Invested Investor Thoughts: Co-Invest As You Would Cohabit
This article is a short insight in to Peter Cowley's thoughts on co-investing from an investor and entrepreneur point of view, which will form part of The Invested Investor book. Let us know your thoughts by emailing firstname.lastname@example.org.
As an invested investor, you need to be selective about who you invest with, not only because you need to feel confident that they’ll stick with the company and follow on as the founders get their venture off the ground, but also because you will be working closely with them on helping the company to succeed. Entrepreneurs, too, need to be choosy about their investors – there’s nothing worse than taking an investment because the company is desperate for the money and then finding that it brings all sorts of problems with it – in other words, it’s potentially toxic to the company.
I would absolutely advocate investing alongside other angels, it spreads the risk and brings diverse skills and expertise to the table – complementing your own experience and, hopefully, giving the founders that extra chance of success. I always co-invest, although in my 65+ investments, I have never co-invested with an identical group of angels.
Early funding may come from family and friends, which brings its own obligations and responsibilities, not least because it might be someone’s savings, or their ‘rainy day’ money. Joining a family and friends round, when you are neither, makes you the third F of FFF – possibly unfairly called “Fools”. But they are also much less likely to do the kind of due diligence that might shed light on issues that need to be addressed before they become detrimental to the company. From my experience, FFF are particularly insensitive on valuation (wanting the founders to keep as much of the company as possible), meaning that later rounds may be a down-round, which is painful for all.
Although not related to co-investing, the entrepreneurs are selling shares in their business and the angels are buying them, so it’s a sales exercise, with the angels gathering information as part of due diligence, and the entrepreneurs providing what they want to share that they hope will close the deal. When both sides are comfortable with not only the information but also the working relationship that has developed, the legal documents are drawn up, the round closes and the money is transferred, and then the entrepreneur must start to deliver.