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AA 006: What is an angel investor’s view if a founder is running 2 different startups?

Welcome to the sixth podcast of the Ask Alex show! Today the question is “What is an angel investor’s view if a founder is running 2 different startups at the same time?”

In this podcast, we delve into commitment and the expectation of investors. As a founder there are not enough hours in the day to do one startup, let alone two. There are a lot of dumb questions, and this ranks as one of the top ones, up there with ‘will you sign my NDA’ and ‘will you fund me before I quit my job.’ No. Listen to learn more!

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Hi, guys! Welcome to episode six of AskAlex. Today we’ve got a question from Jim in the States. Jim asks “What is an angel investors view if a founder is running two different startups at the same time?” Okay, guys. Reinforcing tough loving here, okay? In short, this is a hard pass. There is pretty much no investor who is going to go for this. Startup is hard enough. Think what’s involved, right? You’re taking a crazy leap of faith.

As Richard Branson said “Startup is jumping off a cliff and building an airplane on the way down.” I mean, like, startup is crazy stuff. I mean, mad props for the crazy people out there who actually make it work. I mean, God bless you. It is so hard. I mean, look honestly there just isn’t enough time in the day.

I had a mentoring call today with the founder in America who’s building a nutrition startup for high performance athletes. Amazing guy, love him. But you know it’s just him hustling trying to somehow turn his dream into reality. You know he doesn’t have a bunch of resources, he doesn’t have marketing people, doesn’t have sales people, doesn’t have distribution, doesn’t have operations, administration, and finance. He just doesn’t have it, right?

So, now you’re saying with a total lack of resources you want to build two companies at the same time?

Well, I mean if you can somehow make that work you’re the exception. You honestly don’t have the time to build one company successfully. Well, statistically speaking anyway. But two startups is impossible.

You are not Jack Dorsey and I know you’re going to try and chuck that in as you know the example to be like the panacea to justify what you want to do. You know Jack’s running Twitter and Square. I mean who knows what he’s really doing but they’re both not doing terribly well right now, you know for various reasons. But you aren’t Jack you haven’t earned the right to be able to do that and very very few people actually have. You hear founders talk about how they raise you know $6 million for an angel round, I guess you can call it a seed, I guess. And they didn’t even have a pitch deck. You aren’t that guy and I know a couple of people they didn’t need it.

But the founders were well known, they’re a known quantity, they were packable, investible and they were also only doing one startup. There are also some other exemptions which I’m going to come back to with specific examples or quotes from some people. But just trust me you are not that guy and you haven’t earned the right to have that. This is honestly in the same realm of “Will you fund me before I quit my job?” No. Or “Will you sign my NDA before you hear my harebrained idea?” No. No. No one’s going to sign your NDA, sorry it’s just not going to happen.

 

You know, pretend you’re an investor, right? You’ve got a million in the bank you want to invest in, say 5-10 companies. Maybe depending what makes sense for you. Actually, by the way you need to statistically invest in 20 companies just to get your money back. Angel investing is a really hard game. So put that context on top of you know, that hat that you’re wearing right now. And so Mary comes and she pitches you like “Hey! So I’m raising for my widget. I’m raising 300k to start off my company.

Well, one of my companies, I actually have 2. I’m doing organic quinoa growth stuff, bio printing. AI, social local mobile app as well on the side. And so I’ll be working on both of them. So I want you to fund one of them but I may only be spending like about half my time doing this but I’m also thinking about doing jazz tap.”

So, as an investor are you thinking like “Mary, really? You want me to give you 50 hundred k or 300k round so that you can split your time between games? No.”

No. What do you want? You want Mary gung-ho, all in with something to lose working to make your work, work. Sorry, making to make your investment work, right? You want total and utter commitment. So when you or Mary is saying “I’m not all in.” You’re saying “Well, I’m not in.”

 

So, when you’re saying that you work on more than one company what you’re really saying is you don’t truly believe in the opportunity that you’re presenting to the investor. The problem, the solution you have, the market size, the team, the traction that you’ve generated. You’re not quite sure if you should really be allocating all your time to that. And so it’s just this huge red flag.

Why would anyone want to be a part of something which you’re not quite sure about too? You need to have this infectious enthusiasm. This total dedication to this mission you’re trying to build. This tribe of dedicated staff who are going to be joining you on this mission.

And if you’re not totally convinced by the opportunity, why should anyone else? Put another way, what you’re saying is you want to diversify your risk and you know what, that’s a really smart thought. There is a massive amount of risk involved in startup. I published some interesting stats actually on failure rates on my Facebook the other day and I got like a ton of likes and quotes trying to find out the source for that so people could read into more. And the rates of success of funding or exits there are far lower than you can possibly imagine. And so you wanting to diversify your risk is very smart and this is what investors do. They invest in a portfolio of companies knowing that 90-95 percent of them are going to fail. 5-ish percent of them may just given their money back. And one 1 percent of those companies are going to not only compensate for all the losses of all the other companies but generate the entire returns of the fund.

