Angel’s Sins – Part Two

 

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

Read Part One

 

As the old saying goes, ‘the road to hell is paved with good intentions’. Angel investors can do far more harm than good by taking the wrong approach to post-funding relationships with the management team.

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Hands-Off Oversight: Many investors seem to take the position that, once invested, the future of the company is up to the management team. Many of them actually sit on the board of the company. Two of the keys to start-up success are board oversight and ‘adult supervision’. Without it, the effort can descend into a simple roll of the dice. Investors – or better, their professional representatives on the board – should play an active and forceful role in determining the strategic direction of the company. One of the strengths of many angel investors is that they have had successful careers – experience in building and managing businesses – and that experience is invaluable to a new company and team.

Fanciful Projections: The two most insidious – nay, dangerous – pieces of software for start-ups are Power Point and Excel. Both promote shallow thinking. Start-ups are particularly vulnerable to the kind of loose thinking and untested assumptions that spreadsheets seem to cultivate. I often encounter start-up companies that are using incredibly convoluted financial models – companies that have yet to put two months of cash-flow positive results on the books. This kind of over-engineering distracts from the simple fact that the company has yet to become a going concern. Most often, these Rube Goldberg models result in a continual re-setting of expectations and little change in the culture, focus or profitability of the company.

Performance Reviews: In going concerns, the performance review is a key to evaluating management. The board uses the reviews to decide whether the company has the right CEO and senior team. It is rare that I encounter a start-up that has this process in place – and rarer still to find formal reviews as part of the corporate records. Every member of a start-up team should be performance reviewed by the board on a regular basis. Those reviews should be used to set compensation, renegotiate contracts and arrange for severance when necessary.

In the start-up world, only one in ten companies makes it to their fifth anniversary. My experience has been that most of those that fail do so because the team has performed poorly in the business of business – in other words, they do not fail because of their value proposition or the technology that is at the heart of that value proposition. They fail because they have not implemented the strategic and tactical plans in a way that generated revenue and an expanding customer base. Angel investors have it in their power to improve the odds for companies they invest in. However, to do so requires a more focused and professional approach.

© Dr. Earl R. Smith II

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Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing.

Dr. Smith provides coaching services to C-level executives. He serves on boards of directors, builds advisory boards as business development engines and acts as a senior adviser to CEOs. He is the author of a number of books and writes regularly on business, funding and entrepreneurial subjects.

Books by Dr. Smith:

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

Dr. Earl R. Smith II

Managing Partner, The Federal Circle

What I Do: I serve as a strategic adviser and on boards of directors and advisory boards. I advise investors and CEOs and...

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