Swimming with Asian Sharks - Business Secrets from the Pacific Rim

Notes on Angels and Devi...VCs

I soon discovered there were almost no technology investors in Hong Kong; those who were investing were looking for things that were already established on a customer basis and also had established cash flow.

There are many types of investors, but we will only discuss angels and venture capitalists.  The angels get their name from the fact that these people are willing to give you money when you barely have your company started.  Angels are often people who are financially secure. Many are entrepreneurs who have succeeded due to the help of someone and are paying it forward.  Angels often aren't too concerned about how much money your company will generate because their main concern is to see you succeed at bringing value.

In terms of angels, not all are good.  Bad angels I've met are really mini sharks who are out for a quick dollar and are not there to help you.  These "angels" often don't actually have very much money. They will play the part of a wealthy investor, but if you dig deeper, they are often just one-man bands or middlemen looking to sell you off to an actual investor for a commission. You can identify these "angels" because they will be overly concerned with your financials and if they bring up a fee ranging between 2-5% of the money you raise through them.

The good angels actually care about what you are trying to build, and even if they won't invest, they will try to find ways to help you win, either by referring you to books or people.

Venture capitalists on the other hand have a clear goal: invest money, get much more money back. They are very concerned with your company's ability to multiply their money.  A venture capital company has a very clear structure. You can read more about them in the book Venture Deals. But in general, there are associates and analysts. These are the lowest rung; they can't sign checks, but they actively seek deals. Then there are partners and directors. These guys can sign the checks, and these guys are the ones with whom you should deal.

Venture firms also operate on a life cycle, typically 10 years with possible extension. For the first three to five years, they will find investments, and spend the rest of the time helping manage and bring those investments to fruition. The 10-year life is so the investors who invest in the venture capital fund finally can see a return on their investment.[1]  Because there is a limited life span, the VCs will push to make sure their investment returns a high multiple—10 times in some cases.  They will not hesitate to fire founders and rip the company apart to make money.

Also look out for zombie venture capitalists. Basically these are venture capitalists near the end of the life cycle, or past the point of hunting for deals.  They will often just have meeting with you to find out what's new in the field you are in.  If you do run into these guys, be nice, treat it as pitch practice, which you will need anyway, but don't expect any checks.

In terms of what type of money to take, angel money is always easiest to digest because you can get it in the form of a convertible note, or some very relaxed conditions. Venture firm money is something you have to look at carefully, read all the conditions with a lawyer, especially the exit conditions.  Are you personally liable? Can you find work in a similar field if you leave?  Are they issuing common or preferred stocks?  In both cases, find qualified help such as a mentor or a start-up lawyer.

If you decide to take it, remember these angels/venture capitalists want you to treat the money like your own money.  Don't go spending it all on things that don't bring lasting value to the company.  At the same time, if you do get money and lose it all trying, don't beat yourself up.  I've seen entrepreneurs literally fall apart when the company fails and they lose millions of dollars.  The investors are big boys and girls; they knew the game, they gave you the cash because you would do more with it than they could. So you lost. Learn from it and don't beat yourself up.

[1]http://en.wikipedia.org/wiki/Venture_capital