Don’t Benchmark This!

I have a friend. Let’s call him Val (of course not his real name, but go with me here). Val had a brilliant idea and a business plan to turn that idea into millions. He was turned on to an angel investor by a mutual acquaintance of ours, and the angel investor, supposedly wise to the ways of how things are done, carried out due diligence and structuring to supposedly (there’s that word again) come up with a solid relationship between himself and my friend.

But it wasn’t. What happened in the following year made Val a poster child for all that can go wrong between an angel investor and his entrepreneur. In this case, the setup between the investor and Val went wrong for two very obvious, but seemingly opposing, reasons: the angel investor was too chummy with my friend, but not close enough in the business sense to know that Val was botching the whole business up.

Let me explain. Val’s business plan involved him moving to India. (I’m still under nondisclosure, so that’s as many details as I’ll give!). Fashioning himself an adventure capitalist, the angel investor decided he wanted to go to India for three months to provide mentorship and management oversight. Three months turned into six, then 12. Yet not for business reasons that made sense!

From what I gather, the angel investor was so in close with Val, Val didn’t even have the time to follow his business plan and develop the enterprise as planned.

Now onto the second problem. As Val and business went off track in India, the rest of the investment team back in the States were clueless. That’s because the angel investor from the get-go had not properly designed a way to measure, or benchmark, Val’s success. Like I said, I don’t know all of the details (and even if I did, I couldn’t share them).

But maybe it was that the angel investing team was measuring revenues and not profit margin enough. Or perhaps the angel investor team used a one-size-fits-all approach to their benchmarks–and being that Val’s business model was unique, shouldn’t his metrics have been unique to match them?

THE LESSONS?

For all you angel investors out there, perhaps the message is not to move to a foreign country with your entrepreneur. But I think the bigger morale of the story here isn’t to avoid direct supervision of your startup investment. I think the lesson to learn is all about how you supervise.

In other words, be smart about the benchmarks for your entrepreneur. Set them up right at the start of your deal, watch them, and change them if needs be as the business grows. Case in point–Val’s business never grew!

Metrics are all about each individual startup. They can vary by industry and by business plan. You need to know what will drive the success of this particular new business, and how you can measure to make sure that “what” is happening. That what could involve cash on hand, income, burn rate, customers, revenues … like I said, it can vary investment to investment.

Then there’s the question of how often to be measuring that what! Unlike Val’s investor, every day checkups might not be conducive to success. Weekly, monthly, perhaps even quarterly reporting systems might work in a given situation. Then guess what? You’ll also need to have a system in place for when those benchmarks are not met.

In Val’s case, after a year of failure, the angel investor in India finally was convinced by his team back home to take a hard stand with my friend. He did not handle it well. A blowup ensured, the angel investor flew back to the States, and Val’s business imploded not too long after.

Don’t want to turn out like Val’s investor? Without getting into too many details of their failure–which I can’t do, remember?–let me just say the best angel investors learn how to set up metrics and benchmarking. They learn from networking with other investors at sites like Venture Hype, from reading and doing their homework, from experience.