Value to Exit, or 5 Reasons Why You Want Smart Money For Your Company

You could be right in thinking now is a good time to raise money for a company in and around Europe: despite the many signals of downturn coming from Silicon Valley, Europe and Israel are reporting a 158% increase in the amount of companies getting funded in January and February 2016, compared to the first two months of last year. And when it comes to the earliest stage, no less than 76 accelerators invested almost EUR 40 million in 1,588 companies in one year.

What a difference from six years ago, when I closed the first round of funding for my first company, one year into its existence. Back in 2009/2010, one of the hardest things for a European startup was to find investors. We had been working hard to validate revenue and even managed to hit monthly break-even, when we started looking for investors in Amsterdam in late 2009. This being before doing a startup was popular, and us not knowing anyone in the industry whatsoever, we found the websites of the only two angel networks in the country, only to see that their next meetings were months away. Then to our luck, a friend referred us to his investor, who ended up leading a EUR 200k round in our company. 

That experience gave me my first taste of how venture financing works, and set me up with a set of values and rules that I have been validating ever since. And with Cross Border Angels, our slogan “Value to Exit” is a strong personal reminder to me that early-stage investments have to provide much more than just money: they need to deliver expertise, help set realistic business development goals, and give the founder tools to achieve them. 

Here are 5 reasons why smart money matters more than just money;

1. Entrepreneurship is experiential. Anyone who has successfully built a business in a given vertical, and in a given geography has learned tons of lessons no business book will ever teach you. Our first two angel investors in 2010 turned around our operations and pricing in two weeks, setting our legal services startup up for scalability and growth we didn’t even know was possible. Their angel investment gave us the runway to implement those changes and subsequent growth.
2. Network matters. There is a reason why despite all the connectivity tools and networking apps, people still come together every day for industry events ranging from 20-person meetups to massive conferences attracting hundreds of thousands, like MWC, SXSW, or CES. People do business with people they’ve known over a period of time. Chances of landing a distribution deal with a major corporation or hiring the top sales person are radically higher when your investor can dial an old buddy who is calling the shots at your dream target.
3. Goals must be aligned. One of the hardest things I’ve learned about corporate and public-money-backed investment organizations (and to my knowledge, at least 70% of European venture capital is such), is that while usually they’re genuinely happy to see you succeed, their strategic motives are not related to their investees becoming market leaders or returning 3x on equity. Often, investors get appraised for the money they’ve invested, the innovations they’ve supported, the jobs they created, etc. Out of all 100+ VC funds active in Europe, I can only name 3 or 4 that I’m sure are returning money to LPs. And they are the smart funds you should look for. In contrast, when it comes to angels I know personally (also 100 or so), the vast majority makes a profit on their portfolio. Because most angels have goals very similar to those of the entrepreneurs they support and whose business they understand.
4. Exit strategy. While some very successful investors will argue that entrepreneurs don’t need an exit strategy (I disagree), no one will argue that for an investor. The business of investing is to sell equity with a profit. The investor’s real client is not the entrepreneur, but the buyer of the equity. Successful investors maintain a very close network with such buyers, listening to their needs, and placing their investment dollars in companies that work on the problems these buyers need to solve. Usually these buyers are large companies too big to innovate quickly, looking to buy a smaller company that can solve the problem. But sometimes it’s the stock market, with an IPO creating a fortune for the early investors of a startup that ended up doing a homerun.
5. Creating Value. Some of the most recognized individuals in the investment world are Sequoia Capital’s MD Sir Michael Moritz and iconic angel investor Esther Dyson. Both have supported legendary tech companies in their earliest days. One thing I was surprised to learn recently that both actually started out as business journalists. Moritz was the first journalist to write extensively about Steve Jobs, and Esther Dyson was a foreign correspondent in Moscow when the first businesses started to appear there during the Perestroika. Through their exposure, companies like Apple and Kaspersky Labs were first introduced to the wider audience. Unlike most journalists, Dyson and Moritz started using their network and skills to help tech businesses get noticed, earning them massive fortunes as early investors. That’s what the best investors do: bring unique and powerful value to companies.

And that’s why determined founders of scalable companies looking for investors should sift through investor possibilities until they find the smartest money available to them. Often these are angels with tremendous domain expertise or a strong skill- or networking advantage. Sometimes it’s a fund with a clear track record and reputable partners. It’s great that financing has become more available than it has ever been, empowering thousands of would-be employees to turn to entrepreneurship. But the best opportunities are rare, and it takes ambition, focus, and perseverance to uncover them. 

At Cross Border Angels, we are committed to helping the best entrepreneurs around the world connect with the most useful angel investors. Learn more at https://crossborderangels.com/entrepreneurs.

This article first appeared on Cross Border Angels blog: https://blog.crossborderangels.com.