How to Attract an Angel Investor

 

Now that a University of New Hampshire study indicates early stage financing by angel investors is more advantageous than venture capital money, what now? How do you get the angel funds?

Noted angel investor John B. Dimmer offers seven tips.

The 2009 study – “Initial Public Offerings and Pre-IPO Shareholders: Angels Versus Venture Capitalists” – shows evidence of under-pricing by venture-supported IPO groups in initial public offerings vis-à-vis angel investors. The study was conducted by Professors William C. Johnson and Jeffrey E. Sohl. 

So what does it take to land an angel investment? Noted angel investor John B. Dimmer offers seven tips.

Acknowledging the difficulties of entrepreneurship, the successful angel investor in Tacoma, WA, who likes technology, says he looks for tenacity: “I want people with the moral integrity and intestinal fortitude to make the difficult journey through the Valley of the Shadow of Death and come out the other side,” says Mr. Dimmer. “It’s fun to greet them on the other side, hand them a margarita, and toast the success of their achievements.”

In the third installment of my profile of Mr. Dimmer’s insights, he graciously explains his comprehensive approach in how he selects investments:

Q: What mistakes do new companies make in applying for funding?

A: As I indicated, people are the single most important element in making an investment. As such, I generally don’t see business plans unless I know the people who are involved, or I know someone who knows the people involved. I think that to a large extent, most venture investors share this philosophy.

The business plan always comes first. I want to see a compelling market opportunity, and I want to know how the company intends to capture a meaningful share of that market. Mistakes I often see in this segment of the presentation almost always center around unrealistic sales assumptions. Overly aggressive projections relative to the percentage of market share the company will capture is one common mistake. Another mistake is a fundamental lack of understanding of the sales cycle, and the organizational structure required to produce the target revenues.

Q: Preference on projections?

A: Three years worth of financial projections is adequate, but five years is preferred. I would like to see the first year broken down into some detail, but future years can be prepared on a condensed basis. Having been involved with a myriad of start-up companies, I know that the financial projections will not be accurate; however, the forecasts provide valuable insight into the thought process of the people involved.

The most common mistake companies make in this area is a failure to understand and exhibit the financial metrics of their particular business. For example, software companies should normally generate 90 percent gross margins. If you are coming to me with a software investment, and your forecasts show a 55 percent gross margin, unless you have a very good answer as to why you deviate from the norm and how you are going to make money, I will assume that your business will fail because you don’t understand the financial metrics. Likewise, if you present me with an opportunity in the professional services space, which normally generates 50 percent gross margins, and you tell me that you are going to generate an 85 percent gross margin, I will assume you don’t know your financial metrics and pass on the opportunity.

Q: Structuring the deal?

A: Angel investing is risky business, with many of the portfolio companies ultimately failing. Accordingly, angel investors need to see an opportunity for substantial returns in order to offset the losses on bad deals and generate a reasonable return on the entire portfolio. What kind of a return is required? Well, a lot of that depends upon the timeline between the initial investment and exit, but traditional metrics suggest angels are targeting five to ten times their money back from a successful deal. It should be a given that any company approaching me for funding will have established the asking price for my initial investment.

Q: Exit strategy in proposals?

A: This should include the type of exit transaction, which may be a merger, an IPO, or something else, the timing associated with the exit, and the valuation metrics at exit. The mistakes I see here fall into one of two categories, those being an initial valuation that is set too high, or an unrealistic assumption about the exit timing and valuations. As the exit strategy is simply a forecast of a future event, my solution to either of these problems would be to try and negotiate a lower initial valuation.

As an example, I recently looked at a company that had their financing pulled out from under them. They had a big business opportunity ready to go, and needed capital to execute. While I liked their business plan, I felt their valuation was exceptionally high. I compared their valuation metrics with those of similar publicly-traded companies, and found that I could own these public companies for about 20 percent of the price they were asking. I ultimately went back to them with a proposal, but slashed their valuations. They weren’t too happy and so went looking for money elsewhere, presumably under different deal terms.

Q: Legal controls?

A: I believe that items such as voting rights or preference provisions should be allocated and enjoyed equally between all the parties involved with a company. Periodically I see instances where the founders have preferential rights to voting or liquidation. I’d like to think that we are all on the same team, which means if one person wins, we all win. Preferences then make it possible for one party to win, and another to lose, cause the creation of multiple agendas and ultimately lead to failure.

Q: What are the components of a successful presentation?

