At ACG Conference, Cohen Reiterates: It’s All about the Exit

New York Angels  Chairman Brian Cohen gave the keynote at a conference on April 20 called “The Future is Now: Large Corporate Connects with Early-Stage Innovators,” presented by ACG New Jersey and hosted by Gibbons, a Newark law firm.

Cohen was introduced by Katherine O’Neill, executive director of Jumpstart New Jersey Angel Network (New Brunswick). He then told the audience that he’s a very lucky person. “For close to 40 years, I’ve been in a position to work with extraordinary young people within a world of innovation. What could be better than that?”

Noting that his platform is the New York Angels, Cohen said, “There are 120 of us at the New York Angels, who are incredibly active, and we’ll finish this quarter having invested almost $4.5 million, which is extraordinary!”

He added that anyone can write a check, but “the thing that matters most is that we’re not in the investment business … we’re in the exiting business. And, unfortunately, not everyone knows that.”

Throughout his talk Cohen compared investing to having sex, and he said that most accelerators and incubators are “just masturbators” in that they don’t produce companies that eventually take off.

He also said that he disliked the concept of the early-stage fund/accelerator 500 Startups, which sprinkles a little bit of capital on a lot of startups to see which will emerge as successful companies. “Luck is certainly part of the equation when success is going to be the end result. But you create your own luck. You don’t just spray and pray.” It takes between six and ten years to get to the exit, he said.

Addressing future angel investors, he noted that there is a big difference between professionals and amateurs. It’s an amusing sport, he said, but the statistics are clear. Angel investing is a “serious loser’s game.” When people ask Cohen why he invests, he tells them, “I do it to make lots of money. … It’s a rain forest. If we don’t make money, there is no money to be invested later.”

So, he advised, “Do it to make money. Yes, you can have fun and enjoy it, and there’s even that sense of giving back. But make the first decision a good one: that it’s about making money.”

Many angels regret their decisions to invest. “And there are many reasons why. Usually it’s because of a lack of quality due diligence” (which he compared to unprotected sex). Due diligence is directly related to a better investment, he said. “Don’t be a lone angel. Join an angel group where … your friends, associates and colleagues can offer you their insight and tell you what they think.”

Cohen believes that the industry coddles entrepreneurs, and he advised investors to stop doing that and to ask hard questions, instead. “Make them realize they are professionals.”

“We live in this crazy world of entrepreneurship. Every kid thinks that they have to go out and raise money. … I do believe in bootstrapping to a point. Money is a valuable tool. It’s the energy by which a company functions. But it has gotten out of control!”

Talking about exiting, Cohen noted that if you take angel money, the chances of making an exit are “profoundly better than if you take VC money.”

He noted that “Once you take VC money, their business model forces them to try to keep you in business, to try to make you get bigger and bigger. But, as we all know, the bigger your company, the more decisions that have to be made at the company that is acquiring them, and the more money it is going to cost them.” Also, as you grow, there can be more competition in the marketplace to confuse the buyer. That’s why “we [angels] all love and worship opportunities for early exits.”

The conference focused on the relationship between startups and corporations. According to Cohen, IBM, a company he had counseled for over 14 years, has been trying to secure its future by acquiring startups. “The point I am making is that acquisition doesn’t always work.”

Angels, VCs and corporations all live in the same world, he said. “We all try to spot success.” Big corporations try to spot and then incorporate success. All of these investors have a fear of losing out, and they all want to take big chances.” For corporations, it’s particularly important because there is not a lot of R&D they can do. It’s too expensive, he said.

“Many companies are doing acqui-hires.” They go out and bring on companies disguised as acquisitions, when they really just want the talent. “We just had a company that should have been a 10X exit. But they offered the founders millions of dollars as a bonus package to join the company. And they said to the shareholders ‘We’ll give you a few dollars.” And we lost out. That’s happening more and more.”

There’s a difference between corporate VCs and other VCs, he added. While they both want to go out and find the right companies, corporate VCs make a salary. Their motivation is different from the VC who lives on the payoff from the risk that he takes. He added that corporate VCs often don’t stay around in their positions very long, as they really want to be out in the real world.

To the entrepreneurs in the room, he  pointed out the risk of  aligning with a corporation. “If you don’t have a corporate champion in the corporation, it ends up going nowhere. There has to be a commitment and an understanding from the corporation.” Sometimes the idea of “not invented here” gets in the way of the egos at companies, he said.