Martin Zwilling – On Becoming an Angel Investor

If you are interested in becoming an Angel Investor, you are going to love this interview. Today we interview Martin Zwilling, a well known angel investor and adviser to startups. He’ll be talking with us about what is takes to become an Angel Investor.

[Marco] Martin, thank you for taking the time to do this interview with us. Let me start by asking, can you tell us a little about yourself and what you do?

[Martin] I’m a partially retired businessman, with past careers in big companies (like IBM), Silicon Valley startups (software), and years of consulting, now in the “give back” stage of my life, where I’m all about helping entrepreneurs and startups. I’m on the Advisory Board of several startups, work with a couple of local universities and startup incubators, and invest in a few high-tech startups as well.

[Marco] Your Linkedin profile shows that you have had an impressive career working various positions at large companies. Can you tell us about that and how it shaped your decision to become an angel investor and mentor?

[Martin] During my career at IBM, I was lucky enough to be on the team that developed and sold the IBM Personal Computer, which gave me the opportunity to work with Bill Gates and several other major players in the entrepreneur world. It was there I caught the bug to be an entrepreneur, and there I realized that entrepreneurs didn’t have access to all the business experience and training that I had. Since then I have enjoyed mentoring entrepreneurs, and was intrigued enough to invest in a few as well. Unfortunately, I was never smart enough to put my money into any big winners, like Microsoft or Google. But I have learned a lot from every one I’ve worked with.

[Marco] Let’s say that a person wanted to become an angel investor. Assume that they have had a successful corporate or entrepreneurial career, has some money to lose (let’s be realistic), and wants to invest in startups. How should they go about it? Where should they start?

[Martin] I recommend joining a group of Angel investors, which exist all over the country, like the Arizona Technology Investor Forum (ATIF) where I live. You can find thousands of these on Gust.com  or AngelList. These give you some support and process for finding the right investment opportunities. Just don’t forget that investing in startups is more risky than investing in commodities, you don’t get any return for at least five years, and you can’t sell the stock even if you lose interest or see them going the wrong way.

[Marco] On the subject of aspiring angel investors. Are there any books you recommend? Not that angels can be trained by reading books…

Of course, I have to recommend a book on investing that I wrote with friend Joe Bockerstette, “Attracting An Angel : How to Get Money From Business Angels and Why Most Entrepreneurs Don’t.” This was written primarily to help entrepreneurs prepare for Angel investors, but it works just as well to help aspiring Angels know what to look for and what to expect.

[Marco] What is the biggest investment mistake, or mistakes, that beginning angel investors tend to make?

[Martin] The biggest mistake we all make is to invest too much from our heart, and not enough from the facts. Maybe the cause is great, but the business case or the people are not so outstanding. Another thing I always recommend is to get to know the startup team face-to-face, to make sure the culture and chemistry are consistent with your own. You should approach every investment opportunity like finding a spouse – the relationship is very important, and it must be a win-win non-contentious deal from the very beginning.

[Marco] May we ask, when you were starting as an angel, did you make any investments that came back to haunt you?

[Martin] Like most Angel investors I know, I’ve lost on more investments than I have gained. Most Angel investors do it more to help entrepreneurs through knowledge and experience sharing, rather than any real expectation of making a lot of money. Of course we all hope to hit the big one some day. Yet none of my investments really came back to haunt me, because I didn’t risk my home or max out any credit cards (like entrepreneurs do). My gain is the tremendous satisfaction I have received from seeing entrepreneurs grow and succeed.

I believe strongly in the old adage, “Investors invest in people, not ideas.” There are thousands of ideas out there, but only a few Founders and teams that can execute. I look for teams who have experience in the business domain they are attacking, and experience in building a startup before. Notice I didn’t say “success,” since often you can learn more from failure than from success. Then I look for the best plan – written down, with all the right focus on problem, solution, opportunity, competition, marketing, and financials. The rest is in my book, mentioned earlier.

[Marco] What things would cause you to not want to invest in a startup? Aside from large issues, are there any problems that may appear subtle at first glance, but that in reality are serious red flags?

[Martin] I wouldn’t invest if the chemistry and culture of the startup team doesn’t seem compatible with mine, no matter if all the business indicators look positive. After mentoring and writing for many years, I have accumulated a host of other red flags, but none of us are perfect, so I try to look at the whole package, to see if weaknesses are balanced by other strengths. Another value of an investor group or set of associates is that you get a different perspective from different people. Others will see subtle things you don’t, and if other people I trust are not comfortable, I will probably decline to invest.

[Marco] As an angel investor, how much time do you spend advising startups? What type of advice do you provide them?

[Martin] I spend most of my time advising startups on how to prepare for approaching Angels and VCs for funding. I help them put their story together is the most positive way for appealing to investors, rules of thumb for financials, competitive analysis, and other common business considerations. For example, entrepreneurs often forget that they are not selling their product to investors, they are selling their business. Thus the “product pitch” is not the same as the “investor pitch.”

[Marco] From an entrepreneurs perspective – what is the biggest single thing that you can do to improve your chances of getting angel funding?

[Martin] Usually the financial projections (revenue, cost, margin, cashflow) are one of the first things that Angels look for, and one of the last that entrepreneurs work on or even think about. You need to show a rate of growth, cost structure, and margin that make a large return (10x) possible in five years. We don’t expect you to precisely make these numbers, but the numbers better make sense, be defensible from the opportunity, and show a level of conviction and commitment. If you don’t know where you are going financially, don’t expect any investors to pay your way.

[Marco] In your opinion, are there any types of entrepreneurs (or businesses) who would do better staying clear from Angel investments?

[Martin] Any services-only company (like marketing or consulting) is not likely to win any investment, since they shouldn’t need one (no product needed for scale-up). Also Angels like squeaky-clean entrepreneurs and business areas, so gambling sites, porn sites, or products that have some ethical implications need not apply. In general, I advise entrepreneurs to look hard at “bootstrapping,” since this is the only approach that allows you to have full control of your destiny (no bosses).

[Marco] Lastly, we see a lot of young folks – those in college and in their twenties – trying to become entrepreneurs. Do you have any specific advice you could give them?

[Martin] Young folks are often very idealistic – they forget to look at the business model, and how they will make money. You can’t change the world or cure world hunger if your “customers” have no money, or you lose money on every item you sell. In many cases, it is a good idea for them to “intern” at a startup for a while to learn the ropes, and in all cases, it helps if you can find a partner who has “been there and done that.” Finally these are the ones who can really benefit from finding a mentor, so they shouldn’t be afraid to ask.

[Marco] Martin, thank you for your time and thank you for sharing your wisdom.

martin zwilling Martin (Marty) Zwilling is the founder and CEO of Startup Professionals Inc. He has a very active blog with great articles for entrepreneurs and angel investors alike. You can connect with him via twitter @StartupPro