When it comes time for harvesting a business, there is a sense of holding one’s breath in anticipationd, waiting for the magic to rain money from sky. Or at least that is how I envision the harvesting process. There is one crucial thing that determines harvesting, a magic word, if you will. The entrepreneur must be willing to EXIT.
That said, there is an inherent difficulty in planning a lucrative exit in an arts-based business that relies on the creativity of the founder. Just as there can be issues surrounding control with angel investors, there can also be issues surrounding how to grow the business beyond the creative entrepreneur. The entrepreneur must be willing to relinquish a certain amount of control in order to create market opportunity. Otherwise the business will likely never have a chance at a lucrative exit for investors.
In Winning Angels: The 7 Fundamentals of Early Stage Investments, authors Amis and Stevenson state that “harvesting is the endgame of early-stage investments” (287).
“Perhaps the best impact an angel can have here is to facilitate the interaction between potential buyers, bankers and others that could provide an exit event for the angel and entrepreneur” (Amis & Stevenson, 287).
Short of filing Chapter 11 or Chapter 7 bankruptcy, most other harvesting methods will create a measure of success for the stakeholders. If the company is performing poorly, sometimes these less than ideal exit strategies become the best choice. Amis and Stevenson state “strategic sales are the most common harvest method, followed by financial sales, and IPOs (initial public offerings) which are rare” (323). If an entrepreneur is willing to harvest the business, the angel investor can leverage connections to venture capitalists to find the right kind of exit. Venture capitalists are professional harvesters, keen on creating lucrative exits for stakeholders. If the entrepreneur and angel investor planned for harvesting early in the start-up process, then venture capital should be quite welcome. All the hard work creating the business, building relationships, and weathering the storms of a growing a start-up will have their reward for the angel investor, and hopefully the entrepreneur as well.
You and your investor have made it through some tough decisions. You’ve shown the investor your valuable idea and she has decided to invest. You’ve set parameters and negotiated terms. Perhaps you have negotiated an active role for your angel investor in your business endeavor. Many times an angel investor chooses to invest in companies that are within their interests. If you are an artist, you may have found an angel who specifically invests in arts-based businesses. Many artists have fruitful ideas but lack the business acumen to develop their ideas. Therefore, offering your angel a role in your business can help ensure success, and even teach you a thing or two along the way.
Supporting the entrepreneur is part of the reason many angels choose to invest their money. In Winning Angels: The 7 Fundamentals of Early Stage Investing, authors Amis and Stevenson discuss the five participation roles an angel investor may take on in your business. These roles can evolve and change as the challenges of the business ebb and flow.
Silent Investor: Some angels choose to let the entrepreneur hold the reigns, taking “no active interest in the company, except to sign papers and hope for returns” (249). However, if an issue comes up in an area of expertise, the angel can change roles to accommodate and support their investment.
Reserve Force: A reserve force angel will use their relevant skills to support the entrepreneur when asked. Amis and Stevenson explain how one angel investor maintains a “hotline” that the entrepreneur can use to contact the angel during a difficulty. This kind of angel supports their investment by offering advice, counsel, and even training to the entrepreneur and his team.
Coach: Amis and Stevenson state that the supporting role of coach is “perhaps the highest impact investor who does not control the company” (250). This kind of support involves regular meetings, and offering advice, support and any assistance the entrepreneur will need to ensure success in the endeavor. Much as in sports, the coach does not play the game, he stays on the sidelines (250).
Controlling Investors: This role goes beyond support and becomes an active lead in the business, often usurping the power of the entrepreneur. This is a high-impact role that can often create tension in the relationship between the angel and entrepreneur if the terms are not hashed out ahead of time while structuring the deal.
Lead Investors: As with many things in life, the money takes control. If an angel has the bulk of the involved risk through capital, then he may be interested in holding the company reigns to ensure a return on their investment. Again, creating terms for this scenario in the deal structure can mitigate dissonance between the entrepreneur and angel investor. If the lead investor is doing his job well, then he is likely empowering the entrepreneurial team, taking the lead on future investments (specifically venture capital), and effectively creating value from the team’s effort by leveraging his knowledge and experience.
As you can see, support may come in a variety of forms. Many times an entrepreneur is not the best choice for ceo. He or she may need to learn new skills or relinquish control to earn a strong profit. For artists, this may be easier said than done, since the nature of an arts-based business relies on the creativity of an individual. Therefore, all the ego and experience, or lack thereof may impact the ability of the entrepreneur to accept support, especially a control or lead support. Accepting angel investments sets you up for dealing with these kinds of control issues, as well as the growing pains of creating a business. It is important to consider what kind of help you need when making a deal with an angel investor, and whether you would be comfortable stepping down as head of your business.
When angels investors and entrepreneurs begin working on a deal, there are many aspects to consider. Negotiating the finer details of structure, value, support, and roles can cause uncomfortable scenarios to an already tenuous relationship between angel and entrepreneur. Many angels choose not to negotiate for this reason, preferring instead to accept or reject the entrepreneur’s terms at face value. In Winning Angels: The 7 Fundamentals of Early Stage Investing, authors Amis and Stevenson state that angels who prefer not to negotiate may hire a representative to conduct the negotiations with the entrepreneur. This allows them to stay a safe distance from the emotional stress an entrepreneur may experience during negotiations.
