A reflection on “Winning Angels: The 7 Fundamentals of early stage investing” by: David Amis and Howard Stevenson

“Start with the end in mind. ”

Stephen R. Covey, The 7 Habits of Highly Effective People

As a winning angel, you may go into each investment opportunity for the same reasons, but with an open mind you will get different results. Regardless of how you end, you should have a plan for that end when you begin the investment.

Recently, I was watching an interview with founder of Carol’s Daughter, Lisa Price. She talked about how some of her supporters were very upset with her when she sold her business years after success. She said it was always the plan to sell. REPEAT. She went into business with the goal of one day selling her business.

That was surprising because most people are invested in their ideas and want to see the success forever. But, you can see success forever with a business you started. It just may not be in the CEO seat.

I did a little digging on Carol’s Daughter and found information I would have never thought to look up had I not read this book and learned about harvesting. Crunchbase.com didn’t have all the information that I would have liked to see, but what I learned was this:

Company Name: Carol’s Daughter
Founded: 1999
Acquired by L’Oreal: 2014
IPO Status: Private

Funding Rounds: 3
Total Funding Amount: $18M
Funding Status: M&A (Merger and Acquisitions)
# of Lead Investors: 3
# of Investors: 10

Among the investors list is Will Smith and Shawn “Jay Z” Carter.

In other words, all positive. Carol’s Daughter has been fortunate not to have to deal with negative harvesting (Chapter 11 or Chapter 7).

A reflection on “Winning Angels: The 7 Fundamentals of early stage investing” by: David Amis and Howard Stevenson

Support may be one of the strongest words in the English language. It is the one thing that will ruin a relationship (personal or professional). There is no doubt it is important in business and especially for the relationship of a winning angel and entrepreneur.

The five different types of supportive/participating roles for an angel may differ at varying points of the investment relationship. These are the different roles an investment angel may play.

(1) Silent Investor

For an entrepreneur that is self sufficient and has a clear vision for their company, they may appreciate the role of the silent investor. I wish my parents would have been silent investors growing up (ha!). Just kidding. Now I have an even fonder appreciation of the team member and sometimes coaching role that they played.

(2) Reserve Force

This investor will provide guidance, as requested by the entrepreneur. This role is extremely helpful when the entrepreneur approaches a component of their business that is outside of their comfort zone or wheelhouse. For me, this would be investments. I have not kept it a secret that investments would be a challenge for me. I would certainly request assistance from an angel regarding investments.

(3) Team Member (Full or Part time)

This supportive role would be right up my alley as an angel, if welcomed and if necessary. I have been told that I have a talent of talking a small idea and making it a great success, beyond the original vision. As a team member, I could see being instrumental in providing hands one support in the launch of new products and/or ideas.

(4) Coach

Having been in a director position for the last 5 years, and also reporting directly to the board of directors, I have had to coach and I have had excellent coaches. The one thing that has been the most important factor in coaching is consistency. While I enjoy getting my hands dirty and producing the results, there is also something very satisfying about empowering others to lead with your guidance and support. That is how you build multiple empires with multiple streams of revenue.

(5) Controlling Investor

This role is borderline on becoming the entrepreneur. Amis and Stevenson indicate that this role kicks in mainly when the investor has high stakes – major capital investor, voting control, controls the board, or controls through the investment agreement. Most people do not appreciate a control freak. However, if it’s necessary to save the business, you have to do what you have to do.

The biggest take away that from the section of the reading were two simple questions (page 267):

• What does the entrepreneur need? You will know this from probing conversations, observation and experience from other deals.
• What does the entrepreneur want? This question is equally as important. Allowing them to tell you what they want eliminates the guessing game. It also shows you their level of confidence. The same confidence they will need to lead a business to success.

A reflection on “Winning Angels: The 7 Fundamentals of early stage investing” by: David Amis and Howard Stevenson

Negotiating is not for the faint at heart. You truly have to be able to have a poker face, know your worth, understand the terms and know when to walk away.

Amis and Stevenson describe two types of people: those that negotiate and those that do not.

Chapter 37: Those that do not negotiate.

The #2 reason really hit home: “They are concerned about the efficacy of a relationship based on trust that starts with a fight for money and/or control.” That is major! Negotiation should be considered a fight. However, some people have a way of turning it into just that.

Chapter 38: Those that do negotiate.