A: It’s pretty simple: brevity, clarity, honesty. A quality opportunity should be somewhat self-evident. I might need a little help starting down the path, but if I don’t pick up on it pretty quickly, I’m never going to buy into the deal. So, don’t be too long, don’t get overly complicated, and don’t try to pull a fast one on me.

The other thing I am going to look for in a presentation is the ability of the entrepreneur to think on their feet. If you really know your stuff, this shouldn’t be too hard. I periodically like to ask questions where I already know the answer just to see if the entrepreneur knows what they are talking about. Likewise, I sometimes like to ask questions that are outside the box just to see how the entrepreneur handles obtuse ideas. If you know your stuff, you can digest the inquiry and quickly formulate a meaningful response. If you stumble, you don’t know your stuff, and if you don’t know your stuff, I don’t want to give you any of my money.

Q: What trends would you care to predict?

A: I do not consider myself a visionary, but I’ve certainly worked with visionaries. My strengths come in the form of listening and then determining if there is a realistic opportunity for the vision to be commercially implemented within a reasonable time period. The only prediction I will make is that as our world advances, each advancement creates more opportunities…More opportunities for services, products, and technologies to be developed and delivered to consumers. The world of the entrepreneur is expanding at an ever-increasing rate, and I don’t see this changing any time soon.

The other columns in which Mr. Dimmer shares his expert opinions:

• “Investor: Tips for Increasing Cash Flow, Profits”
• “How Investor Has Fun in Business and Technology”

From the Coach’s Corner, to see the University of New Hampshire study, visit: http://www.unh.edu/news/cj_nr/2009/july/lw22cvr.cfm

Also, here are some Pacific Northwest angel-investment resources:

Boise: www.boiseangelalliance.com

Portland: www.oef.org/home/

Seattle: www.allianceofangels.com/

Spokane: www.connectnw.org/

Vancouver, WA: www.vef.org/angels/

WA statewide: www.watechcenter.org/

Investor: Tips for Increasing Cash Flow, Profits

 

For a growing business, cash flow is crucial for profitability. That’s also true for the biggest companies and sectors traded on Wall Street – airlines, cars, financial services, oil or technology.

Every company is concerned about cash flow; but in 2008, 128 of the Fortune 500 companies in the nation had red ink. They include General Motors, Citigroup, Motorola, AIG, Merrill Lynch, ConocoPhillips, and Time Warner.

Cash flow enables you to make productive decisions to navigate and grow in the competitive marketplace.  

No one knows that better than angel investor John B. Dimmer, the managing member in FIRS Management LLC, a private investment firm based in Tacoma, WA.  He is also a director at three companies and has extensive management experience.

Here is a sample of his cash-flow solutions:

Q: How do you recommend predicting a cash-flow crunch in time to do something about it?

A: You need monthly income and expense forecasts that are established at the beginning of the business year. These must be realistic numbers that all of the management staff has agreed are reasonable. The second things you need are timely and accurate financial statements.

It is very much like planning a road trip in the car. You are trying to get from point A to point B, so you plot a route. You know that there are landmarks along the way. Every now and then you need to stop and check for these landmarks. If they show up where you expect them, you know you are on the right track. If not, you need to evaluate how far off course you are, and take corrective action.

Q: What strategic process do you recommend to evaluate the causes of cash deficits? What are the most promising solutions?

A: Getting back to our roadmap analogy, if you don’t see a landmark that should be there, or you find a new landmark that wasn’t on the original plan, you need a process for getting back on track. You need to take the time to evaluate where you are, where you should be, and what went wrong.

When you are off plan, there are some fundamental questions that need to be asked: Was the original plan flawed? Has there been a fundamental shift in the business such that the original plan is no longer applicable? Did we make an execution error? When, where, and what was it? Can it be corrected? What are the critical variables with respect to getting back on plan?

Usually this involves one primary variable, which is money. Whatever solution you take, you need to make sure you have enough money to fund it through implementation.

Q: How do you recommend finding creative ways to keep the business alive until sales pick up?

A: One of the mistakes I often see are entrepreneurs who staff their organizations under the assumption of optimum activity. The truth is that there are cycles to business. While not all business can use contract help, I like to try and have my companies staffed to a smoothed-average that is just above the troughs and just below the peaks. In this fashion, you can quickly and effectively reduce your labor costs in times of a slowdown without causing a morale-crisis with your permanent employees. I would also use slower times to beef up on training in preparation for when the good times return.

