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Entrepreneur Gold
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Scott Ewing

By Scott Ewing

Ewing is the Knoxville-based principal business analyst at Appalachian Investors Alliance and is principal of Nodachi Group LLC management consulting. He is a former COO of Angel Capital Group LLC and a former U.S. Navy officer and aviator.

Gold is one of the most widely distributed elements on earth. It occurs in most rocks and soils; is found in every continent; and exists in the oceans. But "striking it rich" from prospecting is a rare event: There are few places where gold occurs in a high enough concentration that its value exceeds the cost of extracting it.

Striking "entrepreneur gold" is rare too. Angel and seed-stage investors outside of half a dozen large metro "hotspots" gripe about how few truly capable entrepreneurs they find -- entrepreneurs that can solve real problems with innovative, profit-making solutions, which return value to the financial backers.

As in the famous Gold Rush days, everywhere there are dreamers who set out to become millionaires by venturing on their own. But ask any startup company investor: How many in the long line of hopefuls are likely to endure and prosper through the innumerable challenges faced by small business operators?

And what the investor really wants answered is: "Who in the line of entrepreneurs seeking cash for their startup dream today will have wherewithal in the future to return my original investment...along with something extra to make up for risk?"

As one angel I know is fond of asking every entrepreneur after receiving a pitch: "That's an interesting idea, but how do I make money in your business?" It's a fair question, but one that entrepreneurs too often fail to anticipate (or appreciate) when making an appeal to angel investors for funding.

Too many entrepreneurs have it in their minds that angel investors are great risk-takers. Successful angels are not risk takers; they are risk managers.

While it's true that angels invest earlier and in less mature businesses than venture capital funds, professional-minded angels should adhere to the same due diligence standards as VC's. After all, the angel- and seed-stage investor's objective is (usually) to fund a company from pre-product through the launch of a minimum viable product, and to help deliver a startup to the next stage of venture capital with excellent prospects for its receiving growth-stage financing.

What does it take to be an entrepreneur that an angel investor could call "entrepreneur gold?"

For a start, forget hackneyed advice that "passion is the most important quality of an entrepreneur."

It's no great feat for a person to become enamored of their own ideas. Just because an entrepreneur is "passionate" doesn't signify that the person is sensible.

Other oft-cited traits: self-discipline, confidence, flexibility, strong work ethic.

How indicative of finding entrepreneur gold are those? An experienced angel investor might respond that every minimally qualified prospect for funding touts their having those same traits. A strong work ethic, for example, is an entry-level qualification for being successful in life. Foundational -- certainly. Yet, proffering basic traits alone won't convince an investor of how he or she will make money by investing in your business.

Here are five telltales I look for that have proved reliable for finding entrepreneur gold. No indicator always works; however, when these five are evident, I'm usually satisfied to spend considerable time performing due diligence on an entrepreneurial business, which will support an investment decision. Conversely, if one or more of the indicators are missing, I'm most likely to move on to look at other opportunities.

Number One: Care in planning. It's my own habit to put off listening to a pitch from an entrepreneur until I've had a chance to read and digest the entrepreneur's written business plan. Nowadays, too many entrepreneurs are being told that a written plan is unnecessary--that in the course of starting a business, they can expect to "pivot" from their original model once, twice, three times. Why trouble to write down a plan when the plan is likely to change?

Lots of reasons. Nothing focuses the mind like the act of committing ideas to paper, and an entrepreneur's ability to communicate a well-though-out business case offers the investor a window into that person's strategic mind.

In almost no instance is forming a business an unplanned event; rather, it's a kind of set-piece battle problem.

While accepting the maxim "no plan survives first contact with the enemy," it's also to be stressed that a true strategian avoids making grand plans "on the fly." Lack of adequate planning that results in a startup needing to "pivot" will cost precious time and burn cash--investors' cash. (I'm not disdaining flexibility to respond to a promising, new opportunity; it's the overhauling of one ill-conceived business model with another, done in desperation, which I fear.) No investor wants to pay for an entrepreneur to learn by trial-and-error how to build their business. A solid, detailed business plan, not a fill-in-the-blank download from the Internet, should go a long way toward gaining the investor's confidence.

Before offering the next of my five indicators, I should point out that there are many angel investors who prefer not to read a 30-page business plan. They'll ask for an entrepreneur's pitch deck, and they make "gut" decisions on whether or not to fund a company. All I'll say about that is the main complaint I hear from angels is that they wish they'd performed more careful due diligence prior to their making unprofitable investment decisions. Enough said.

Number Two: Speed in execution. An entrepreneur must be ruthless in prioritizing what needs to get done and when--always aware that whatever funding is sustaining their business is burning away fast. The easiest thing in the world for an entrepreneur to do, especially after securing what seems like a big dollop of investors' cash, is to waste valuable time on low-value activities such as tinkering with the company's website or making him- or herself freely available as a "subject matter expert" to non-customers at sundry conferences and goodwill events.

How an entrepreneur intends to use precious time can be deduced by carefully examining the startup's post-investment, 12-month budget; a 36-month financial pro forma plus assumptions, which must include a hiring plan; the technical or product development project management plan; and both a marketing and sales plan (not the same thing). Experience has led me to be wary of a new product, manufacturing, or software startup that focuses almost exclusively on technical development at the early stage--pushing off marketing and sales considerations until after a final product is delivered. A company that fails to include the "voice of the customer" to quantify the impact of sales and marketing from the earliest stage in its technology commercialization program is a firm that, inevitably, will build a "solution in search of a problem." And burn investors' capital in the process.

