Top 3 Reasons Angels & Entrepreneurs Walk Away from Deals
It is 11PM on a Friday night. You just got off the phone with your lawyer and all the paperwork is in order. The Board has given you 24 -72 hrs to pull the trigger. You have spent last 3-6 months getting it to the finish line. Yet come Monday the deal didn’t go through? Either the entrepreneur walked away or we did….
Does this happen frequently? I don’t know; but would say it is infrequent occurrence but heartbreaking when it happens at this late stage. The essential question is : Why? What Happened? What led to both sides devoting time/money/resources but were not able to close the deal? Of course, not all deals get unraveled last minute. A few fall during enhanced due diligence. Many fall away during the term sheet negotiations (majority). But the ones which hurt the most (to the Angel/VC and to the Entrepreneur ) are the ones where only a signature is awaited for executions. The feeling when this happens is like being left alone at the altar – with the whole world watching. The single instance it happened to us – the Entrepreneur team decided to walk away as they wanted to keep exploring more lucrative terms.I wanted to share a few common attributes I came across as I analyzed BVG deals which didn’t get through. I have tried looking at this from different perspectives – the Angel/VC, the Entrepreneur/Founder and my own personal take.
1) Lack of Transparency:
This is common occurrence – we can share NDAs, etc., across the board but sometimes we don’t get critical/basic information revealed to us until diligence takes over. This holds true for both sides of the aisle.
The Angel Perspective: Too often we find that the Entrepreneurs are hesitant to share the details of their ‘secret sauce’ with us. This is typical during our enhanced due diligence where we are evaluating offerings especially in the Tech/financial services/clean energy sectors. Come on folks, we signed the NDAs, wouldn’t be talking the details with you unless we understood that your summary level offering had a good chance of making it in the market place – so yes we need to know in detail how that trade algorithm works, how that trough moves in the Solar Space, how secure is your secure chat offering? I don’t want to find elementary things during due diligence. It is a waste of our time and yours and calls into question your integrity? Guess what we are walking!
The Entrepreneur Perspective: We cannot share the details of the ‘secret sauce’ until you show us commitment towards funding. We don’t want you to take our ideas to a bigger firm because you cannot fit us in your fund mandate or deal size. Some factors are non-material to us, why do they matter to you? We want to talk to the analysts and question their assumptions? We want to see the Value -Add along with the $$ if we don’t – then we are walking!
My perspective: Maybe there is an inherent mistrust of the Angel Investor/VC ‘s based on the perception that they are trying to advantage of the hard work/dreams of the entrepreneur. In my mind, it is a simple give and take – you want money, you share your secret sauce, that’s how it goes. Don’t be upset that you have to share your IP in order to get funding, that’s what NDAs are for.Transparency is a two way street. (Maybe some of the hesitancy is due to the cultural/social tag associated with sharing intimate details of successful ideas as a large portion of our deal flows we look at are from the BIM (Brazil, India, Mexico) lack of strong IP protection laws, urban myths with deals gone wrong etc. )
2) Valuations :
This is an important attribute – Not the Numero Uno though that will be # 3. Angel/VC stage valuation is considered more of an ‘Art’ rather than a ‘Science’. Valuation is where you will find divergent understandings and oblique views from both the Entrepreneur and Angel.
The Angel/VC Perspective: How often do we hear numbers for valuations from the Entrepreneur, which range from interesting to incredulous? This is a tricky stage as Valuation is more often than not tied to the Entrepreneur’s own assessment or number in the head as to what is fair value. The big question is how did the Entrepreneur arrive at that number? What benchmarks/metrics were used? Can we validate the assumptions used to arrive to get to the band of our internal own low/high valuation?
