Back in 1999, I funded a company that was primarily in the services/consulting business. I tend to fund companies that have proprietary technology as the core product, so this was a bit outside of my range. However, I had met the entrepreneurs through a childhood friend and I quickly got to know one of the founders pretty well. This company worked with early stage technology start-up companies (mfgquote.com, Secureworks and eHatchery were some of their early clients) helping them create buiness plans, identify their market/customers and introducing them to potential investors.
Business went swimmingly…until 2002. In mid-2002, business started dropping off quickly due to the downturn in the market. In the consulting business, new gigs are cashflow lifeblood. When new jobs dry up–so does cashflow. However, the entrepreneurs had thought of this. They had taken equity (common stock, options, etc.) instead of cash in some of their jobs with the early stage companies. However, common stock and options don’t pay the bills. The company toughed it out until 2005.
In 2005, the founder that I had gotten to know came to me and admitted the above facts. He wanted to restructure the company, look for traditional consulting jobs and try and pay back the investors over time. I thanked him for his honesty and wished him well.
Fast forward to 2007. The entrepreneur has taken a job at a major telecommunications company in a C-level position. True to his word, he has set up a partnership that includes all the investors in his previous company and he is paying into the partnership cash and options so that, over time, and true to his word, he will pay off the investors.
That is good character.
6 responses so far ↓
Jon Stubbs // January 3, 2008 at 11:41 pm |
Are you seriously suggesting that an entrepreneur should feel some obligation to pay you back if you lose money in an investment that fails? And that the failure to do so is a lack of “character”??
It seems that this attitude values your passive money over an entrepreneur’s blood and sweat.
Is anyone going to pay back an entrepreneur for losing his life savings by taking the risk? [If you argue that your investment wasn't passive, then it's even worse--since you should share the blame in helping him lose money].
Seems to me that you’re making an investment on arm’s length terms. You assume the risk/reward and so does the entrepreneur.
I don’t think many investors have asked Meg Whitman to pay them back when they lost money on eBay stock during the bubble burst and I don’t think it shows a lack of character if she didn’t forego her salary to pay back those who lost money on their investments. It’s just the name of the game.
It just can’t be the case that some fat cat expects to make money off the back of the work of others, and then expects to be paid back if it doesn’t work. Can it?
That is, unless of course your “angel investment” was an “angel loan.”
Knox // January 4, 2008 at 3:53 pm |
Hi Jon–
Thanks for the comments.
I never suggested that the entrepreneur “should” pay back the money. He made the decision on his own–without any pressure or suggestions from me (and it was an equity investment).
He didn’t make an excuse or whine about risk and reward or “fat cats” usurping his mighty intellect.
He did it quietly and with character. And, you know what? I’ll back him again any day whether he pays me back or not.
Jon Stubbs // January 5, 2008 at 2:09 pm |
Thanks for responding!
I did find it quite interesting that you called my talking about the concept of risk/reward “whining” in light of this post by you:
“3.) Future Growth-A early investor should be rewarded for putting personal capital at risk. Using an angel’s personal capital in the form of a convertible note to grow a company over time primarily for the founder(s) gain is a misalignment of the risk/reward ratio in this type of investing.”
I assume you talk about risk and reward a lot to justify your % ownership in a company as compared to VC investments and founder ownership. It’s not “whining,” it’s the way business works.
I guess discussing risk and reward is only important when it comes to protecting your money but not losing money? Head I win, tails you lose?
I’ve made angel investments. I’ve lost money. I would never accept an entrepreneur “paying me back” for my lost money in an angel investment. Especially, if they’ve just taken a huge risk using their life savings, family sacrafice and hard work, and I have more money than they do. I guess that shows character too.
Tom // January 5, 2008 at 3:12 pm |
I was wondering what the point of the original post is.
To me, it just seems like it’s designed to guilt future entrepreneurs into feeling like they need to pay back angel investments if their company fails, or else they would be perceived as not having “character.”
This strikes me as a poorly thought out concept, and I hope that’s not what is being suggested (though even if it’s not intentionally being suggested, I think it will the same effect on those entrepreneurs who read it after they have taken money from this fund).
Knox // January 6, 2008 at 4:27 pm |
Hi Tom–
I appreciate your comments.
A quick note: Our angel group does not have a fund. We all invest individually. An important distinction, but one that some entrepreneurs misunderstand.
This post was merely a story, not a parable. I do see that is has stirred up some strong convictions, tho!
Knox // January 6, 2008 at 4:34 pm |
Jon,
Well, I certainly agree that everyone has their own opinion.
Here’s another post of mine that you might be interested in reading;
http://angelatlanta.wordpress.com/2007/11/02/a-perception-of-philanthropy/#comments