The #3 approach is probably the safest for most people: “Get someone else to negotiate (essentially a negotiating strategy used by a non-negotiator”. This goes back to my last reflection on structure. Having a seasoned, component attorney will work wonders.

I have had my fail share of negotiation and it is tiring. I’ve negotiated the terms of a learning management system, media projects, salaries, etc. The most draining negotiation was for a house that I purchased. After several rounds I walked away. Much less for the reason of efficacy or the concern of a strained relationship (which was irrelevant in this case), but more on about the unreasonable back and forth on the terms. I ended up looking up the status of the house and it did eventually sell… after being on the market for 5 months and many reductions in price.

There is an art to hold out for the terms that you want, but there is also an art to walking away.

A reflection on “Winning Angels: The 7 Fundamentals of early stage investing” by: David Amis and Howard Stevenson

What did I just read? This section has been the most confusing to me so far. I hope that I will not have to fully grasp it in order to understand the remainder of the book.

There were two things that made this difficult for me to understand, they were talking about the stock market (shares) and there were a lot of terms that are not in my business vocabulary…YET.

What I was able to understand is that there are three fundamental structures for business terms. The structures may have an exit impact, relationship impact, downside protection, upside protection, entrepreneur protection, worst case scenario, and notes and suggestions.

I am tempted to end my reflection there, but I am going to talk through this. As I was reading this section, my main thought was: if this doesn’t make sense to you, hire a lawyer.

The upside to having an attorney on your side during the structuring phase (as well as negotiations) is that a component and seasoned attorney has he resident knowledge of hundreds of deals related to your interest. They will be able to provide you with sound advice that will protect your interest in the long run.

What I also took away from this reading is that some investing angels believe structure matters and others don’t. In general, I thrive in situations where there is structure. There is a basic understanding of what all parties desire. No grey areas.

My last thought. I would love to see an updated Amazon.com’s structure, especially in 2020 post pandemic since they are DOMINATING the business world. On thing that I know for sure, whomever trusted Jeffrey Preston Bezos in 1994 is living a very happy life. Whomever did not accept or trust his structure is very, very sad right now!

A reflection on “Winning Angels: The 7 Fundamentals of early stage investing” by: David Amis and Howard Stevenson

If I were to ever decide to be a venture capitalist, I would predict this to be the most difficult part of the process for me. Since investing goes both ways (investor to entrepreneur and entrepreneur to investor), I better figure it out fast!

One of the main reasons I think valuing would be the most difficult part of the investment process for me is that I do not predict numbers based on behavior well. I think I need to tap into other areas of my life and determine how I make those predictions and figure out how to apply it to business valuing.

The reading, valuation section, identifies 12 methods of valuation. These methods are broken down further into sub-methods or approaches.

Quick and Easy

The five (5) methods of Quick and Easy are $5mil limit, Berkus method, Rule of thirds, $2m – $5m angel standard, and $2m – $5m internet standard.

Of the five I would most likely rule out Rule of Thirds first. It is my experience that the works or value added by all parties is not equal. Depending on the investment, one third stake may not be equitable for anyone other than the founders. Between the founders and the Venture Capitalist (VC) they hold the most risk in the business. The only reason I would say that the managers would get one third is if they managers with proven records of moving the needle.

The Berkus method had great measurements for how much to invest. Basically, the better the deal, the more the investment.

Last, I must be unsophisticated or lack the vision for significant progress because my eyes popped out of my head at the thought of asking for less than $2m as a bad thing!

Academic/Investment Banker

The two (2) methods for academic/investment banker are multiplier and discounted cash flow.

These two methods didn’t seems as different as the examples provided by the different angels, but one seems to require more experience or intuition to calculate.

The multiplier method is similar to how I calculate how long it will take my staff to complete a project OR how many staff members I will need for a project or season. It’s fairly simple math. There are variables that have to be considered based on projects (or industries in the case of investment), but it can be a great way of completing valuation.

Professional Venture Capitalist

There is one (1) method and it made me thing of Shark Tank again. As a VC, there are financial goals that they are setting. Some may set annual goals, goals per investment, goals per industry, etc. To reach their goals, this method is critical! It is an easy way to combine the other method (Multiplier Method) to determine the percentage of the company to ask for.

I would presume needing to be a numbers person to get this method correct consistently.