Finally, encourage your staff to make things happen. When we hit a slowdown in the car business, we ask our sales staff to get on the phone and start calling people. This usually starts with former customers and takes the form of a friendly call simply to inquire how everything is going with their car. Often times, you discover that they love their car, and they have a friend who is interested in buying a new car. Sometimes you find that they love their car and they want to buy another. And sometimes you find that there is a problem. Problems, however, create opportunities. If you invite them to come in, and then solve their problem, they will remember that you were proactive. They will tell their friends about their experience, and their friend will come and see you for their car needs.

Q: What about negotiating with investors or other financial supporters until cash flows increase?

A: Investors hate bad surprises, especially when the surprise is accompanied by an emergency need for funds. Assuming you created the roadmap, and are tracking your progress, you should be able to see the bump in the road well before you actually hit the bump. Most investors are business people who have been down the road before and know that everything is not smooth sailing. They will appreciate the fact that you have a plan, that you are tracking your results against the plan, and that you have foreseen a problem before it hits.

Generally cash flow problems mean you need to borrow more money or raise more equity. If such is the case, have your presentation for raising new money ready to go so that you can transition from the communication stage to the pitch. Be humble, because the last thing I really want to hear as an investor is how smart you are and how great everything is going when, in fact, you are off plan and running out of money.

Part of the negotiation is an acknowledgement of the problem, a rational analysis and a well-crafted solution. You, as the owner, may need to take a bit of a hit in order to implement a solution. This might come in the form of a down round of fundraising where you are force to make up the dilution to the other shareholders out of your own holdings. Know what you are and are not willing to do. If you are forced to give up something to keep the company alive, figure out how to get it back, perhaps via options, if your revised plan was the proper call and the company comes roaring back.

Q: How do you know when it’s time to close or sell the business?

A: I always want to stay in the game, even when it is two outs in the bottom of the ninth inning, you are down by five runs, and the count is full, there is still a chance you can pull off a win. Nonetheless, I try to keep entrepreneurs from getting in so deep that if their company fails, they are wiped out.  I’ve been involved with two companies where I had to tell the entrepreneur that they shouldn’t put any more money into the operation.

In one of those instances, we were able to locate a buyer for the company. The purchaser was a publicly traded entity that, since the purchase, has taken a bit of a down-turn, so the jury is still out as to whether the entrepreneur will come out whole. Nonetheless, it was a better option than closing the doors. With the other company, we have what we feel is great technology; we just can’t seem to get a revenue stream developed. We are in the process of procuring a patent, and think that it will have good commercial value once the patent is issued. Accordingly, we have put the operational aspect of the company in suspense, and are pursuing acquisition opportunities.  The biggest risk on this strategy is a failure to cut a deal followed by an impotent patent.

I never advocate simply closing the doors. If you are doing proper planning, you should see the problem coming down the road. There should always be something saleable about your company, even if it is less than a full recovery.

From the Coach’s Corner, Mr. Dimmer’s other tips: 

• “How to Attract an Angel Investor” – www.bizcoachinfo.com/archives/1367
• “How Investor Has Fun in Business and Technology” – www.bizcoachinfo.com/archives/1272

How Investor Has Fun in Business and Technology

 

When John B. Dimmer talks, people listen. Mr. Dimmer is the managing member in a Tacoma, Washington-based private investment company, FIRS Management LLC.

He also serves on the board of directors at three companies:

• Idaho Trust Bancorp, a bank holding company based in Boise, Idaho
• Konnects Software, a firm that provides business networking applications harnessing internet technologies
• PBJ Holdings, an automobile dealership holding company

His community service includes the Business Advisory Council for the Lundquist College of Business at the University of Oregon and he serves as the Entrepreneur on Campus at the school’s Business Center for Entrepreneurship.

At FIRS, he’s invested in projects for the last nine years with his father, John C. Dimmer, who is also well-regarded. He has served as a director at KeyCorp, Multicare Health System, Stellar Industrial Supply Company, and others. He’s also a Trustee for the Museum of Flight, and a member of the Advisory Board for the University of Washington Tacoma.

The younger Dimmer is also a co-founder of the Tacoma Angel Network, www.tacomaangelnetwork.com, a non-profit organization that brings together accredited investors with companies seeking to raise private equity capital.

Mr. Dimmer had a rich background prior to FIRS. He was a director of two technology companies and was president of Free Range Media, a successful internet company.

He was the manager of commercial surety at Reliance Surety Company, where he worked for nine years. “It was quite an education in financial analysis, management analysis and legal – I learned how to read contracts.”

