When You’re Not CEO Material

TL;DR: Before you even talk to VCs, know your own strengths and weaknesses as a leader, and work on them. Know your VCs by asking honest questions early on, and verifying answers in the market. And be proactive and honest about what you really want to be doing at your company, and what matters most to you. When CEO succession drama starts to damage a company, it’s almost always because the founder and the VCs failed to (i) align themselves on their approach to Company management and recruiting early on, and (ii) create an environment of trust and transparency where founders can give up some control without fearing that the fruits of their hard work are being given up as well.

Background Reading:

No matter how much certain investors market themselves as “founder friendly,” no competent VC can guarantee a Founder CEO that they will stay CEO. VCs have a job to do: to turn other people’s money into more money. To the extent they are convinced that keeping a founder as CEO will maximize their chances of doing that (long-term), they will do so. Otherwise, they will tell a founder CEO, sooner or later, that a new CEO is needed.

“Founder Friendly” VCs are the ones who’ve concluded that being friendly to founders helps them make more money.  They are not your BFFs, and you shouldn’t need them to be.

The below are some thoughts, from someone who’s seen it play out many times, on how founders should approach the “Are you CEO material?” issue; both before the hard conversation has arrived, and after.

First: Answer Your Founder’s Dilemma: Rich or King?

If staying in control of your company is much more important to you than achieving an excellent financial return, you should significantly reconsider whether venture capital is right for you at all.  Remember: VCs have a job to do, which is to make lots of money. You bring them on to align yourself with them so that when they make lots of money, you make lots of money.

It’s fine and common if you have a certain ‘mission’ that runs alongside the goal of building successful, profitable business; most great founders do.  But if you’re working with VCs, (i) that mission better be the kind of mission that unlocks lots of benjamins, and (ii) you better be OK at some point handing over the crown and becoming a part of, but not the leader of, management. Because, statistically, most founder CEOs eventually get replaced; voluntarily or involuntarily.

Second: Find Out if a VC is a Coach or Underminer

While all VCs are in it to make money, their philosophies regarding how much “coaching” to give founder CEOs vary wildly. Some VCs know that a founder CEO most likely will need to be replaced once the company has become a true enterprise, but they see value in keeping a founder in the CEO seat for some time and coaching them on their gaps, and also helping them fill some those gaps with other senior hires.  Other VCs virtually never let a first-time founder CEO remain in their position post-Series A. They are fine having them as CTO or COO, but they will almost always make their large check contingent on bringing in one of their preferred professionals.

There is no way to know whether you are working with a Coach or an Underminer other than to (i) directly ask (early) the VC what their perspective is on senior management post-closing, and (ii) examine the existing portfolio of the VC to see what has in fact happened every time they’ve closed a round. Trustworthy advisors who are active in the market are helpful here, as is LinkedIn.

If you’re working with an Underminer, and there are no other options, it is what it is. Work within that reality (see Step 4).

Third: Realize that you are being “sized up” from the moment you first speak to investors.

No one should pretend that “good CEOs” fit neatly into some contrived stereotype. Their personalities, appearance, backgrounds, etc. can vary significantly. However, the core jobs of a CEO, particularly at early stage, are quite uniform: (i) recruit employees, (ii) recruit investors and strategic partners, & (iii) manage and lead everyone to execute effectively on the strategy. From the moment you first interact with investors, they are asking themselves whether a founder CEO can do those things.

Fact: everything about your interactions with lead investors, from the tone and confidence of your communications, to body language and eye contact, and how you respond to push-back and calculated aggression, will influence their perception of whether you are “CEO material.” Complain all you want about prejudices, bias, judging books from covers, etc., but that is just reality. Leadership is not handed charitably. It’s asserted by behavior and results. The concept of “executive presence” is something worth familiarizing yourself with.

