Angels and venture capitalists strike out much more often than they hit home runs. Before Brian Cohen became one of Pinterest’s early investors, he bought into a business marketing insurance policies to pet owners to cover veterinary care. Cohen, now chairman of the New York Angels, has just published What Every Angel Investor Wants You to Know (McGraw-Hill (MHP), 2013), with co-author John Kador. He recently told me about the pet insurance deal and its lessons for angels and entrepreneurs. Edited excerpts follow.
This came to me through a friend. That’s always a bad signal. A personal relationship sometimes gets in the way of quality decision-making. They’re vouching for the entrepreneurs. Now the question is, is it a good idea?
They came to my home on Long Island. They had spent some money creating these little plushy toys, dogs and cats and hats and tchotchkes. It really gave the impression that they were a marketing organization with some level of thought [about] what they were going to do.
The number was about $50,000. It was so early in my life as an angel investor that I didn’t understand how important it was to ask questions regarding the use of the money.
We were funding a particular specific project, which I didn’t know at the time. Which was a … what do you call it on TV when you run those advertorials? Infomercials. I didn’t know. The guy says, “We need the money to build the business.” I say, “Great.”
It’s always good to learn from your mistakes, but it gets expensive to learn from your mistakes when you’re an angel investor. I would never make these mistakes again. At least not at the same level of stupidity or ignorance.
We gave them the money. We signed the paperwork. We said, “Gee, pet insurance. It’s working well over in Europe.” They were bright people. But it was a critical question that we just didn’t ask, which was, “How long can the money sustain you?” Generally if you’re going to properly fund a company, you should have at least a 12-month runway. We didn’t ask that question.
So your money goes in, and then all of a sudden you find out that it didn’t last that long. And then they come back to you and say, “More, please. More porridge, sir.” They called us for more money like two weeks later. We said, “What are you talking about, you need more?” They’re like, “Yeah, we spent it.”
It was two infomercials that they ran. I didn’t know that I was paying pretty much directly to run those and buying the time to do that. You’ve got to ask all these questions, or at least have protections in place so you know where the money is being spent. It was a big mistake.
That’s the way a lot of angels make investments. It looks good, sounds good. It’s one of those too-good-to-be-true [pitches]. “If we get X percentage of the people who we market to, the upside is a billion dollars.” When we look at all of the financials that are presented to us, and those are five years or even three years out, that’s a clear indication that something is amiss. All of the years that I’ve been doing this now, no one’s ever made those numbers. No one.”