Right out of college and armed with a B.S. in Finance from the University of Oregon, Dimmer began learning his craft at Puget Sound Bank, which included consumer lending and credit collection.

At Clover Park High School in Lakewood, WA, he was an All American in golf

Today, as a scratch golfer, he plans his putts like intricate business deals. But his passion is racing. He races in international historic racing events in his “ex-Jackie Stewart 1971 Tyrrell Ford 004 Formula 1 car.” The circuit’s vintage 1966-1983 models reach 200 miles per hour, www.historicgrandprix.com/home.htm.

So Mr. Dimmer, married with three children, is an interesting businessperson. Here’s an excerpt of some of his answers to other questions:

Q: What business philosophies drive you?

A: I’ve always believed that if you want something badly enough, with hard work and commitment you can achieve your objective.

I believe that integrity is everything. You must be honest and deal fairly with your customers as they are your lifeblood. You must also be honest and deal fairly with your employees. If you try to spin certain situations your employees will immediately recognize it and you will slowly erode their trust and thus lose your ability to lead.

We get involved with a lot of different activities at FIRS, but the overriding requirement is that it has got to be fun.

Q: What’s been the key to success for you? 

A: Hmm, well, I certainly feel that I’ve worked hard, and I also feel that I’ve been lucky. I really think the key, however, is that I have always had an objective and a plan for meeting that objective. It is very difficult to achieve success when you don’t know where you are going, or know where you want to be but don’t have any idea how to get there.

Q: What, if any, are your favorite business quotes?

A: My favorite quote actually comes from a fortune cookie I got at lunch one day when I was deep in the throes of trying to build Free Range Media into a successful business. It said, “The greatest joy in life is doing what others say you cannot do.” I am a very competitive person and like it when people underestimate my capabilities. Proving them wrong is such fun!

Q: What were your family’s underwater ventures involving the salvaging of historic shipwrecks?

A: The short version is that my dad got involved in funding a treasure hunting expedition off the coast of Uruguay. After a few years of operations, with little in the way of results, my dad asked me to go check everything out. I can promise you that there was more than enough sunken treasure to make a salver very, very wealthy. Unfortunately, Uruguay would not let us export our recoveries. Without the ability to export and sell the recoveries, we had no way to make a return on our investment or fund future operations. So I shut the whole thing down. 

We had a salvage vessel that was specifically built for our operation that we were returning to the U.S. for sale.  During the return voyage, it ran into a hurricane off the coast of Columbia. The bad news is that the vessel sank (no loss of life in the sinking). The good news is that we had it insured for twice the value, so we almost recovered all of the money we put into the whole operation. In terms of what was accomplished, our operation discovered the wreck of the Agamemnon in Maldonado Bay in Punta del Este, Uruguay. 

The Agamemnon was Lord Nelson’s first ship-of-the-line command, and participated in the Battle of Trafalgar. We recovered a cannon that has been documented as the only cannon known to be in existence that was fired at the Battle of Trafalgar. Needless to say, the British were very interested in acquiring the cannon.  Unfortunately, given Uruguay’s refusal to allow us to export the cannon, it is sitting in some warehouse in Montevideo.

Q: How did you get involved in racing? 

A: I first became involved as a result of the Tacoma Grand Prix held in 1986. I met a driver by the name of Parker Johnstone, and we became friends. I was interested in driving cars, and he helped me navigate the requirements for licensing. 

Q: Who is your car-dealer partner in Oregon?

A: My partner in the Honda dealership is Parker Johnstone, which is probably a good thing since the dealership is called, ‘Parker Johnstone’s Wilsonville Honda!’ Parker and I have continued to remain good friends since that chance meeting at the 1986 Tacoma Grand Prix. Parker went on to have a very successful professional racing career with Honda during which time I was his business manager. He is an individual of the highest moral character, and is doing a terrific job of running the dealership.

Q: What do you read or what are your favorite sources of information?

A: I spend a bit of time surfing the web, and pick up quite a bit of information there. I subscribe to BusinessWeek and The Wall Street Journal. And I talk to a lot of folks. I enjoy getting different people’s insights into companies and opportunities. 

From the Coach’s Corner, here are more tips from Mr. Dimmer: 

• “Investor: Tips for Increasing Cash Flow, Profits” – www.bizcoachinfo.com/archives/1348
• “How to Attract an Angel Investor” – www.bizcoachinfo.com/archives/1367