No, this does not mean you need to pretend to be some gun-slinging, type A alpha executive. Many great CEOs are calm and collected. But the fact of the matter is that being a CEO of any company requires the ability to have hard conversations and take some heat. If you can’t hold your own in a direct conversation with a VC, they will infer that you can’t do so in the many other key conversations that a CEO needs to have to lead a company.

I’ve lost track of how many times I’ve heard something like “That founder? He’s got a bit of an ego,” to which I usually respond, “What do you think it takes?” Ego? Thick skin? Stubborn? Chip on their shoulder? A little prickly? You better f***ing believe it.  Industries usually don’t get blasted open by people overflowing with tenderness and sensitivity.

Fourth: Focus long-term on transparency and influence; not control.

I’ve found over time that many founder CEOs do not actually enjoy being CEO, especially as the company starts growing significantly (~post Series B). They insist on staying in the CEO seat, not because they truly think it best suits their skillset, but because of a fear that stepping down from the top automatically means totally losing influence and visibility into where the company is headed. A culture of transparency and clear communication at the board level can resolve this disconnect and avoid dysfunction.

The key issue here is not whether the Company needs a new CEO, but how to handle succession. The perfect way to create mistrust between founders and their board/management is for VCs to parachute in C-level hires with minimal founder involvement in the recruitment and selection process. It looks something like “We are getting a new CEO, and it’s X (often who was a CEO at a prior portfolio company).” In this scenario, the recruitment of new executives feels far less like the leveraging of much-needed, independent new talent for the benefit of everyone, and more like the investors taking control over management by hiring their loyalists under the pretense of ‘upgrading’ the team. 

When a founder CEO is able to propose her own candidates for the CEO position (and other C-level positions), and play a lead role in interviewing, vetting, and training the prospects, succession goes substantially smoother for everyone. In that scenario, much like a truly independent director, the founders will view the new CEO and other C-level hires as balanced people whose long-term vision and values are closely aligned with the original team. Trust is preserved, and that trust, along with a continued seat at the Board table and contractual protections around their equity and compensation, frees founders to move to positions in the company that are better suited for their skills (CTO, Chief of Product, Chief of Strategy, COO, etc. etc.), and which they usually enjoy more.

Again, different VCs have different philosophies on how to approach CEO/Executive succession, including timing. The only way to find out is to get a dialogue going early on, before term sheets are delivered, and verify the answers by talking, privately, to portfolio companies. As always, having your inner circle of advisors to, confidentially and off-the-record, help you gather that information is key.

Fatal Errors in Early Startup Hiring

I don’t pretend to be an expert in HR or tech recruiting, at all. However, being a VC lawyer gives you a deep inside view into a lot of what goes right and what goes wrong in early-stage hiring for startups; particularly what goes wrong, because that’s usually when lawyers get called in. Lots of data points to notice patterns. While there are a whole lot more issues that I’m not covering, below are a few key recruiting errors (tactical, not legal) that I’ve regularly seen Founder CEOs make as they start trying to expand their roster.

Hiring Sociopaths

Well that escalated quickly, didn’t it. Very very very^2 few people are so talented that they can make up for having a toxic personality. What is toxic? Someone who either (i) can’t control their own emotions, or (ii) seems to somehow regularly trigger other peoples’ emotions, in a bad way.

The early days of a startup are chaotic. You need personalities that will absorb some of that chaos, and make it easier to manage, not harder. Character and values are at least as important as the person’s skillset. When I hire lawyers, I pay at least as much attention to subtle cues in a person’s behavior as I do to their analytical skills; their facial expressions, manner of speaking, how they react to others, how they describe other people and themselves. I’ve seen what it’s like to work in places where there is even just 1 super toxic personality. It ruins everything, and can sink a company.

That doesn’t mean emotions in general are bad. Emotion often means you care about something. It’s OK for people to get emotional about stuff; better than people who are disengaged and stoic all the time. But there’s a world of difference between getting emotional because you care about something v. just because you can’t control yourself, or don’t want to. Blind reference checks help a lot.

