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Assuming you discover that things are not going well, you need to decide how much time and energy you want to invest to try to get things back on track. Part of being engaged as an angel investor is helping where you can when a portfolio company needs it, and if you have focused your investments in domains that you know well, there should be plenty of opportunities to help, including:
Talent gaps. It is very common for angels to get involved in helping a startup source and recruit key talent. Many active investors have strong networks, and they may even know seasoned executives and consultants that they can bring in on an interim basis if necessary to get companies “over the hump” on whatever issue is holding them back. This can be an effective stop-gap solution while the company continues to recruit for a permanent executive.
Specific execution challenges. Founding teams are necessarily small, and young entrepreneurs often have gaps in their business experience. For example, strong technical founders may need help driving customer growth, which might be slow due to poor positioning, inefficient marketing, ineffective pricing, or a poor initial user experience. Arrange a working session with the team and spend several hours digging into a specific issue. You may be surprised how effective your own business experience, domain expertise, and seasoned perspective can be in overcoming challenges.
Angels can help with product feedback, finances, and introductions to potential customers or marketing/distribution partners as well.
In short, many problems that might otherwise cause a startup to fail are solvable if the company still has enough runway to execute and the investors are willing to get involved. The key is to keep track of what is going on with the company and rally your co-investors as necessary.
dangerAt the same time, don’t go too far. Do not, for example, offer or agree to become a guarantor of the company’s debt. Sometimes companies will want to issue you a warrant or give you other compensation to guarantee their debt. Just say no. The scenario that some creditor will come after you to pay off the company debt is one you want to avoid. The downside here is much bigger than losing your investment.
exampleIn an ironic personal twist, Pete invested in an LLC with an individual who had guaranteed a debt in another LLC. That other LLC failed, and this individual had to declare personal bankruptcy. As a result, the LLC Pete invested in was shut down.
Not having a market for the product or service is the number one reason startups fail.
A pivot, a term popular in startup culture, happens when a company realizes that their current product or business strategy is not going to work and they change course to a new product and/or business model. A classic pivot scenario is that a company is struggling to sell their product, while potential customers keep asking them if they can solve a different but related problem.
exampleA company may be struggling to sell a digital advertising network product. Their sales prospects don’t see the need, since the existing solutions are sufficient; but they keep saying that what they really need is an ad network analytics product to inform them on how the advertising networks they are using already are performing. The company uses the same team and pivots its product strategy to an analytics product.
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