What Angel Investors Want to Hear vs What is Best for the Startup?

We looked at a company who had been more or less steady-state for several years but wanted an infusion of cash. They were operating in two smaller markets without fully capturing either of the two smaller, midwest cities, but were coming to investors asking for additional funds.

The business was a local service company, where you needed local people as gig workers for a niche of brick and mortal companies. Like Lyft, Uber, Door Dash, and other “gig economy” businesses, a local person signs up, gets notified of a potential job, and they would accept the job and do it.

This business was run by one guy and generating a modest salary. But it was one person who was signing up local businesses, answering the emails from the gig workers, managing the business. It was not generating enough cash to hire a staff, and there was just too much work for one guy. He was hustling and working hard, but running on a relentless treadmill.

So, he was raising more investment money.

The entrepreneur had a lot of things to show for his effort. He was successful at selling to the brick and mortal companies, who saw the value of the gig workers, and he was successful at finding gig workers who were exceptional at their gigs.

Two markets, but barely making a dent.

The entrepreneur was in two small markets – two relatively small midwest cities that are big enough for gig workers, but he acknowledged that the business was touching 1-2% of the potential for each market.

There was so much more meat on that bone.

A franchise model in the making.

This business has all the hallmarks of a franchise business. It is geographically constrained, since it services small, local, brick and mortar businesses. None of the locations overlap and are independent of each other.

Once the sales process to the brick and mortal companies is honed and tuned, it works over and over.

The onboarding process for the gig workers took a while to develop, but the company knows who to target and knows which gig workers are the best.

It should be an excellent rinse and repeat “franchise” business that has a well-defined playbook that gets executed over and over.

The angel investment community demands the wrong thing.

What I saw in this business was an abundance of opportunity. The entrepreneur showed the value of the business by running it for the last couple years. The brick and mortal businesses he serviced improved their bottom line. The gig workers enjoyed the extra paycheck, and it was truly enjoyable experience for them. Oh, and the consumers who used it paid handsomely and paid over and over.

The entrepreneur was in a trap, and the investment community did not see it.

The trap was that the lone entrepreneur had expanded quickly and appeared to be overwhelmed. Multiple cites meant he could not have boots on the ground all the time, so things may not have had the attention they deserved. The lack of revenue from each of the smaller cities did not allow him to hire local, full time managers to run the business.

Then, the entrepreneur was trapped by the messaging that the angel group wanted to hear.

The correct thing for this entrepreneur to do would be to invest in the existing, smaller cities. The entrepreneur needed to get each of the smaller markets to print enough money to support a full time local manager and one or two local sales people. At that point, each location would be paying their own way.

The correct thing would be to tune and hone the business in the smaller markets and get them to perform.

The correct thing would be to invest the time to build a playbook for opening and running another location. This would include the marketing materials, back end management systems, customer service, gig worker recruitment, and so forth.

With a “franchise playbook” in hand, the entrepreneur would then be ready and able to launch in dozens of similar sized cites, or even go for big metropolitan areas. However, he did not appear to have that playbook figured out and executing – yet.

Expanding to a dozen cities when you are not ready.

What is best for the company? In my mind, the company needs an investment in the existing locations to get them running closer to their potential. The business is not a high-flying AI-based business with huge scale potential, but it is a convenient, comfortable, reliable, and valuable part of what makes a local economy work.

What do the angel investors want to hear? Angel investors are told that they need to see 10X returns and huge scale. Their messaging is to go big and be “audacious.”

Consequently, the entrepreneur needs to have something bold to pitch.

Rather than stating that he needs to become more efficient and profitable in the existing smaller cites, the entrepreneur comes out of the gate telling investors that they are going to expand to a dozen other cites.

The expansion plan is a good sales pitch to investors, but is it good for his business? I would argue that the entrepreneur needs to get the existing cites to profitability before expanding.

The angel investor messaging got in the way of a comfortable, meaningful business.

The angel investors need to hear “growth” and “expansion.” They need something to justify a 100X potential return on their money.

The entrepreneur did not appear to me to be ready for expansion, with all the travel, upheaval, chaos, and stress that it may involve. However, he seemed to be pitching what the angel investors “needed” to hear.

My worry is not that he fails to get the angel money slated for expansion, but that he does get it and is forced to expand too much and too fast.

Angel investors may have missed a huge opportunity.

These kinds of businesses should be where angel investors make their mark. Sadly, I wonder it that will happen.

This startup may never be a huge billion-dollar exit with 100X returns, but it could easily be one that employs thousands of gig workers, benefits hundreds of local brick and mortal businesses, and provides a meaningful, useful service to maybe hundreds of thousands of consumers. It is not a high-flying, sexy business, but it can touch lots of people.

These kind of businesses are where angel investors should be thriving. The key here is not just providing capital, but providing advice. The entrepreneur is working alone, fighting the daily battles for sales, marketing, operations, and is exhausted.

An angel investor who has run businesses with multiple locations, has some background in marketing or sales, or just wants to give back would be perfect for this entrepreneur. The investment of time can be every bit as meaningful – if not more – than the dollars invested.

This business will never be a 100X unicorn acquisition, but it will be a thriving part of a local community. An experienced mentor would be the best contribution that an angel group could offer this entrepreneur.

It would be a shame that a hard-working, thoughtful entrepreneur would be forced to go to an angel group needing one thing (mentorship, advisors) and getting money instead.