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7
CHAPTER

Types of Private Investors


I should like to have a more perfect knowledge of things, but I do
not want to buy it as dear as it costs.
”Michel de Montaigne




INTRODUCTION
Every private investor would appreciate having a “more perfect knowledge
of things,” but operating, at best, with an imperfect knowledge of the “dear
costs” of things, each has decisions to make”as you are about to discover
from their own words. Taken together they form a highly articulate verbal
community that talks straight, an information-rich, information-sharing net-
work of idiosyncratic individuals.
In his 1997 Inc. article, “My Life as an Angel,” Norman Brodsky speaks
to what drives these networks of investors: “For me, there™s nothing like it”
the business of seeing a business rise up from nothing . . . There™s just some-
thing unbelievably thrilling about seeing the growth, watching the numbers
go up, getting the business to stand on its own . . . I can™t get enough of it.”
He continues: “These deals . . . offer me the opportunity to teach other peo-
ple some of the things I™ve learned over the years and to share with them the
excitement of bringing a new business into existence.”
The variety of individual private investors we enumerate in Exhibit 7.1
forms a nexus, a large group within which we differentiate types. Based on
our experience, and based on countless conversations and interviews with in-
vestors, we have selected individuals who we feel capture the essence of types
of angels from among the more than 1,359 listed in ICR™s database. From



141
142 UNDERSTANDING THE ANGEL INVESTOR



CONSORTIUM OF
VALUE-ADDED DEEP-POCKET INDIVIDUAL
INVESTOR INVESTOR INVESTORS




PARTNER FAMILY OF BARTER
INVESTOR INVESTORS INVESTOR




SOCIALLY UNACREDITED
MANAGER-
RESPONSIBLE PRIVATE
INVESTOR
PRIVATE INVESTOR INVESTOR


Exhibit 7.1 Typology of Angel Investors
Source: International Capital Resources




these conversations and interviews with private investors have emerged pat-
terns of like-mindedness within similar investment orientations.
To know the types, to glimpse their differing motivations, is to evaluate
what investors are looking for and determine whether your time would be
wasted or well spent in dealing with certain investor types. Thus, under-
standing and distinguishing types of investors form the rationale for this
chapter.
In assessing investors, entrepreneurs are dealing with singular indi-
viduals, not impersonal structures such as banks. Beneath the facade, all
banks are the same. Their criteria for granting a loan fit a single mold. Their
ratios, calculations, and protocol are stamped out cookie-cutter style. Their
loan-to-risk computations are cloned. On the other hand, no monolithic in-
vestment criterion dictates when and where private investors are likely to in-
vest, although they share much, as we have noted. But neither are they of
infinite variety. Angel investors fall into types, the types we delineate here. So
as you listen to the barter-investor, the value-added investor, the deep-pocket
investor, and so on, weave these individuals into generic types of the private
investors you will be meeting and asking to invest in your vision.
Our first type of investor is the value-added investor.
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Types of Private Investors


THE VALUE-ADDED INVESTOR

Value-Added Investor #1
I either jump into the plan or the plan jumps out of my hands.

I™ve been involved in a broad range of industries over a lot of years. This
includes the experience of having worked with a company that, when we
started, was doing about half a million in sales and grew to $80 million
in sales within two years. We have bought up about 21 companies and
gone public and done amazingly well. The common thread that runs
through all of my activity is my background in building ventures. The fi-
nancial investments I™ve made in companies, for the most part, have
ranged from $50,000 to $150,000 per company (Exhibit 7.2).
Location of the company is an issue for me. If I can™t drive to the
company within an hour of my base, San Francisco, it becomes a real
stretch for me. I have invested in out-of-state deals, but I™m not comfort-
able with them. Furthermore, industry is not as important as the eco-
nomic opportunity, the point being that I am a generalist and not a
technologist. I look at each case on its own merits. I perform the due dili-
gence. I™ve invested in both loans and equity. I look for an opportunity
to advise the companies. That™s the reason I do all this, because I like
helping companies.
Private investors who spend time with companies are called
value-added investors, which is precisely what we are. I™m a very active


EXHIBIT 7.2 Value-Added Investor

• Very experienced investors and former investment bankers and venture capitalists
• Storefront venture capital firms
• Short due diligence cycle, require business plans
• Make multiple investments
• Want to help grow business and have fun doing so
• Lead investor searches out investment opportunities and makes an independent
decision to invest and often suggests investments to others
• Very strong network of co-investors whom they leverage and who trust their
judgment
• Become extremely active and involved, however, only for short periods; problem
solver orientation
• Tend toward industry concentrations
• Invests close to home
• Invests $50,000“$250,000 in either debt or equity

