Last week, Greg Cangialosi and Sean McElroy of Baltimore Angels walked through how their investment group have quickly become the leading resource for angel capital investment and entrepreneurial mentorship in Greater Baltimore. Earlier this year, I had the opportunity to present to Baltimore Angels some thoughts on what made some angel investments successful and others not.

The Founders’ Cortex. With few exceptions, startups are cash starved, so when they meet investors, they’re parsing their thoughts carefully but passionately. And there’s a profound difference between what they want you to think is going on, what they believe is going on, and, in fact, what’s really going on. While many early stage entrepreneurs struggle to admit it, the picture is incomplete, lacking in some critical areas, whether it be product, customer, team, or competition. While such a partial picture is expected in a startup, the challenge for any investor is deciding whether there is enough “there there” to invest. What matters most is whether the capital being raised is adequate to reach next funding milestone. Investors often rely on the entrepreneur for that insight. Therein lies the rub.

Stuck Together. Most early stage entrepreneurs are charismatic, passionate about their product, compelling in their vision of the market. But what’s critical to making a successful investment is appreciating the shared goal of getting to the next round of funding. Otherwise, no matter how promising the technology, how great the market opportunity, your investment is worthless. It doesn’t matter how clever, one sided or controlling the terms of your investment documents are: a cash starved carcass is still a carcass. The reality is that it’s very hard to fund a work in process and almost impossible to fund a company where milestones from the prior funding round haven’t been met.

Mind the Gap. Once an investor is past the diligence and ready to invest, the critical decision remains: to figure out what’s important to the next money in. The answer varies dramatically by market, model and stage, and can be driven by beta customers, or channel partners, from coverage in several sectors, to some semblance of a sustainable pricing strategy. To fund a company without understanding what will attract the next stage of capital is a critical flaw with many early stage investments. To answer this question enables the entrepreneur (who when cornered, will take almost any money on any terms) and the early stage investor group to ensure enough money is raised now to bridge the gap to the next financing. This requires understanding the tension between taking what’s offered and finding what’s required. Such a frank discussion and shared commitment to raise adequate capital reduces the risk of successive note rounds, which are little more than temporary fixes for capital shortfalls. Equally importantly, an adequately capitalized company enables founders to get past perennially raising seed capital and execute on what is needed to get to the next set of funding milestones. This also requires the lead angel to embrace what their role in the financing really is – not to be a high profile but passive beacon for other potential investors, but to ensure enough is raised to bridge the funding gap to the next round of investment.

Originally published in Baltimore City BizList.