Hiring “Big Company” People

Jeff Bussgang’s “jungle, then dirt road, then highway” metaphor is valuable for understanding how you can go wrong in hiring people who aren’t the right fit for a startup environment. A Series C or later company operates extremely differently from how a seed or Series A company does. Later-stage companies have higher salaries, more narrowly defined roles, more predictability, more formality, more perks. Earlier stage means lower salaries (but more equity), more flexible and broad roles designed to ‘just get it done’ (whatever ‘it’ happens to be that day), more unpredictability, and closer-knit/more casual culture. “Highway” people usually can’t handle the jungle, or even the dirt road.

Problems arise when a company has raised a seed or Series A and suddenly wants to present themselves as one of the big dogs by hiring someone with a very impressive resume and title. That person will very often want a compensation package that strains the company’s budget, and a level of resources and order that simply isn’t appropriate for early stage. Talent can come in the form of a lot of different cultures and personalities. Make sure you’re hiring talent with realistic expectations for your company’s stage. Salary v. equity expectations are often a valuable signal here, and can select for the right or wrong people.

And a big thing to watch out for: I’ve known of VCs who subtly push founder CEOs to hire “big company” people sooner than they are really needed, to create a greater sense of urgency in needing to raise a new round, that they lead. If an investor has put some seed or Series A money in your company and wants to lead your Series A or B, they have an incentive to shrink your runway by filling your payroll with high-salary people earlier than is appropriate.  More payroll means you’re forced to close your Series A (or Series B) sooner, and at a lower valuation, than you otherwise would’ve wanted; increasing their ownership. Be mindful of this dynamic, and ensure you have a total grasp of what your talent needs are and aren’t. 

Hiring Too Fast

You see far more companies that die because they hired too fast, and eventually couldn’t keep up with payroll, than the converse. Successful entrepreneurs know how to be scrappy and resourceful; seemingly magically figuring out a way to achieve results with far fewer resources than other people could. That should apply to hiring as well, and it’s often achieved by ensuring that you aren’t hiring “big company” people (see above) with (i) unrealistic salary expectations, and (ii) such specialized skillsets that they leave needs unfilled that require hiring more people.

Hiring extremely talented, flexible generalists appropriately suited (and compensated) for early-stage is often how resourceful CEOs keep their early-stage company “default alive” instead of “default dead,” to use Paul Graham’s language.  As a general matter, at early stage someone who is really good at X, Y, and Z is more valuable, and a much safer hire, than someone who is world class at just X.

Hiring Friends or Family

If you build anything that starts getting traction, there will come a time when people start suggesting their friends and family to fill job positions. In some sense, this is not a bad thing. Recruiting from your existing roster’s network is actually a very smart and common way to find quality candidates without needing to pay recruiters. The danger, of course, lies in the psychological tendency for immature founders to hire people simply because they like them, rather than because those people actually have the talent and skills the company needs. 

Only go down this path if you are 100% comfortable saying ‘no’ over and over again, because you’ll need to. Frankly, if you’re CEO and don’t know how to say “no” when you need to (often), you’re going to face much bigger problems than hiring. 

Friends and family are easy to hire, but they’re much harder to fire because of the emotional and political dynamics surrounding the personal relationship. And hiring people because of existing relationships, instead of because of merit, is also a fast way to create an insular, mediocre mono-culture of people who are all buddies with each other, as opposed to a performance driven one. As a resource-strapped early-stage company trying to navigate chaos, you can’t afford to have a low performance culture. Hire for merit from Day 1.

As I said, there are dozens of big mistakes companies make in hiring, and I’m sure there are fantastic blog posts out there from experts on the subject. The above is just a few really core tactical blunders VC lawyers see founder teams make, because we’re usually called in to help the team clean up the mess from a legal perspective.

In the early days, hire extremely talented, flexible and mature team-players with realistic expectations about startup life, not too early, and not just because you like them or they are someone’s friend. It’ll save you an enormous amount of headaches… and legal fees.

