Oct 132014

Dr. Earl R. Smith II


Have you ever done a favor for someone only to find out that you did them no favor? What to they say about the road to hell? Oh yes – that it is paved with good intentions.


About a quarter of my work is with companies that have been funded by angel investors. During the first couple of months of any engagement, I work to identify the underlying causes of the condition that the company is in. It is rare that I am called to help with a company that is hitting its projections and generating a return for the investors. Most often, the return is slim or non-existent and the investors are beginning to run out of both patience and any interest in sending good money after bad.

In reviewing a number of management teams from this kind of company within the last several months, I have noticed a tendency – particularly among the CEO – to dismiss or heavily devalue the support and advice that they have been receiving – particularly from the angel investors. That got me to thinking about the dynamics that drove these situations.

In a prior life, I built a company that financed feature films for major US studios. One of the most famous characters in that industry was Jack Warner of Warner Brothers. The stories about him and his approach to business are legion. One of the things that he said stuck with me all these years – “a verbal agreement is not worth the paper it is printed on.”

Mostly out of good faith and intentions, angel investors attempt to mentor the young CEOs that they have invested in. It is hard to fault their motivation. Part of being an angel investor is ‘giving back’ to the next generation. Most angels are experienced and successful business leaders in their own right. However, what is it that they say about the road to hell? It is paved with good intentions!

The CEOs that I interviewed all had an easy sense of entitlement. Of course, the investor would spend hour upon hour working with them. Of course, there would be no fee for that time spent. Of course, the investor would write the next check after the company – most often because of the failure of management to deliver results – was on the verge of running out of money.

Psychologists call this behavior ‘enabling failure’. That reminded of a criticism often leveled at the Nuevo Riche – that they know ‘the price of everything and the value of nothing’. The perverse restructuring of this saying was ‘nothing should cost anything because I am worth everything’.

When the companies developed needed to bring in ‘experts’ to help them move to the next level, each of the CEOs had responded in the same way. They asked ‘how can I get the help I need without paying anything for it – and, if I do need to pay for it, how do I get the investor to foot the bill’? As a result, they ended up hiring ‘con artists’ instead of experienced consultants. They entered into loosely structured agreements without detailed performance metrics. In other words, they did not know how to engage professionally. In other words, they replicated the relationship they had with the investors!

My first review session with angel investors – after finding these kinds of tendencies – begins with an insistence that they force management to pay for all the support they receive – including support from the investors. Frankly, most cannot being themselves to do this – and the results are predictable.

The only way to make sure that a CEO learns how to evaluate support is to force them to make a cost-benefit calculation every time they engage. It may feel good to ‘help the kids along’. However, my recommendation to angel investors is to limit that approach to your own grandchildren. Force the CEO to choose between the money in the bank and paying for the support he needs. Help him learn that what is received without payment is very often inadequate to the problems he faces. He may not thank you right away – but the lessons learned will become very valuable if the company actually begins to grow into a going business.

Tough love now makes for easier times later.

© Dr. Earl R. Smith II

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