I would add under "speed in execution" this warning: Don't mistake a startup's rush to expand operating and capital expenses as indicators that the business is off to a "fast start." Each new or proposed addition to the payroll, all the equipment purchases, every facility expansion...will need to be supported. Not just by the startup's adding top-line revenue, but by improving profitability. A firm off to a genuine fast start should have no problem proving its intentions by showing planning documents that demand:

  • speed to execute primary and subordinate tasks;
  • efficiency to achieve ambitious (yet attainable) milestone or delivery date
  • concentration of effort to maintain strategic orientation; and
  • tight financial control to curtail dithering, dawdling and diffusion.

Number Three: Deferred gratification. Exploring an entrepreneur's business plan and accompanying pro forma financial projections can make it simple to deduce whether a startup has been launched as a "rip-and-run" or "quick flip" business; or, whether the founders plan to slog it out for years, if necessary, to build a company with substantial, positive owners' equity.

Investors might be satisfied to invest in either sort of venture, but they won't be pleased to fund an entrepreneur who intends to extract all or most of whatever value is created ahead of investors being repaid.

The obvious telltale that an entrepreneur wants gratification sooner rather than later is how much he or she intends to draw from the business in salary or other expenses. Six-figure salaries in a startup that has yet to become profitable are a red flag for investors. The founder and key employees' having advanced degrees and long resumés shouldn't justify overspending. A company's hiring and compensation plans must follow, not lead--in the march to attain business profitability. The admonition goes double for spending on "perks" such as prime office space; new vehicles; multi-starred dining, travel, and lodging expenses.

I write from experience: Many startups I've seen fail were businesses whose owners felt entitled to take generous salaries, run up expenses, hire needlessly, and generally view business as a lifestyle enabler for themselves, friends, and family rather than as a longer-term project for building value in the enterprise.

My advice to investors is always to demand details about the line items in every startup's budget. For entrepreneurs, making financial projections several years out is guesswork. Pro formas are likely to be wrong. But accurate budgeting is a critical skill--one that every capable entrepreneur will master. A detailed and accurate budget is a strong indicator for entrepreneur gold.

Number Four: Dependability. To an engineer, "dependability" is a measure of a system's reliability, integrity, durability, readiness, safety, and maintainability. All good things when one considers business from a systems perspective. In the eyes of the investor, the entrepreneur is personally responsible for instituting and maintaining dependability throughout their company. The best indicator of whether or not a company can achieve dependability is how well-established the same trait is in the person of the entrepreneur. When investors entrust capital to an entrepreneur, they are understandably anxious to know how the entrepreneur will conduct business at all times--especially through those many periods when financial backers lack immediate insight or clear understanding as to what is transpiring with their investment.

"Trust, but verify" was a well-known expression in the Cold War. Parties involved in a high-stakes relationship could be assured that their interests were being met by each side routinely "checking up on" the other--overtly, through a process for inspection, and covertly, by gathering intelligence, especially on the behaviors and activities of leaders. In the digital age, making enquiries to assess an entrepreneur's dependability is a common practice. Conducting research, more formally referred to as obtaining "open-source intelligence," should not be neglected, particularly in cases when the entrepreneur is not fully known to investors. The object is for investors to develop and maintain a strong sense for an entrepreneur's dependability before and after their offering angel financing. Social networks, online communities, people search engines, document repositories, telephone search databases, government records, and map and imagery searches offer the informed investor a trove of information for assessing an entrepreneur business partner's character and substantiating dependability.

Number Five: Industry experience. The indicator refers not to an entrepreneur's having spent time in varied businesses, but to their having deep knowledge of the particular industry in which they propose to launch a company. Insider experience matters for being able to identify real concerns and deficiencies from within that industry. Original thinking can be hard to come by in business. Companies and, indeed, whole industries can become hidebound by tradition. Still, innovators emerge from the ranks of those who work closest to a persistent problem. Many times, such problem-solvers are ignored by their employers. As a consequence, they elect to strike out on their own.

An entrepreneur whose story begins, "We had a serious trouble, and when I offered a solution to my employer, they said 'it will never work...that's not how we've always done things'" may very well be golden. To find out, an investor will want to examine the entrepreneur's resumé. If an angel investor is part of a group or fund, the job of checking into resumé details should fall to the group member that's had a related background. Or investors should seek the opinion of someone from that industry who is experienced at "seeing through" obfuscating resumé language to deliver an unbiased judgment regarding the entrepreneur's career strengths and weaknesses--at least as presented on paper. Conducting a reference check is never unwarranted.

If you are an angel investor reading this article, you may be thinking that going through an entrepreneur's application for funding to uncover the five telltales I've listed will take much time. I'd remind investors that studies published by the Angel Capital Association and others have argued that more hours spent performing due diligence positively relates to greater investment returns.

Twenty hours spent investigating a company is an average; uncovering the five telltales I've presented will take a fraction of that time, and will help determine if more effort afforded to due diligence will be justified.

For entrepreneurs and entrepreneur mentors, I can hope this article provides insight into the "mind of the investor," and has offered some ideas on how entrepreneur applicants for angel and seed-stage funding can become more competitive.

Entrepreneur gold is a rare commodity. Investors are always in search of it; few entrepreneurs have the stuff to qualify.

My hope for every entrepreneur is that they'll be among the rare ones who can endure the many challenges of starting and running a business, and will prove to be that person who creates value for themselves, employees, customers, and (equally) for their investors. (###)

This article appeared on LinkedIn Aug. 22, 2019, and is reprinted here with permission-Ed.


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Tags: Angel Capital Group, Appalachian Investors Alliance, entrepreneurs, management, Nodachi Group, performance, Scott Ewing, startups


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