At BVG we use a STORC model data grid : Size (market size), Team, Opportunity, Revenue, and Competition as we rank & calculate our internal range for valuation numbers. Please don’t tell us that you think your company is valued at $2M+ because a website says so. At this stage we find that maximum number of walkaways happen as the numbers just don’t co-relate to either our comfort levels or of the entrepreneurs. If the entrepreneur’s are looking at just getting us to fund their Salaries & Expenses – guess what – we are walking!
The Entrepreneur Perspective: We have invested our sweat, hard work, and resources in this offering. This is our gateway of realizing our dreams of making a change in the world, being recognized for our efforts and make money. Not to forget that most of us have left a cushy paycheck and are staring at an uncertain future and have gone through a lot of rejections from Angels/VC’s to get here. We know that our idea/offering works. We need your help and $$ to help us scale up, boost our marketing and sales pipelines, and we are selling you tomorrow’s PE multiples. We are giving you a big chunk of our equity to get us to the next stage and yet we find that all you are interested are in a getting to the exit ASAP and having preferential liquidation preferences. Will you really help us, if we don’t get that comfort level then we are walking!
My perspective: This is a very tough milestone in negotiations. In my own dealings – I have tried to be fair to the Founder/Entrepreneur at the same time be aware of my fiduciary responsibility towards the BVG investors. Since we are usually the first funding opportunity after seed round – a lot of entrepreneurs/founders are looking for a validation of their own idea/offering. In some way they almost feel that a lower valuation or an ‘Angel Valuation’ is a comment on the merit of their offering – which frankly it is not. I encourage the folks to come up with a range for their valuation numbers & not have a set/definite number. When questioned on the range/band of the valuation number they should be prepared to defend and share the metrics used. I do the same and sometimes the chasm between the numbers is too wide to build a bridge to cross, sometimes it is a mere footbridge.
3) Fit :
Fit is about Compatibility and Chemistry between the teams and alignment on majority of the key strategic and operational milestones. Why is this so important? After passing screening phase – the period from due diligence to deal terms is an intense 3-6 month period of daily interactions – whether it is via email/chat/Skype or in person meetings. How do we work together – if cannot gel and work as a team at this stage – It will be very difficult to maintain and unwind such a relationship stretching over the years irrespective of the success of the venture.
The Angel Perspective: The most important factor in our eyes – is there a fit ? Does the entrepreneur understand our motivations and work with us? More importantly can we work with the entrepreneur’s team? Is there an understanding of where we both come from? Can we both speak the same language as to the vision/strategy/execution – different dialects are welcome :). We appreciate confidence but don’t like cockiness. We deeply value rare skill sets but we don’t appreciate a superiority complex. We love passion but want you to be interested in all aspects of business. We admire belief in the product/offering but we want you to open your eyes around if there are better offerings. Most importantly are you willing to listen, able to execute and look at us as partners, if not then we are walking and will encourage you to walk too.
The Entrepreneur Perspective: We are looking at you for funding and not tech/offering validation every second day. How does it matter to you that our office is in a building owned by my uncle and it is not papered? He is family and I am bootstrapping. Why are you questioning or challenging every statement we make…I came here looking for help not be interrogated. Yes, I want a salary – who is going to pay my bills? Why is it ok for you to call me/my team on weekends asking for last minute updated numbers? My team and I still own the company but it appears you are the new boss? That is the reason I quit my old job and became an entrepreneur so that I can be my own boss. Why does every meeting lead to more work for me? Remember I got a business to run. We don’t think that you know more about my business than your team yet we have to defend the assumptions/projections?
My perspective: Angel investing is deeply personal. It’s both a job and a calling. It’s a lot like panning for gold: looking for the small bits of gold amongst all the other shiny pebbles. I take what we do seriously; I am betting with my own chips. I am looking to give back in ways that are both personally fulfilling and economically beneficial. I am going to learn a few things as we go. I am willing to be coachable as much as you are. If we are going to be working together for the next 3-5 years in good times and in ‘not so good’ times we need to have chemistry and understanding that we are all part of the same team and working towards the same goal – a successful exit with lots of money!!