make up a fake e-mail address that had something to do with Pete was right.
Pete: That would have been pretty cool.
Dom: So folks, that’s it for this week. As we said last week, we are going back to weekly, so do be prepared for more Pete and Dom.
Dom: Thanks, everybody, for listening. Thanks again, everybody, for joining us on the Q&A last week. Thanks for joining us this week. Looking forward to talking to you again next week. And as always, please get in touch with us through PreneurMedia.tv where every episode is there and transcripts, and show notes, and links, and various ways that you can leave us comments, and leave audio feedback.
Or through iTunes. You can leave us a comment on iTunes and give us feedback there. Or e-mail support [at] preneurgroup [dot] com. If you contact us through any of those means, we will get back to you. So thanks again, folks. And Pete, okay, I’ll say it one more time. You were right. A great interview. Well done, mate.
Pete: Awesome, guys. We’ll see you next week.
Dom: See you next week.