Source: International Capital Resources
144 UNDERSTANDING THE ANGEL INVESTOR


investor. For instance, I™ve just completed a merger for two companies
that I™ve been involved with. I™ve done all kinds of things with these busi-
nesses, which is precisely what I enjoy doing.
I am a follow-on investor. I™ve been in a number of situations in
which there have been deep-pocket investors who put a million dollars
or more in companies that I eventually got into as a follow-on investor”
a situation I like to see. I™m not saying that a follow-on investor has to
have $1 million in the company, but if there is a major investor in the
company, it™s nice for me to know, as a follow-on investor, that he or she
has a lot more invested in the company than I do, that he or she is going
to carry the company through the blips. This is exactly what has hap-
pened and exactly what has saved some companies that I™ve been in-
volved in. So being a follow-on investor attracts me.
For me to become involved in companies at the idea stage, I have to
see that each company has a good product, a ready market, and a man-
agement team with a lot of experience in its field. If the company has
some revenue, I™d prefer to see about $1 million in sales. The CEO is also
important in a company that I look at.
And, in my mind, the people in the company have to have, at the
first cut, the four Ps. They have to be passionate, persistent, pleasant,
and penetrable. By passionate I mean they have to love the business
they™re in. They have to live it seven days a week in their heart and their
soul. They have to be persistent in reaching for the appropriate goals,
they have to do it with fervor, but they also have to commit to the fol-
low-up issues associated with any task. And I mention that especially in
regard to my recent experience with a person of great vision but no fol-
low-up. The people in the company also have to be pleasant to work
with. Compatibility is an issue. In fact, treat your investor as your part-
ner. Finally, they have to be penetrable, that is, open to advice”ex-
tremely important, especially given my involvement with businesses.
Part of this is having a collectively logical mind, that is, the people have
to be able to think logically through business issues.
I™m at the point in my investing career where I really discourage
plans being sent to me. Initially, I want to look at an executive sum-
mary. In terms of a nondisclosure issue, you™re probably going to find
investors who are willing to sign every nondisclosure statement coming
to them, or they won™t sign even one because of the liability. You can get
around that by giving them the executive summary, which typically
doesn™t have any proprietary information in it. Then you will see if
they™re interested and carry on from there. I usually review the execu-
tive summary, which gives me a real quick idea of what the business is,
then turn to the resumes”because those are the people who are going
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Types of Private Investors


to make it happen. Then I either jump into the plan or the plan jumps
out of my hands.
I want to plug something I call mutual due diligence. As much as an
investor is going to do due diligence on your company, you should do
due diligence on the investor. And you should think about what kind of
investors you want, what they™re going to bring to the table. I think
there™s a whole host of questions you can ask. From my experience, an
organization like ICR brings together quality investors. By contrast, you
have no idea what you will find out there on the street.
One of the sensible questions for an entrepreneur to ask investors is
whether they have ever done this kind of thing before. Have they been
involved with a company and with the kind of investment they™re about
to make with you? Because if they haven™t been through the downside of
working with a business, I don™t think you want to be in the position of
a trainer. It takes an awful lot of time out of what could be an awfully
good company.


Value-Added Investor #2
What I ask”and I™ve learned this question painfully”is whether
the venture can survive as a business in the short term, say 6
months, a year, or 18 months, whatever it takes to get to a positive
cash flow.

I™ve been on both sides of the table, as a principal, as an investor, both
for venture capital firms and for my own account. I™ve also been on the
entrepreneur side of the table raising money. I am an absolute expert in
this business, because, after 20-plus years in the business, I™ve been in
more traps and made every mistake you could make as an investor. The
trick is not to make them more than once or twice. That™s probably why
I™m such an expert. This is very much an apprenticeship business. That
is, the investor learns by doing.
I focus on a few areas, trying to sift the weak from the strong in in-
vestment opportunities. Number one for me is the market. Let me just
say up front that the definition of your market is the key. Obviously, as
an investor, I want to see that there™s a big enough market so that if you
have to shift strategy or change course, there™s enough room to do it.
Specifically, I™m interested in the appropriate market segment you™re
doing business in. And if it™s the San Francisco Bay Area, fine. Tell us
how you™re going to capture the San Francisco Bay Area and use that as
a model for expansion into other cities. Zero in on your segment and
talk about that.
146 UNDERSTANDING THE ANGEL INVESTOR


If you™ve got a product and you want to attract third-party in-
vestors, the entrepreneur needs to think about the following: making
that product into a business, using the personal skills of your team, cre-
ating a distribution network, and multiplying your expertise into similar
kinds of products or services. Then mill all that together to make a busi-
ness that has a chance to grow and to attract third-party capital.
I want a product or a service that offers customers a compelling rea-
son to buy it. That means it needs to be different from whatever else is
out there, because you™re obviously going to be a small business going
against the big guys. But”and this is where I™ve gotten a lot of arrows in
my back”it cannot be so different, so revolutionary, so unique that you
have to do a lot of missionary selling to convince people that this is a
product to buy. Now, that may be fine for larger institutional investors
or venture capital groups that are in seed-development capital. That™s
what they do. The technology guys and engineers who do due diligence
aren™t the people who write the checks. The people who write the checks
are the purchasing managers, so you need to convince me that the theo-
retical demand for your product can be converted into dollar orders in
the short term.
A second criterion for me is survivability. This, however, is a dou-
ble-edged sword. When I look at a plan, certainly I want to see a big
enough opportunity to make it worth my while, or an opportunity to
shift course if necessary. That™s great. But what I ask”and I™ve learned
the answer to this question painfully”is whether the venture can survive
as a business in the short term, say 6 months, a year, or 18 months,
whatever it takes to get to a positive cash flow.
How are you going to do that? How are you going to sell product in
the short term to generate cash internally? I think this is absolutely crit-
ical. What is your sales strategy? How are you going to get those orders
in the door? What is a realistic sell cycle for your product or service? If it
looks like it™s two months, it™s probably four months. I™ve learned that
the hard way. I™ve been in some deals where the technology worked, the
product was great, the people liked it, but the sales cycle turned out to
be four or five times as long as we thought and, as a result, we ran out of
cash and had to engage in down-and-dirty financing to bring in capital
at a much lower valuation level.
Another factor is financing strategy, an aspect that goes with the
survivability. As I mentioned, I will look to see whether the company can
generate cash in the short term to survive. Also, have you thought about
a long-term financing plan? And I know that™s a little difficult when
you™re scratching around trying to figure out where the next dollar of
capital is coming from, but it™s important to have, just like you have a

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