I am asked regularly for advice and feedback on raising money and evaluating business plans.

Often I don’t have the time to provide as thorough an answer as I would like. Recently, I was asked by a close friend to answer a few questions regarding my experience as an angel investor and an entrepreneur who has raised millions of dollars in venture capital. Since I owed this friend a backlog of favors, I happily obliged.

Our discussion consisted of a thorough Q&A sequence that answers a lot of common questions I hear quite frequently. I thought I’d share this useful information with all of you (or ‘y’all’ as it’s pronounced in our Dallas publishing office):

Q: What is the one thing that many entrepreneurs overlook or don’t take into consideration when seeking angel investments?

DH: Here are a number of great ‘un-expectations’ when seeking angel investors:
1. Quantity of money that will be needed (whatever you think, multiply by π).
2. Time it will take to achieve stated goals (whatever you think, multiply by π).
3. The enormous amount of time you will waste – regardless of your laborious efforts and exhaustive hours spent (multiply by π). This is because prudent angel investors will subject you to a ruthless process with the small likelihood that they’ll, ultimately, invest in your deal (Why? See next question.)
4. The fact that having angel investors in your deal “sucks.” As soon as you have investors involved you lose control. You can no longer financially manage your business at your discretion. Your business expenses, your personal salary and the money you can draw from the business will be rigorously scrutinized.
5. If your business contract is not structured correctly these “angels” can quickly sprout horns and end up firing you and owning your deal.

Q: Why are angel investors so picky?

DH: Here’s the deal: Angel investors are smart and have tons of options. Out of 1,000 submissions they will (have to) say “no” at least 995 times. The five they do choose to invest in will need to be as rock solid – with a seasoned veteran dream management team, patented IP, stress-tested product, market-proven business model, past revenue history, tracking towards profitability and chasing BIG markets with a very plausible and expected 30x ROI. This extreme selectivity is essential to sustain their losses because 9 out of 10 of their deals will go belly-up. They’re betting big on the one deal, so statistically, it’s not event prudent to say “yes” to little opportunities, the mathematical risk of failure is too great.

Q: What can I do to prove my business is worth the risk?

DH: In this day and age you can extensively test a business model on the internet for very little money upfront. Launch a product/service/prototype, target and cultivate an audience, start securing transactions and grow organically into a tested and proven business without acquiring outside investors. Once you have a proven model, you can dictate your terms with investors who want in. Or you can keep growing organically and make the business a ‘cash cow.’

As an angel investor myself, I know how rigorous my due-diligence is and the extensive degree of control I will need to hand over my cash. But as an entrepreneur, my objective is to always build the business with NO outside investors. Ironic isn’t it? It’s also a clue.

Q: When considering a new business, what do you find is a “deal breaker?”

DH: Lack of integrity, trustworthiness and weak character of the leader/entrepreneur will ALWAYS send me running in the opposite direction. As an investor you bet on the person, not the business plan. When a chink in the character armor is revealed, all bets are off. Investors pay a high price when they focus on the ‘hot’ deal and not the clammy dealer. They lose every time. Experienced investors always bet on the jockey, not the horse!

Q: Do most angel investors want to invest in a project close to home? Why?

DH: Yes they do! It is easier for them to protect their investment, i.e. be in your face all the time, when you are in close proximity. Like I said, grow organically and you won’t have to worry about this! There is no greater waste of time and energy than continually reporting, updating and meeting with your investors in order to satisfy their curiosity and worrisome.

Q: Besides angel investment groups, family, and friends, where do you recommend entrepreneurs look for funding?

DH: There are four ways to raise money without angel investment groups or FFFs (Friends, Family and Fools, as they are called).
1. Customers – Get out and sell something! Start selling what you have before you pour a bunch of money into perfecting it. Grow on revenue.
2. Employees – Every employee should produce at least 4x the cost of their employment. Get them producing to the 4X standard and you’ll multiply your revenue (essentially free) exponentially.
3. Vendors – Those who have a vested interest in seeing you succeed may possess ‘angelic’ qualities themselves. They might even be willing to float you some cash to open what will be a valuable sales pipeline for them.
4. Contracts – Factor your contracts as cash. This is based on doing point #1 well. Sales solves a lot of money problems. If you can prove people are buying what you’ve got to sell, the money floodgates will open up.

Have a burning question yourself? What have you always wanted to know about money, entrepreneurism, leadership, management, sales, motivation, etc? Use the comment box below to submit your questions for my next Q&A blog post.