Startups better bring their “A game” if they want to land early backers now.
On Tuesday, Brian Cohen, chairman of New York Angels, shared more of his tough love with entrepreneurs—and spoke about angel investing slowing down. He was speaking at this year’s New York Venture Summit, hosted by youngStartup Ventures in the financial district, in the shadow of Wall Street.
During a fireside chat with Stephen Davis, a partner with law firm Goodwin Procter, Cohen described angel investing as a contact sport where entrepreneurs and investors learn about each other. “I tend to want to have breakfast, lunch, and dinner with [entrepreneurs],” he said. “I want to get to know you. I want to see if you can change on a dime and think fast.”
Furthermore, Cohen said entrepreneurs need to understand that 90 percent of all money for startup seed investing comes from angels. “You can’t get it from venture capitalists; VCs are out of the risk business, predominantly,” he said.
For example, he said there were only six seed investments in the last quarter of 2013 in Silicon Valley by venture capitalists. “With this slowdown in angel investing, all of you entrepreneurs have to up your game,” he said. That includes talking about how well they know their customers’ needs. Cohen said some startups make the mistake of operating “in a little ‘skunkworks’ somewhere, building a product for an imaginary customer.”
Angel investors want to see entrepreneurs who build companies and have vision, not just products, he said. “That belief gets an angel investor closer to you faster,” Cohen said. The stakes are high because very few angel investors make money, he said, so the pros in the scene look for significant returns on every investment they make. “There’s a lot of you [entrepreneurs] that don’t have 30X returns; I’m not your money. I’m not going to invest,” he said. “I know I’m going to have mistakes that I have to make up for with a big return.”
Cohen has had some notable bets pay off. The terms of Amazon’s acquisition in April of digital comic book platform ComiXology in New York were not disclosed, however Cohen let it slip that as an original backer he “made a lot of money on that investment.”
That kind of healthy return is what Cohen said he wants because he is in the exit business. “How is it going to rain if I don’t have any exits?” he asked. So he often asks entrepreneurs, even if they are just starting out, how they plan to exit. That could include making themselves a target for acquisition by creating an answer for a problem a big company is wrestling with. “That’s what I want to know first about where you’re going,” he said.
Regardless of a slowdown in angel investing, Cohen said that entrepreneurs who know how to build a business should drive the scenario for raising money. “If you start thinking the money is in control, [then] you’re out of control,” he said. Entrepreneurs should also seek “smart” money, Cohen said. For instance, he said Lily Liu, co-founder of New York-based PublicStuff, approached his group in a commanding way. She handed out questionnaires to all 110 New York Angels and said, ‘Why should I take your money?’ I loved it,” he said. “She was in control.”
