How Do I Know If An Investor Has Money To Invest?

So I’ll be honest– I was reading my fellow entrepenuer Doug Richard’s blog and posted a reply (which in my typical verbose fashion turned out almost being an entire post in itself). Being a frugal chap, I thought I’d update my neglected blog AND point you back in the direction of Dougs blog and his School for Startups (not to be confused with Startup School in the U.S, run by Paul & his wife who also founded Y-Combinator)

This is an important question for entreprenuers raising their first round of Angel or VC funding:

Does the white-winged messenger from the gods you’re courting for investment with your fabulous new Google-killing start-up, actually have any money to invest?

“Fallen Angel” (Photo Credit: Raquel Giffard)

After reading Dougs post, I felt one thing had been overlooked: Ask the Angel.

I’d recommend the entrepreneur look the angel in the eye, preferably during the first 10 minutes of a meeting and simply as the question “Do you have the money available to invest at the moment?” Any entrepreneur who is going to last the distance in business is going to need to be able to follow their gut as to when someone is telling the truth or telling porky pies.

I’ve found it is surprising how few people ask direct questions, out right, in person, to their face. It often reveals either a more candid answer that you might expect, or atleast you garner the answer indirectly from their reaction.

Few angels like to be seen as “not investing”. They want to keep their finger on the pulse- and there is often that sense of not ‘wanting to miss the next big thing’. Many I know will justify this by arguing that they could always make another asset liquid if they really had to, to take advantage of an opportunity (i.e. for those newbie’s reading- by selling a house, land, stock from another company to have cash available to invest) but I’d argue that this rarely happens in order to invest in a start-up.

So called “Angel Networks” are notorious for being full of timewasters, who use them as much as a club and enjoy the notion of being an investor, while rarely investing or indeed not having the capital to do so. That is not to say ALL Angel Networks are bad; some are OK but approach with serious caution. Personally, I’d also avoid any which charge upfront fees.

In summary, IMHO it is best to ask direct question up front, at the start. It is not rude. It’s demonstrating practical business sense – and an ability to be candid and pull no punches.

Lastly, all this applies in spades and more to VCs. For the uninitiated, make sure you ask them a boat load of questions. What is their fund size? When did it close? How much do they have left? What was the last investment they did? What size was it? When was the last time they did an investment the size of yours and in a comparable sector? So, Angels are not the only investors who like to appear to have money to invest, when they dont…

Quickfire overview:

• Whether VC or Angel, ask out right if they are investing
• Ask about specific last investment – inc. size and type of deal
• Have conversations face to face and follow your gut instinct as to whether they are wasting your time
• Ask to speak to the last entreprenuer they invested in
• Don’t be afraid to ask other VCs or investors – the Angel or VC may found out, but it just means you’re doing your due diligence
• Check www.thefunded.com for feedback about VCs. Some of it is just bitter talk from rejected applications- but mostly its good stuff.
• Don’t take any money at any cost – the devil is usually in the detail

Lastly, re-read Dougs post as everything he says is bang on: there is nothing better than to get free advice from a seasoned Angel investor, but be clear about your own goals and beliefs- no one wants to invest their money in a CEO who is a push over. Equally, not a CEO who won’t listen or cant change position given good reason. Make sure you’ve got that balance right.

The big fat UK investment “equity-gap-elephant-in-the-living-room” that nobody wants to mention

In reply to a post that someone replied to on Robert Scobles blog, saying that there was no issue with VC tech funding in Europe and that there was plenty money for startups and suggesting that it was just as easy to fund a company to build a multi-billion dollar business in Europe as the U.S. (the persons comments in italics), I recently wrote this response…

“There’s really no shortage of venture capital in Europe.”

Not true. There is no shortage of growth capital. There is no shortage of seed capital. There is a major shortage of Venture Capital for Series A with early stage companies. I dont know if you have raised capital for an early stage company in Europe, but if you have tried you’ll know there are literally only a handful of VCs who understand the tech ecosystem fully AND are prepared to invest early stage.

“If you want to build a billion dollar software tech company in Europe by using European VC money, it’s perfectly possible to do it”

I’d challenge you to give me 5 companies in this category who have grown to a billion dollar company, purely on European VC money (let alone UK), other than rolling out the usual suspects such as Skype et al. In contrast, I can probably name you 20 U.S. in the consumer internet sector, without breaking a sweat.

There is problem in Europe – its the equity gap. And its big. There are of course always exceptions to the rule, but in general U.S. seed investment is larger, and VC investment is earlier. In contrast, seed investment in the UK/Europe is smaller and VCs invest much later. That leaves a gaping hole between around £250,000 and £2m ($500k and $4m U.S.)

Everyone knows this, everyone will discuss it private, but nobody wants to spoil the party at European conferences by saying it. Which is a pity, as it needs to be said; because there is so much good stuff going on in Europe in the startup scene, thats its a disgrace that more support and more risk capital is not made available early enough.

Europeans (of which I am one) sometimes ask why there is no Yahoo, Google, Flickr, YouTube, MySpace etc etc of Europe; I believe the reason is what I have just described. Sadly, the same fate awaits us again in 4 years time when the consumer mobile internet services mature, and the same conversation will be had again.

The U.S. is now heavily investing in mobile startups and I believe has every chance to over take Europe in mobile services and take up, within 18 to 24 months. You read it here first.

The European tech sector needs to wake up to this reality and do something about it; until it does the U.S. will continue to dominate North American and European markets with web and mobile consumer brands, because they invest earlier and more aggressively, in more companies.

That was the gospel according to St. Andrew.