The Inner Compass of a Business Deal

Trading and investing are two very separate disciplines. What most people call investing, is what I call trading.

Buy low and sell high is a trader’s formula for success. It is what retailers do. They purchase a product wholesale and sell the same item to retail customers. Retailers do not actually want what they have purchased. Their sole purpose in purchasing inventory is to resell it at a later date.

Similarly, if you invest in real estate for the purpose of capital gains; then you are gambling with your own asset–with that roof that covers your head. If you purchased a property with the purpose to reside there, then it doesn’t quite matter what the valuation of the property is and if the price goes up or down.

If, on the other hand, you were to invest in a property and give it out for rent; then that property would be an investment as it generates cash flow or passive income.

Before you invest in any asset, it is important to know why you have decided to invest in that particular asset. Is it to generate cash flow or chase after capital gains? If you decide to do the latter; you must know that you are a trader.

As an angel investor, I do not–and have never–walked into a business with the intention of selling it. Angel investing is about creating and building sustainable businesses that contribute to society.

When you’re looking for seed capital or funding, it is important to consider the inner compass that is motivating the source of that funding. In addition to your own personal income and savings; there are alternative sources of financing available to budding entrepreneurs. From bank loans to government grants to angel investors to venture capitalists to crowd sourcing.

At the end of the day, money is money. Money is a neutral force that is neither good nor bad. Understanding the ‘inner compass’ behind the source of that seed funding will allow entrepreneurs to understand what they are giving up to allow something new to come into their lives.

The Angel Investor

Angel investors tend to place a higher priority in a startup’s ideas and/or team than its immediate potential for profit.

In my experience, angel investors are former entrepreneurs or individuals with extensive business experience who got into angel investing for idealistic reasons of what business could be; as opposed to what business simply is.

My own personal motivations went beyond pure monetary gains. I wanted to invest in businesses–and entrepreneurs–I actually believed in. One of the reasons why so many businesses out there fail is because of all the ‘mistakes’ that entrepreneurs make on their journey. Some of those ‘mistakes’ are unavoidable. My job is to make sure that those mistakes do not cripple a budding enterprise. For first-time entrepreneurs, there are many challenges that money alone cannot fix. There is a knowledge and experience gap.

That is where I come in.

In addition to funding, angel investors provide feedback, advice and their personal network. The businesses I invest in are not listed on the stock exchange so there isn’t much public data for decision-making. I largely rely on referrals from trusted sources to make my investment decisions.

While I do attend investor conferences and sit through a gazillion pitches; I’ve found that referrals are a far better bet when it comes to making an investment with excellent potential. Attending pitch conferences is really no different to speed-dating where you meet an individual for a few minutes as you attempt to figure out if it will be the right relationship.

An angel investor’s role is to invest their own money in a way that enables the business to develop. To throw money at a business as though it were a magic wand that could make all its problems and pitfalls disappear would be a highly short-sighted and foolish decision. I am incredibly hands-on in all the businesses I invest in. No hiring decision takes place without my approval. There also needs to be tremendous financial discipline to not allow entrepreneurs to needlessly invest in either people or projects with no long term potential.

The Negotiation

When signing any business contract, it is imperative to take into account the motivations of the parties that are involved. Any kind of business deal is an exchange of energy between either a group of individuals or business entities.

Signing these contracts comes with certain obligations, control mechanisms and outlines what would eventuate in a scenario where there is a gain or a loss.

1. Who is bearing the brunt of the responsibility?
2. How are the risks associated with the deal shared amongst the parties involved?
3. What is the ‘inner compass’ of both parties pointing towards?

In an ideal world, both entrepreneurs and investors should strive to do what is best for the business. Similarly, in the case of an employment contract; it should be the same imperative that drives the deal forward. It is the creation of a contract that ensures mutual benefits to both the employer and the employee.

But we all know that that is not how it works in the real world.

Contracts are a complicated and messy business. The potential is always there for people to feel short-changed or cheated. Which is why I believe that in the negotiation process, it is important to take into account the agenda of the various players involved. In any contract, there are tangible and intangible reasons why people make the decisions they do.

The only way to ensure that you have made the right decision is to take stock of whether the ‘inner compass’ of the parties you’re working with is pointed in the same direction as yours.

If the answer is yes, you’re onto a winning deal. If the answer is no, it’s best to think again… and explore some other options.