However, many angel investors do indeed negotiate terms for their deal. In a previous post, I discuss the power an entrepreneur has to create the terms of the deal. That power is balanced by the angel investor’s willingness to negotiate.
In fact, here is where having a strong constitution comes in handy, because some investors use negotiation as tool to test the entrepreneur’s mettle.
Amis and Stevenson highlight an investor who “likes to negotiate as a test to see how the entrepreneur thinks…He knows that the relationship with the entrepreneur will undergo some significant stress and he likes to see how they hold up under stress right away” (228).
As an artist seeking investment funds from an angel, this tactic can be quite grueling since business is not your everyday playing field. However, making sure you understand exactly why you need funding and how those funds will work for you, will help you during the negotiation process. If you understand your boundaries for the funds, then you will be able to set your own limits and standards with the investor.
Investors will likely have a few tricks up their sleeve to negotiate the most profitable scenario for their investment. An honest angel will try their best to negotiate a deal that is good for both parties. Angel investors who seek to cheat an entrepreneur for profit do not have strong reputations. This should highlight the importance of researching your potential angel investor.
Also, it is important to note that an entrepreneur has some negotiation tricks as well.
When creating the terms of the deal, you have the power to give and withhold gifts, including first looks at future rounds, referrals, networking, and information about progress or opportunities (Amis & Stevenson, 233).
Striking a balance in negotiations for angel investments can bring up a variety of emotional, financial, and egotistical challenges. Artists are often solo-preneurs, and therefore, legal representation may benefit an artist who is in negotiations with an angel investor. If an angel is experienced, then they will have the upper hand, and if the angel is inexperienced, then there should be even more eagerness to include legal council to ensure a strong negotiation process and a successful deal that favors both parties.
I will begin this blog with a disclaimer: I am not a very good chess player.
Ah, chess, the intellectual’s favorite pastime, full of rigid rules, strategy, and forward thinking. Structure is so important, each piece moving within it’s boundaries, all of them intending to do their part in securing the king’s position. Each player has their own agenda, moving round after round with forethought and precision. The culmination, the dull knock as the king falls and the opponent evenly states, “check mate.”
I cannot offer sound advice for structuring a deal with an angel investor. However, I can allude to the idea that, just as in chess, creating a strong line of defense from both sides will yield a valiant game. Not to mention, as in the gentleman’s game, playing by the rules with sportsman-like conduct is imperative.
As an entrepreneur seeking funding, you have the leeway to create the rules of the game through the structure of the deal. The most important thing you can do to ensure strong and stable rules for your endeavor is to educate yourself in the essential terms regarding how such deals are structured. Understanding what you require from your investor and what your investor wants from you in return is the first step in creating a well-played deal. The first rules you create are the basis for future rounds of funding. Creating your deal structure in the angel round with forethought and strategy will enable future investment opportunities to move more smoothly.
The disappointment of failure, (check mate), can affect more than your ego. Angel rounds tend to be full of emotional connections both with your idea and your investors, who may know you personally. And we need not tarry on the thought of loosing a substantial amount of money, along with your reputation, should the business fail. Unless you are fully versed in creating a deal’s structure, both the language and the impact of the terms, it would behoove you to seek out an attorney to help you visualize and understand the demands placed upon you and your investor. In Winning Angels: The 7 Fundamentals of Early Stage Investing, the authors recommend writing up a ‘one-pager that describes the main elements of the deal between the entrepreneur and the investor” (207). This single page should include capital structure, involvement of the investor, expected time the entrepreneur will stay in the business, salary and benefits, reporting mechanism, and any other specifications required between the two parties. This one-pager can then be taken to an attorney to structure the language and make sure the rules will creating a winnning game for the new team.
Many of the rules you put in place in this angel deal will affect how your business moves and operates in the future. Taking the time to strategically plan how you will utilize an angel investment, making sure you and the investor are a good match, and understanding the language and structure in the deal will set the stage for a strong investement for both parties. Each of you will have your own agenda in the deal, and therefore, it is vitally important to your business that you understand the rules of the game.
Most entrepreneurs have several ideas floating around. Deciding which idea will create a winning business can be difficult, even for experienced entrepreneurs. Creative entrepreneurs are no different. But, as I talked about in a previous post, piquing the interest of an angel investor will depend on which idea you are cooking up to present for funding. In truth, angel investors can’t predict the future any better than an entrepreneur, but they do use a variety of evaluation techniques to help mitigate the risks of loosing their money, and increase their chances of helping you succeed. In Winning Angels: The 7 Fundamentals of Early Stage Investing, the authors highlight the idea that “valuation is what [the angel investor] is willing to exchange for something else [they] want (145).” As a creative entrepreneur building valuable idea can seem daunting, but in light of this statement, you can see how value is in the eye of the beholder.