Compensated Advisor

I stated earlier that I am not really a gambler and I am not a numbers person, but I do work extremely hard. I know how to drive results. I supervisor of mine has attributed me to taking small ideas and producing big results.

The two (2) methods of the Compensated Advisor sound more “safe” to me, but can be unappealing if you are concerned with your time. Instead of trading money (your money) for stake in the business, you are trading time.

To me these two methods sounded like short term contracts that would serves as long-term residual income.

Value Later

The last two (2) methods are the Pre-VC Method and O.H. Method. These methods are for confident investors that have money, money, money! They are less concerned with the valuation of the company, but that’s because they get more in the end (provided the company is successful).

A reflection on “Winning Angels: The 7 Fundamentals of early stage investing” by: David Amis and Howard Stevenson

The first section of this book talking about the sourcing stage of investment. See my reflection on sourcing here. In the first page of the section about sourcing the authors make an immediate connection between sourcing and evaluating.

For a split second I wasn’t sure why Amis and Stevenson chose to separate the two since they married them early in the reading. After reading about evaluating, I understood why.

Evaluating an investment opportunity is related to four essential elements and highly based on intuition.

PEOPLE (1)

When evaluating, you want to know who the deal is with and that goes beyond the business owner. The people include the entrepreneur, team members, investors, advisors and any significant stakeholder. What is the track record? Are they synced with one another and the common goal?

BUSINESS OPPORTUNITY (2)

Within business opportunity are four subelements: model, customer, timing and size. All other these elements are important to understand as an entrepreneur and investor because they tell the story of how the company will make money.

THE CONTEXT (3)

The most common factors related to context are: economy, technology development, regulation, and stage of the industry. In my opinion, this is where the intuition coms in the most. Think about it, intuition is the ability to understanding something immediately without the need for conscious reasoning. If you can project success of an industry, in part based on economy (not solely based on economy), that’s a lot of power.

THE DEAL (4)

Terms of the deal may be the most interesting part to both parties. How much will this deal gain or cost (depending on which side you are on) – price and what will the structure of this deal be?

There are other things to consider during the evaluating stage. Like, what is the risk? Are you asking the right questions? Are you adding value, if so what kind? Do’t ignore the red flags?

A reflection on “Winning Angels: The 7 Fundamentals of early stage investing” by: David Amis and Howard Stevenson

This book identifies sourcing, evaluating, valuing, structuring, negotiating, supporting and harvesting as the 7 fundamentals of early investing for “angels”.

Winning Angels begins with describing “sourcing” in an investment deal. By page 43, I was thinking “this sounds like a different version of Shark Tank“.

About Shark Tank: Shark Tank, the critically acclaimed and multi-Emmy® Award-winning reality show that has reinvigorated entrepreneurship in America, returns this fall to ABC for its tenth season. The Sharks – tough, self-made, multi-millionaire and billionaire tycoons – continue their search to invest in the best businesses and products that America has to offer. The Sharks will once again give people from all walks of life the chance to chase the American dream and potentially secure business deals that could make them millionaires.

“Sourcing or identifying entrepreneurial projects of merit is the first step in the process of making early-stage investments.”

Sourcing for angels is a little different. One, angels do not have the platform of abc to source potential investments. However, for someone that is interested in the early stages of investment or an entrepreneur that is desires the financial backing of an investor, the chapter about sourcing is a great place to get started.

Amis and Stevenson divided the sourcing activities into four groups

1. Preparation activities
2. Networking activities
3. Visibility activities
4. Focus activities

Investing feels a lot like gambling and I am not sure that I am that risky. But, if I were to use the information provided in this chapter, this is what I would do:

1. Preparation activity – Write my one page about the type of deals that I will be targeting. Fun fact about me is that I LOVE one pagers. I make my team members write them all the time about what they are working on or proposing.
2. Networking activities – There are so may ways to go about this and depending on the audience, I would have an adjusted approach. The joining Chamber of Commerce is a great way to network with different companies, especially when it comes to sharing quality deals (as recommended in the reading).
3. Visibility Activity – My preferred method of creating visibility would be to share the knowledge that I have gained through an online course. I would market this course through social media and to budding entrepreneurs. There could even be a contest post course – just by finishing the online course and completing some sort of targeted post assessment, each “student” of the course would enter an opportunity to win an investment.
4. Focus activities – This activity would be about narrowing your focus to a specific industry. It reminds me of the practice of “Nailing the Niche” that I wrote about in another class.