Founder Education

TL;DR: Accelerators have emerged as elite universities of sorts for tech entrepreneurs. But they offer a bundled value proposition at a price (in terms of time and equity) that doesn’t work for everyone. For those teams in need of just the educational aspects of an accelerator, other (quality, but lower cost) offerings are starting to be developed that should be considered.

I’m a huge proponent of curation and leveraging the knowledge of trustworthy domain experts to avoid burning time; time that could otherwise be spent running a company.

The value of curation in the lives of founders is perhaps reflected best, above all else, in the rise of accelerators. Accelerators’ core value proposition to founders is that, in exchange for (i) several weeks of their time, (ii) an equity stake, and (iii) rights to invest in future investment rounds, founders in accelerators gain virtually immediate access to significantly curated resources: investors, mentors, other founder teams, prime office space, educational content, etc.

And on the flip side, great accelerators are able to attract quality resources by promising the people who provide those resources access to a curated set of startups; saving them time from having to sort them out in the general marketplace.

Of course, the value of those resources and their curation varies wildly depending on the quality of the accelerator. Top accelerators have proven invaluable to many young, inexperienced founder teams who’ve saved countless time searching, networking, vetting, etc. by tapping into an accelerator’s network and resources. Lower quality accelerators, however, are often a time suck, and much like the “Top Startups to Watch” lists we all see get thrown around, can serve as a damaging and distracting vanity metric.

But as much of a fan as I am of great accelerators, the reality remains that accelerators offer a bundled value proposition. And not every founder team needs, or is willing to ‘pay’ for, the entire bundle. Some founders have already arrived at a successful business model showing strong traction, and are good in the advisor department, but just need connections to Series A investors.  Other teams are well-funded, and already have their own office space, but could really use some guidance on the ‘fundamentals’ of recruiting, managing a scaling company, etc. It shouldn’t surprise anyone if resources are developed in startup ecosystems to address these types of companies for which a typical accelerator isn’t the right fit.

Every now and then I use SHL to spread awareness about new resources in the market that I feel are really adding something differentiated and high value for founders relative to what’s currently available. Years ago I wrote about Clerky and how it filled a void in the market of startups that just need a super-fast, totally standard incorporation and corporate organization, and due to capital constraints are willing to go through it without a lawyer. I also wrote about how eShares was using a SaaS model to liberate early-stage startups form burning money on 409A valuations. I later wrote about how services like Bad Ass Advisors can help companies connect with specialized advisors/mentors beyond the limited roster of people available in their local market.

Today, I’m writing about another topic: Founder Education; meaning how founders can get access to the wisdom/pattern recognition of people who’ve observed dozens, or even hundreds, of startups. It includes best practices on topics like starting a company, finding advisors, finding product-market fit, using advisors, compensating people with equity, targeting investors, understanding metrics, building sales/distribution channels, etc. etc. Books and blogs are great, but they can only go so far, and sorting gold from garbage gets hard. Top accelerators have developed internal curriculums for these sorts of topics, but (remember) they come bundled with a lot of other resources, and at a price, that don’t necessarily work for all companies.

In Austin, I was recently introduced to Founders Academy; an educational curriculum designed for tech founders. It’s run by Gordon Daugherty, a very well-known and respected (including by me, and SHL readers know I’m jaded from experience) startup advisor in Austin who’s had a front seat for some time at one of Austin’s best known accelerators, Capital Factory. Gordon’s built Founders Academy into a packaged, structured curriculum for new tech founders; offered both as a set of online videos that you can buy, and also as an in-person course (taught by Gordon over a few days) that founders can sign up for.

I got some feedback from a few teams that participated in the in-person course, and they all said it was extremely valuable for the price of a few hundred dollars.  I’ve reviewed much of the material myself, and have also interacted with Gordon enough, to say that he knows what he’s talking about, and because his background is in Austin / Texas, his curriculum will resonate well with founders operating in markets that aren’t Silicon Valley.