Angels who invest in artists may or may not be looking for financial returns. Perhaps they are looking for access to other artists in which to invest or building their reputation as an investor for the arts. Maybe the angel adores your kind of art, and wants to see more of it in their community. But always, always, an angel investor is looking at you and your potential to succeed.
So, if you think you have a good idea that is financially beyond your budget, a great way to convince angel investors that you have potential is to crunch the numbers and show them the value in your idea. If they invest in you, how will they see a return on their investment? Granted, some angel investors most definitely want to see their cold hard cash returned with change, but you may be surprised by someone who wants to simply say they helped an emerging artist. When figuring value for a stakeholder, you should present the cost to start the project, how much it will take in ongoing costs to see the project to completion, and how you expect to profit from the endeavor. Be thorough and specific in each area, and make a point to show the investor what their role will be in the process. If numbers aren’t your thing, seek out someone who can help you see the project through a financial lens.
When you come to an angel investor with a solid plan that includes strong financials, you are setting the stage for an angel investor to see you as a valuable asset to your project or business idea. Some angels decide how to value their investments very quickly and others may take a well-worn path to valuing their investments, choosing to work like venture capitalists, or academics who multiply and discount cash flow. Suffice it to say, if you are looking for an angel investor who uses sophisticated methods, then perhaps you have already graduated beyond emerging artist and have cooked up a delicious idea that goes beyond just completing a project.
I would like to share the story of Johanna Basford, adult coloring book artist extraordinaire. Basford is a Scottish illustrator who studied textile design. Soon after graduating she began a small business, drawing wallpaper designs. The recession hit, and she folded up shop, realizing her heart was more aligned with illustration than textiles. She began seeking jobs as a freelance illustrator and eventually landed work with corporations such as Nike, Absolut Vodka, and Chipotle. She was approached by a publisher to make a coloring book for children, but asked instead to make one for adults. She drew five pages, and began her journey as a coloring book illustrator. She has sold over 22 million books in over 40 countries! (I have three of them!)
Johanna’s story sheds light on how an artists can grow and offer value to an investor. From humble, free-lance beginnings, to corporate illustrator, to coloring book giant. Just like not all businesses make it to greatness, not all artists do either. Nonetheless, angel investors like to take chances that their investment could pay off in a grand way. So, build value into your creative ideas, don’t be shy about asking for the support you need, be stalwart in your effort to prove your idea to angel investors.
So my husband is a bit of a foodie, and he loves to cook. (Did I win the husband jackpot or what?) I asked him, how do you decide what pot to use when you are cooking? His answer: It depends on what you’re cooking.
Yes, given the title of this blog post, I’m about to create a metaphor for artists seeking angel investors using pots and kettles. You, the artist, are an entrepreneur. It is time to start thinking of yourself that way, because calling yourself a delicate teapot is significantly different from being a black kettle. For one, a teapot could never do the heavy work a black kettle does. When an angel investor evaluates you and your idea for funding, he is going to test your mettle. You need to be tough enough to do your job, and able to withstand a long and heated journey. And secondly, perhaps a delicate teapot does not need an angel investor. Delicate teapots tend to come from money.
Creative entrepreneurs need money. It takes time, resources, and even technology to create a body of work. And before you think I’m finished with my metaphor, I’d like to point out that when an angel is looking to invest in a creative entrepreneur, he will be looking for an idea that has both scope and scale. In other words, angel investments depend on what you’re cooking. The lone artist trying to get funding to paint a mural on a dilapidated building is not likely going to find an angel investor. There isn’t any return on investment in small ideas. The pot is only half-full. However, a lone artist who has a vision to paint ten murals on a selection of inner city buildings, while teaching neighborhood kids how to paint just might attract an angel for their project. This is a pot full of possibility, able to feed many people. And before you think this stands in the realm of non-profit funding, think about how much exposure is created by that kind of project! A creative entrepreneur can solidify their standing as an artist, build up their personal brand, and sell more artwork in the future. That doesn’t mean your ideas always have to be grand, but they do have to offer a way for the angel investor to profit from their investment.
Angel investors evaluate and consider many other aspects of your business idea. As you have agreed to call yourself an entrepreneur from here on out (or you must stop reading…), you must consider the professional framework angel investors often use for evaluating an investment opportunity. The Harvard Framework takes in to consideration four aspects of an endeavor: the people, the deal, the business opportunity and the context of the endeavor in world at large.
So, when your black kettle is cooking with a great idea, there are a few questions to ask yourself.
Who is on your team? Include yourself in this evaluation, since you must bear the weight of the proposed project. Consider your stakeholders and who will support you in your endeavor.
What are you offering your angel investor? Consider the price and structure of the deal.
What is the opportunity created by cooking this idea? Consider timing, the customer, scope and scalability of the idea, and the business model you will use.
And finally, is the world ready for your idea? Consider your great idea in the context of the world at large. Think economy, technology, regulations, competition, customer need.
Some angel investors only look for creative projects. They are looking for your kind of black kettle, and if you’re good at combining quality ingredients, then an angel investor might just like what you’re cooking!
This post was inspired by the book Winning Angels: The 7 Fundamentals of Early Stage Investing by David Amis & Howard Stevenson.