Over the course of this week I’ve come across some great articles and blog posts that should be required reading for any entrepreneur looking for funding—including those that have done it before. Starting with The Entrepreneurs Report from the law firm Wilson Sonsini Goodrich & Rosati (WSGR) there are two articles from outside contributors on Perfecting Your Pitch and How Do I Get Meetings with Investors. For the first piece you can pretty much substitute ‘Angel’ for ‘VC’ and it’s right on the money with respect to the Pasadena Angels. One word of caution, however, when reading the WSGR report, try not to dwell on the VC financing trends. The good news in all this is that although Angel and VC financings are down, there are still good companies getting funded as we speak.

A couple of other good posts/videos that I’d highly recommend are Tony Tjan’s the Great Entrepreneur’s Secret and 10 Things to Know Before You Pitch a VC for Money by David Rose which do a good job of covering the intangibles we look for in entrepreneurs and pitches.

Most company founders accept the fact that they will sell their business sometime, usually in the distant future when outside investors expect an exit. For many family businesses, the founders anticipate passing the business down to children while others plan to sell it to their managers and employees. However, there are some very good reasons why selling out now might be a better option.

Firstly, consider the risk of the business getting into difficulty and being forced to sell out and receiving much less than what the business is worth right now. Can it happen to your company – certainly! The rate of failure of early stage ventures is quite high, estimated to be around 50% in the first 6 years. Even older businesses still have a 2% failure rate. If large businesses like Enron, Worldcom, Arthur Anderson, Bear Stearns and other large well established corporations can go under, what makes you think you cannot?

If you were like me, then you may have the greater part of your wealth tied up in your business. When my business started making losses during a recession, I recognized that it could easily be sold out from under me and I would end with very little for the risks I had taken, the low salary I had received for many years during the early stages and the long hours I had put in. Sometimes you need to capture the wealth in your business so that you get the rewards for those efforts. If you are any good at what you do, you can always start another one or buy a small business and develop it and make the money all over again.

Then consider whether your business is the best place for your hard earned wealth. Even if you are taking $200,000 a year out of it in income, what could you sell it for and continue working? Say you could get $2 million after tax for your business and you could continue working as an employee for $80,000. While you are worse off by, say, $70,000 net, you would need to keep your business for another 20 years to be as well off. But of course you now have $2 million to put away in the bank and a way to provide a more  secure future for yourself and your family.

Family businesses have their own dynamics but few founders fail to educate their children to be better educated than themselves. Thus their children end up being dentists, doctors, lawyers and so on. Many don’t wish to go into the business of their parents or want to go into a new technology business, a very different proposition to the old technology business of the parents. The founder should seriously think of selling out all or part of the original business in order to create an investment fund for new business ventures which tap into the passions of the next generation.

Successful entrepreneurs are capable of developing several ventures throughout their working lives. No doubt some will be more successful than others. Seriously consider whether it is time to take some money off the table from your current venture and then have a go at the next one. In this way you will have put some wealth aside for your future and taken considerable risk out of your life. You might even find that the next one is much more successful than your current one.

By now everyone has seen the infamous Sequoia presentation, R.I.P. Good Times. From what I can tell traveling around the US and overseas, it looks like these slides have circulated faster than the Paris Hilton video (sorry, no link on this last one–you’ll have to find it yourself). If you’ve already seen the presentation, there’s a good post worth checking out from Silicon Alley Insider that provides a few more details on what was discussed at the all-hands Sequoia meeting.

There’s also a good post from last week by Jason Calcanis of Mahalo, What to do if your Startup is About to Fail. Although it’s vintage tell-it-like-it-is Calcanis and a little disparaging of investors (VCs), it provides some further thoughts and granularity for dealing with the current tough times.  Although Jason’s been in the news this week for not fully vetting a prospective employee and accidentally hiring a felon, don’t discount the worthiness of his advice. Even though we may not agree with his explanation and apology for this recent mis-step, I can vouch for the quality of his advice having been on the other side of the table in a number of startups.

Part III of a Continuing Series on How to Select an Angel Group

Imagine going to a VC or bank and receiving a bill for a few thousand dollars for your first meeting. Imagine also that the requests for payment only get worse the further into their funding process you go. By now you’ve probably figured out that I’m making this up. However, there are Angel groups that operate in a somewhat similar manner.

Here on the west coast there are angel groups that charge $3000+ for the ‘opportunity’ to present your company to them. These organizations are sometimes based on a franchise model and try to extract money from entrepreneurs any way they can. I’ve heard all the excuses from these groups, including that they have to charge entrepreneurs to cover their management expenses. Reputable Angel organizations typically cover their management expenses out of their own pockets and don’t ask struggling company founders to shoulder that burden. In reality the best Angels make money the old fashioned way—working with entrepreneurs to generate investment returns upon exit.

There are a couple of exceptions to this that are worth mentioning. Some reputable Angel organizations charge a nominal fee (~$50-100) to submit a funding application. The intent here is not to use this as a money making opportunity, but to provide a filter or sincerity test for the entrepreneur and to reduce the number of poor and incomplete business plans (aka junk) that get submitted. Secondly—and this applies to the vast majority of Angel groups and VCs—companies receiving funding (and only when that happens) will be asked to cover the investor’s legal expenses (~$15-20k) with the proceeds at the time of closing.

The Angel Capital Association (ACA) has some good guidelines about this on their website. They also “recommend that angel groups charge entrepreneurs no more than nominal fees for applying for and/or making presentations for angel capital and that all fees are fully disclosed, ideally appearing on the group’s Web site.” Out of 82 groups they also mention that two thirds of all Angel groups don’t charge any fees. Since starting in 2000, the Pasadena Angels has never charged companies fees for anything short of closing (applying, presenting, mentoring, etc.) and we’re proud to state this on our homepage.