As I’ve written about before on: Bad Advisors: The Problem with Localism, many tech entrepreneurs operating in second and third-tier ecosystems run into a serious problem when they limit their pool of advisors to their city’s geographic boundaries: they get bad (sometimes really bad) advice. Founders Academy, and other programs like it (if you know of them, leave comments please) thankfully help solve that problem by scaling the wisdom of domain experts (advisors who aren’t charlatans) in ways that are more structured and digestible than just blog posts or books.

Education means leveraging the wisdom of others, so you can avoid the mistakes that they made. For tech entrepreneurs who don’t have time or money to waste, the right kind of education is invaluable. And while top accelerators have emerged as the elite universities of the tech startup world, they clearly aren’t for everyone. It’s great to see quality educational resources popping up to fill the void.

p.s. Like Clerky, eShares, and Bad Ass Advisors, I don’t have any ownership interest in Founder Academy. The mention was entirely earned.

Gatekeepers and Ecosystems

TL;DR: Relationships are important, but a business mindset that prioritizes ‘relationships’ over real value delivery enables gatekeeping and cronyism, both of which are contradictory to entrepreneurship, and can suffocate a business ecosystem.

Background Reading:

As I’m known to do on occasion, I’m going to get a bit personal with this post; because the backstory (my backstory) helps explain the message.

To say that, growing up, I did not come from money would be an understatement. When I was born, my parents (mexican immigrants) were selling tomatoes and avocados out of a pickup truck.

In a sort of american dream story, that pickup truck eventually became a moderately successful produce business, where I spent a good portion of my elementary school off-time sorting produce and invoices. Unfortunately, through a series of bad, misguided decisions, that business eventually ended in bankruptcy, and my parents in divorce. My sisters and I were raised by my single mother, who supported us by selling perfume at an indoor flea market; her small business, where I worked for most of my teenage years.

Yes, to get from there to where I am now took an enormous amount of work and hustle; hours a day commuting to public schools in better neighborhoods, days without sleep to get the grades that would get the scholarships that would pay for the colleges that I otherwise couldn’t afford, even while working, etc. But the real reason I tell that story, and this is where it connects to the crux of this post, is this: I would not be even close to where I am today if it weren’t for people willing to work with and support others purely because of their talent and merit, regardless of whom those ‘others’ knew or where they came from. 

Those people are the reason I’m here. And the underlined portion of that sentence is what makes all the difference.  Because I came from nowhere, and knew no one.

There are very few statements about business that I find more obnoxious than, “it’s all about relationships.” Not because I don’t value them. To the contrary, I think building trusting, deep relationships is one of the most important things CEOs can do. See: Burned Relationships Burn Down Companies. What truly unsettles me about that perspective is two-fold:

  A.  It reflects a pervasive mindset on how to achieve success that, when played out over time, concentrates opportunity in pockets of people who all know each other. People who go to the right schools, live in the right neighborhoods, etc. are able, despite being all kinds of mediocre, to leverage their ‘relationships’ to keep out those who are far hungrier, and far more talented, but simply don’t have the right ‘relationships.’ 

  B.  It creates gatekeepers, who can use their access to the right ‘relationships’ to control a market. And gatekeepers are the exact opposite of true business ecosystems. Gatekeepers, and the idea that you have to know specific people in order to succeed, are contradictory to entrepreneurship.

I’ve observed how, in a variety of markets and startup ecosystems, pockets of people have attempted to become gatekeepers. It never ends well.  Influencers/connectors, meaning people who serve as ‘nodes’ of an ecosystem by knowing lots of people and helping them connect with each other, are a great thing. Every town needs them. A gatekeeper, however, is an influencer/connector who has devolved into using their relationships to cut off the market from others who won’t go through them. Rather than facilitating an ecosystem, they use the “it’s all about relationships” fallacy to artificially centralize it. 

