“The aim is to make money, not be right.” – Ned Davis
Follow-On Funding is a typical need of start-up companies as they grow their business operations, this is in part due to either the company’s success or failure. If a company is succeeding, it will need additional funding to grow; however, if a company is failing, it will need additional funding to either stay afloat or revive operations. Although Angel Investors are a great way to obtain seed-capital or growth-capital, Angels will eventually run out of funds due to a full portfolio and/or personal financial need.
At BlueWater Angels, we have found that companies whom identify the need for follow-on funding in their milestones and projections during their first round of funding tend to be more successful with the funding and do not go bankrupt. On the other hand, companies who have not arranged or discussed follow-on funding typically only breach the topic when they have run out of funds and are on the verge of failure.
While follow-on funding seems like an easy step for investors that already have assets within the company, most investors agree that an additional round of due-diligence is necessary to ensure a good deal and provide proof of concept. While most investors agree to perform more diligence, many company executives are against the additional investigation and would rather jump right into the process, this raises many red flags with investors and often can turn-up problems and mistakes on the company’s part.
We have found that all follow-on funding requires three things:
- Additional Diligence
Read more about Due Diligence.
- Substantial Efforts towards Complete Transparency
Read more about Reporting Transparency.
- A guidance counselor for Angels who are too committed
Often with Angel Groups, there is a single Angel assigned to the deal, referred to as the “deal lead.” This person warrants the group on the progress and updates of the company and works hand-in-hand to ensure growth. While this person can be a great asset to both the Angel Group and the company, the person’s judgment may be fogged by their closeness to the deal and their need for success. Offering a second person to guide them or to take lead on a second round of funding allows for clear minds and a non-personal approach to investment, most often leading to a more successful path.
Frequently, regardless of our efforts and expertise, we have found that young, naïve Angel Investors have trouble of letting failing deals go. By retaining their position in the company and sometimes even investing further capital, these Angels tend to easily waste money. We recommend that investors seek additional information before investing in any deal and work with a financial expert or portfolio manager to ensure the deal is not tainted with diluted funds or corrupt practices.