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by Martha Lagace, Staff Writer, HBS Working Knowledge
"This is a story of gloom, ladies and gentlemen," cautioned veteran angel Bert W.M. Twaalfhoven, as he stepped up to the podium to tell his tale at the Angel/Entrepreneur Conference.
As one of two expert commentators at the session on "The Fundamentals of Angel Investing," Twaalfhoven (HBS MBA '54), who founded Indivers B.V., the majority shareholder in worldwide manufacturer Interturbine Group, wore a brave yet bemused grin as he recounted his own lifetime of adventures in sometimes-hostile angel territory.
"I still make mistakes," he pointed out.
One of Europe's best-known and most prolific champions of entrepreneurs, and a founder of the European Foundation for Entrepreneurship Research, Twaalfhoven announced cheerfully to the conference audience that of the 50 companies he's started in 10 different countries, 17 turned out to be utter failures. ("I lost 55 million dollars on that. Of course, I made a little bit more.") He told the audience that he was spared major losses in "the techno game" because he had been short of cash until October 2000.
Presenting research results based on his own experience as well as on 50 other startups he and a team have studied in both the U.S. and Europe, Twaalfhoven shared some general conclusions he's been able to draw about the life cycle of angel investments.
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| Failure is the basis of success. | |
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| —Bert W.M. Twaalfhoven |
"Don't laugh," Twaalfhoven said, before announcing that he usually banks on 60 months of toil before his own losses even begin to be recouped. Such a time period is not remarkable, but rather "the average experience" of the venture capital investee companies studied in Holland, Germany, Belgium, Boston, and Chicago, he told the audience.
"I'm awfully sorry," he said. "... After three years, you're at the bottom of the pit."
Twaalfhoven's advice for entrepreneurs vis a vis their angels: Make a competition analysis. Make your business plan by month, by quarter, by year. Make a negative business plan—a worst-case scenario—and show it to your angel investor or your venture capitalist. (Twaalfhoven did amend this advice later in the discussion. If you're too scared to tell your angel or venture capitalist your worst-case scenario, he suggested, then at least admit its potential to yourself: particularly, he said, if your family has put up money. That's assuming, he added, that "you want to stay a member of the family".) Share and outsource your risk. Control your costs monthly. And finally, never give up.
"Be realistic and optimistic," Twaalfhoven concluded with a smile. "Failure is the basis of success."
Seven steps
Twaalfhoven's remarks were preceded by those of his younger colleague, David Amis, who in his career to date has already been both an entrepreneur and an investor.
Amis, a founder of early-stage investment firm Capitalyst, told the audience about a systematic approach to angel investing that he and HBS professor Howard H. Stevenson have devised and outlined in their new book, Winning Angels: The Seven Fundamentals of Early Stage Investing (Financial Times Management, 2001). For anyone who might imagine that there is no science to angel investing, and that it is all based on guesswork and gut instinct, Amis pointed out, there are indeed some basic fundamentals to the game. The seven elements of angel investing—sourcing, evaluation, valuation, structuring, negotiation, support, and harvesting—can be learned and mastered by anyone, he said.
In its advice to savvy angels, Amis added, Winning Angels does not neglect a much-overlooked art form: the art of rejection. Saying "no" to an entrepreneur who may already be confronting a losing streak is another important skill that deserves further practice. There are three rules of rejection, Amis told the group, aiming his remarks at the angels in the room: Do it early. Separate the personal from the business. And always provide leads and advice to the entrepreneur, despite the rejection.
As an entrepreneur himself, said Amis, he'd once received a rejection from an angel which was so warm that, rather than discouraging him, it had sent him off on a cloud. The magic words? "Dave, I know you are going to get a big win and I want to be part of it ... But I don't think this is it."
Winning angels come in all shapes and sizes, Amis concluded. "There really is a lot of structure to this and there are many ways to be successful," he stressed.
Quoting a colleague of his, Amis ended with one final tip that perhaps merits universal application. "It's okay to be stupid," he said. "Just don't be ignorant."
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