And so if you’re a pitching an investor who has 100 million under management they need you to effective return that funds and the minimum is a 100 million. They want you ideally to do 10 X that should returns of investors of 3 X so you need to be doing between 300 and a billion to make an investor with a 100 million dollar fund happy and that’s scary, right? Investors fail a lot and they don’t talk about this and so it’s a very smart thought to want to kinda diversify your risk.

Unfortunately, as I’ve been talking about you haven’t learned the right for that but by being all in in your deal, your start up, so long as you manage your dilution over the various rounds for you to get to your exit. You’ll actually potentially do better than investors, you’ll make out really well but of course you have that concentration risk.

When you sell your company you’ve earned the right to have optionality, you can invest in other companies or you could say “Hey, I’m going to be a venture builder. I’m going to use my resources, the network I’ve built, all the knowledge I have in my head and help others build more companies.” I’ve got to tell you, I’ve had a bunch of people reach out to me and ask about doing this and I have done some of this myself. It’s not quite as easy as it think it is but when you have the money you’re allowed to have those options but you have to earn the right first.

So, start small, be scrappy, get your hustle on, build your exit and you know do another one. Maybe you can fund your own seed round if you do really well you can fund your A round and you can own more of your next company.

But right now you have to just be focused on one thing. Now, I do not advocate lying to investors. That’s honestly a terrible idea. I mean, you know think about marriage, right? If your wife finds out you have another family in the Philippines they’re not going to be happy, right? Well, you can divorce your wife and these days that’s relatively common.

I mean more than half of marriages in the states end up in divorce. Unfortunately, with investors they’re not going anywhere. The moment they give you a dime they’re in for life. They own their stake. That’s not going anywhere and it’s not your company more. They can fire you! Your ass is on the line that’s a really scary thing to be. Tech Crunch is always talking about like fund raising seems like a badge of honor and if you haven’t raised money you ain’t shit and that’s such a fucking lie.

If for some crazy reason you have to do more than one start up just don’t tell the investors. It’s just such a bad idea. But again don’t lie to the investors they’ll find out about this kind of stuff. Ultimately, this question prints a noob on your head.

So, look this is my honest perspective, my opinion. Let me share some from some other guys who are arguably better looking and probably very likely smarter than I am. So, Gordon Miller who is an investor in the States says “At least in my opinion, anyone that is splitting their time between two startups in going to end up with both of them dying. They certainly will not be getting my money. Before I put my $400,000 into my second company, my “partner” who was elected to get 51% of the company and who was the CTO and invented the technology that we founded the company on was required by me to quit his “Plan B” job of returning to University as a full professor. By quitting a tenured position” Getting tenure in the States is a pretty sweet deal.  I mean, they get paid huge amounts but they can basically not worry.

“He had no choice but to make it work. Now, almost 20 years later, that company that we both founded turns $47M a year in revenue. He doesn’t own 51% anymore since we brought in investors in 2003, but I hear he is quite happy with his choice to go “all in”.

If a founder is not “all in” then “I’m Out”. Christopher Mirabile who is an angel investor and founder in the States writes “I am afraid that would disqualify the founder from getting investment in either company by most angels. I think the logic would be something along the lines of: If the founder does not believe enough in either company to prioritize it over the other and “invest” in it with his/her full time,

Why should an investor invest in it?” and that’s exactly what I just told you.

John Sechrest who is the founder of Seattle Angel Conference writes “Entrepreneurs are often very high energy folks with lots of ideas. It happens regularly that we see people who are running more than one company. However, any growing company is going to take all the time and resources you have to get it to grow through the stages that come as a result of funding.” Now, you’re probably wondering about exceptions, right? Well, Greg Brown who is at Charlotte Angel Fund “For me it’s a non-starter unless we are talking about a founder with previous $100M + exits under his/her belt. And even in that case I would want to understand at what point this founder planned to step aside and let someone else run the company.”

Jason Grindle who is a former investment advisor and CEO writes “Rather than looking at what is on paper, in this case, running two companies, I would instead look at the success rate of the CEO and the founders. If the CEO has no successes or notoriety under his belt,

I am not investing, regardless of what has his full attention. If the CEO is running a firm, or an incubator for instance, and has dozens of successes, I would probably ask to get in on any deals he would bring me.”

Tim Berry, just to close us up writes “I wouldn’t like it. I wouldn’t want to invest in either of those startups. Startups are a lot of hard work, take dedication, and commitment. Two at once seems like a path to failure.” Okay, so thank you so much for that question. Audience, if you have a question please reach out to me at alexanderjarvis.com/askalex head to the bottom, there’s a nice pretty red button where you can ask a  question and I’d love to answer it for you.

Thank you so much for taking the time to spend it with me. I really appreciate it. It’s lovely. Thank you very much. I hope you have a great day. Bye guys, cheers!

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