Relationships do matter. Relationship-building skills are important. But the people who most emphasize the supremacy of relationships, instead of prioritizing authentic differentiation and value proposition, are often the most mediocre. Fact. By stating that relationships are what matter most, you’re indirectly acknowledging that your success has come from whom you know instead of from what you can actually deliver

I remember as a kid driving through the “rich people” neighborhoods (upper middle class), imagining how amazingly talented everyone living in those homes must be. There’s no way they could be that successful if they weren’t the best of the best, right? Now, I’m nauseated by how many people I’ve encountered over the years who’ve coasted into success simply by (i) being competent, yet uninspiring, and (ii) leveraging relationships they built during their childhood and college years. Because it’s “all about relationships.”  When lawyers are coached on how to build up a client base, the first thing they almost always hear is “start building relationships.” And perhaps work on your sports trivia while you’re at it.

People who truly believe it’s “all about relationships” do not become successful entrepreneurs. Great entrepreneurs focus first and foremost on developing a legitimate, differentiated, and defensible value proposition, and then building the right relationships from there. Be so good that the right people – the ones who don’t think it’s all about relationships and quid pro quo – can’t ignore you. The relationships will follow. 

When clients approach our firm, I am happier when I hear that they have scoped the market. It serves as a great starting point for explaining how and why, instead of following the old playbook, we’ve built our reputation by completely re-tooling how law firms run: better technology, a unique culture built through unique recruiting, billing rates hundreds of dollars per hour below market, extremely high client satisfaction, strong policies against conflicts of interest, and competitive market compensation for top lawyers who work 25% fewer hours than the firms they leave.

Many don’t realize it, but that last part has been part of my core mission the whole time. Our firm is built, from the ground up, to allow lawyers to have healthy personal lives, instead of pushing them (for the enrichment of partners) into workaholism. So that they don’t end up overworked and divorced. Like my parents. I told you the backstory mattered here.

Yeah, we’ve got relationships. But they were and are earned; not given, and not bought. To this day, I shut down any suggestion that we establish economics-driven (as opposed to merit driven) referral arrangements with anyone. Not everyone is happy about it. You can’t make everyone happy. It is not all about relationships.

A true business ecosystem cannot be controlled. And true entrepreneurs cannot be held back by gatekeepers; they find a way around them, eventually. It’s what they do. Give people a chance if they are hungry, and can demonstrate real skill. Even if they come from nowhere, and know no one. 

Angel Investors v. “Angel” Investors

TL;DR: The term “angel” investor has connotations that in reality don’t apply to a significant portion of early-stage seed investors outside of Silicon Valley. Historically, angel investors were very wealthy individuals who’d take big, almost irrational (from a risk-adjusted perspective) bets on entrepreneurs for reasons that go well-beyond a profit motive. Many “angels” that you’ll encounter as an entrepreneur, however, think and act in a much more self-interested, conservative manner; much like venture capitalists, but with smaller checkbooks. Both types are crucial to startup ecosystems, but knowing the difference is still important.

Related Reading:

One of the core reasons behind this blog’s existence is that the majority of legal/fundraising advice available to startup entrepreneurs comes from places (like Silicon Valley or NYC) that are dramatically different (in terms of access to capital and key resources) from the environments in which most tech entrepreneurs find themselves. That doesn’t mean at all that SV or NYC advice is bad or wrong. On the contrary, much of it is very very good and founders who look only to local advice will screw themselves – see: The Problem with Localism. But founders also need to understand the mismatches between the advice/culture they’re exposed to on the most popular podcasts, blogs, etc., and how things tend to work for normals.

One important area where I see the disconnect arise is in founders’ expectations in interacting with “angel” investors. The typical “angel” investor that you encounter in Austin, Houston, Atlanta, Dallas, or Miami does not look, think, or act like what Silicon Valley people have historically referred to as “Angels.” 

