What’s an Angel Investor to Do?
This pandemic has me thinking about my current investments.
I’m not looking for new investments. I’ll listen, but I’m not looking. I know once this pandemic passes, however long it takes, I’ll be attracted to some spectacular startups with excellent opportunities. I believe the Covid-19 pandemic will accelerate change and create enormous new market opportunities.
But for now, I am concerned about my current investments. As I talk to the entrepreneurs, I am not surprised. Almost all of them think they are in the right place at the right time. They believe this pandemic and its resulting macroeconomic backwash will only be good for them. Each of them can articulate the three reasons they will come out of this as winners.
I love it. That’s what I want from an entrepreneur. I want positive leadership. But let’s be mindful of this.
Cash is king
No one knows how their buyers will react as this pandemic plays out. The more unknowns in this economy, the more difficult it is to forecast. The more uncertainty in the business’s forecast, the more cash needed just in case. Hit your forecast, and you are a hero. Miss it, and you might be gone. This is the reality of such a time as this.
I am using these three criteria for reviewing my current investments.
Do I believe they have long-term viability?
What cash is needed to keep them viable in the short term?
Can we agree on a plan going forward?
Long-term viability
There is a new normal emerging. I’m starting to see the signs of it. Some of my investments are positioned to take advantage of it. Others, not so much. I feel like my portfolio has been thrown. The companies I was worried about seem to be the most exciting now. The companies I was most excited about now concern me.
So I ask my entrepreneurs,
“Are your customers using your product more today than yesterday?”
“Are your prospects who were delaying pre-Covid now wanting to buy?”
“Is this new buyer momentum sustainable post-Covid? Why?”
These are my questions in discovering long-term viability.
Short-term viability
I have a fellow investor who says, “You must be present to win.” He says this to entrepreneurs when talking about cash and cash flow. You need cash to survive each day. You can get it from customers who buy what you sell. Or you get it from investors who want to own some of your company’s future.
My investments must have enough cash to get through this pandemic into the recovery. Some of the larger VCs are recommending twelve to eighteen months of cash. As an angel investor, this number was never a reality for early-stage companies. After the investment, they usually have six to eight months of cash. During that time, they are aiming to close deals so they can attract the next round of investment or get to cash flow positive.
My investments appear to have either just closed a financing round or are about to close one. This is great timing. The others need to work on preserving cash until we exit this economic tsunami.
I often say, “I’ve never seen a business go out of business that has month-to-month positive cash flow.”
Cash flow equals business viability. To continue to survive, you are either living off investor cash or customer cash. Net, net, you need cash to live another day.
“Can we agree on this?” That’s the big question when I talk to entrepreneurs.
For me to support the business, the entrepreneur and I need to agree on cash. We need to agree on where it comes from, where to spend it, and how quickly to do so. This simple analysis will tell us how much is needed. If we can’t agree, it means I don’t believe in the plan going forward. If I don’t agree, I won’t invest.
Where does it leave the entrepreneur? He needs to find money from other investors or come to an agreement on a business plan with the majority of investors.
Stressful times
When cash gets tight, experienced entrepreneurs get focused.
They focus on their burn.
They focus on their team.
They focus on their most successful product.
They focus on their customers.
They focus on their investors.
That’s a lot to focus on. But all of these elements must be considered as they are the source of cash and ever-increasing value.
It ain’t easy being an entrepreneur, but it sure is exciting. These economic times will birth the next generation of great entrepreneurs.