Classic Angels

While the full origin of the term “angel” investor goes beyond this post, in general very early stage investors were very wealthy individuals who, in addition to other activities, wanted to “give back” to the business community by making bets on promising entrepreneurs that no one else (rational) would be willing to make. Hence, their investments were “angelic.” While this doesn’t mean at all that Angels didn’t scrutinize their investments, or that that they acted completely out of charity (hardly), the term absolutely has (correct) connotations of motives that are much broader than just making a great return.

These classic “Angels” were wealthy enough that writing a $100K or $200K+ check barely moves their needle, and so they could take the risk of investing in a company with little more than a very promising team and an idea, and perhaps the very early beginnings of a product. If it fails, NBD. They’re doing it for the relationships, the excitement, and the chance at supporting something new.  I often see founders take very early money from investors that fit the classic “Angel” profile, but those relationships take a long time to build. They don’t spark over a pitch contest or business plan competition.

Anyone who says there isn’t enough money in Texas/the South is painting with way too broad of a brush. There’s tons of money floating around here and elsewhere. The core difference is that in Silicon Valley, the true capital-A “Angel’ money was created in tech, and therefore much more easily flows back into early-stage tech (because the Angels trust their judgment on tech teams/companies). Outside of that environment, much of the ‘Angel’ money comes from other industries (like Energy, Healthcare, etc.), and so much more relationship-building, selling, and (cultural) translation is needed to convince it to go into a tech startup.  Great t-shirts and a pitch deck won’t get you there.

Most “Angels”

In most other tech ecosystems (outside of SV), when people speak of “angel” investors they are often talking about successful individuals who, while willing to take on the risk of early-stage seed investment (which is great), are not so wealthy and altruistic that they’ll barely feel losing $100K-$200K.  That means that most “angels” seen in non-SV ecosystems are much more conservative in how they pick their investments (and will therefore have higher expectations), because to many of them angel investing really is about making a great financial return.

Classic Angel investors were/are generally very wealthy senior executives and business people with net worths well into 8 figures and above, who will bet on team, vision, and minimal traction (if any); so very early stage. The majority of “angels” that entrepreneurs encounter in their own ecosystems, however, come from broader backgrounds (lawyers, doctors, real estate, business owners, etc.) and are affluent/comfortable, but not quite the 0.1% (their angel investments are material to them), and they”ll often want to see clear customer traction, revenue, and a more mature product; and a lower valuation. 

Of course, there are far more “angels” than Angels, so I’m not suggesting at all that the more conservative, self-interested nature of typical “angel’ investors is bad or a problem. They are crucial to startup ecosystems. I’m not running around writing $100K checks on team+vision either. But the distinction between the two categories often gets lost on first-time entrepreneurs, with negative consequences.

You likely need a Pre-Angel Plan

So the net result of the above is that tech entrepreneurs outside of the most dense ecosystems like SV and NYC encounter much higher expectations from “angels,” and therefore (and I’ve written this in prior posts) pre-angel money, what is typically called “friends and family” money, is often essential to building something attractive to “angels.” If I encounter a founder team planning to start a company without a viable path to $50K-$200K in initial funds, either from their own savings, friends and family, or a classic Angel, that is very often a red flag. Not game over, but it is a concern. 

It’s certainly been done before, especially when the founder team is very self-contained and willing to work for nothing until there is real traction, but most companies will never make it to the “angel” investment stage (product, traction, revenue) without either bootstrap/F&F funds, or a classic Angel investor willing to make a big bet. Accelerators have helped with this issue by (often) being the first non-F&F money in and serving as a valuable signal to “angels”, and they deserve credit for that, but even getting to a point where you’re attractive to a top accelerator often takes some real cash.

In short: most angel investors are much more conservative, and have higher expectations, than the term “angel” suggests, because they’re in a different category from the classic wealthy “Angel” investors that give the term its meaning. Be mindful of that fact, and prepare for it in your early-stage fundraising strategy.