Category Archives: Angel investment

My Advice to Startups Seeking Angel Investment

Angel investment

Over the weekend I was asked what advice I’d give to founders of a startup seeking angel investment. Here’s my list.

  1. First, make sure you really want angel investment. Read 10 good reasons not to seek investors for your startup. Take it to heart. If you don’t need investment, really, you are better off without it. And also, read startup sweet spot too.
  2. If you do, then next, make sure your business is a good investment. Read up on what makes a business a good investment. It’s about the team, the growth potential, ability to scale, traction, etc. Many great businesses are not good investments. Read Do you have what investors want and angel investment self assessment.
  3. Wait until you’re ready. Don’t seek investors before you have a team in place, milestones met, numbers to show, good evidence of traction and validation. Investors invest in businesses, not plans, and definitely not ideas. Sometimes they invest in people, like known startup successes with great track records; but if you were one of those, you’d know it.
  4. Know the basics. Understand the normal process. Research investors near you, interested in your industry, and target specific people and groups. Never spread cold emails all over the map.
  5. Investors  invest in your business, not your pitch. What they buy into is the business, the facts, the achievements; not the pitching. If you don’t have milestones met, progress made, concrete numbers to show, then don’t waste your time. You need an intro or profile or summary first, and then a pitch, and, if they are still interested, a business plan for due diligence. But don’t ever mistake the plan, profile, and pitch for what matters. You tell them about the business.
  6. Do a lean business plan first, before the profiles, before the pitch. It’s for you, not the investors. It’s just bullet points, milestones, metrics, and projections. You need to know how much you need, and what you’re going to spend it on, before you start. Review it and revise it. A pitch without a plan is like a movie filmed without a screenplay. Don’t sweat the big plan with all the summaries and descriptions, at least not at first. Maybe not ever. But have a plan, keep it fresh, review and revise often.

(Note: I posted this first as an answer to a Quora question.)

Top 10 Pitch Fails

Angel investment, Business Pitch

I was asked recently for a list of things that annoy me in angel investment pitches from startups. I’ve done this before, so there will be some duplication here. But here is my top 10 pitch fails list. 

  1. Profits. Talk of profits, overestimated profits, the failure to understand that investors make money on growth, not profits; startups with high growth rates are rarely profitable; profits in high-growth startups stunt growth and reduce the odds of successful exit. That’s why you need to spend other people’s money, right?
  2. “I don’t need no stinking projections.” Surprises me how often I’ve seen it. “We all know,” the pitcher says in a cynical tone, “that all those projections are useless.” And dismisses the idea, often with a wave of the hand. Or sometimes it’s a holier-than-thou tone. But no. I need you to think though unit costs, realistic volume, the conceptual links between marketing spend and volume, what it takes to fund growth. I want to know that you know, roughly, that you’re growth will take a ton of marketing spend, and that when you get to $20 million annual sales you are going to have a big payroll and overhead.
  3. Expecting me to believe your numbers. You’re damn right I want to see them, but don’t expect me to believe them. I use them to guess how well you know the nuts and bolts of your business. But at the moment of truth, I’m going to trust my instinct for what I think you can sell, and how much I think you can grow, given the stories you’ve told me and the markets you’ve carved out.
  4. Discounted cash flow. IRR and NPV. Amazing how people can believe numbers that project the future based on a compounded absurdity of assumed sales, less assumed spending, multiplied by an assumed discount rate, five years from now. And yet, I see young people crushed because I wanted something that had a lower IRR than their thing. Y’see, I didn’t believe the IRR either way. I went with the people and the market. This is actually a particularly annoying subset of the point above it.
  5. The annoying myth that nobody reads business plans. Big mistake: confusing the obsolescence of the big pompous formal use-once-and-throw-away business plan of the past with not wanting or needing planning. Ask the two faces of lean startups, Eric Ries and Steve Blank, whether startups need to set strategy, tactics, milestones, metrics, and essential projections for revenue, spending, and cash, and they’ll say the equivalent of “yes of course.” But they are (mis)quoted often as saying don’t do a business plan. What they mean – ask them – is don’t do an old fashioned business plan. Keep it lean, revise it often, and manage with it.
  6. Knowing everything. Sometimes people think investors want founders who know everything, answer each question no matter what, and are the world’s leading expert on any possible subject to come up. No. I want people who know what they don’t know, and aren’t afraid to be not certain.
  7. I don’t want people who get all defensive when challenged. The win is in the relationship, long term. I can’t tell you how many times I’ve seen private discussions between investors, after a pitch, go negative for somebody who investors feel “isn’t teachable.” It’s easier to work with people who listen, digest, than with people who think every doubt is a challenge to their leadership and authority.
  8. The small piece of a huge market. No, please, don’t ever tell me that your $10 million sales figure is realistic because it’s only one percent of a $10 billion-dollar market. Or 1/10th percent of a $10 billion market. That logic never works. Build your forecast from the units up, not from the top down.
  9. Oversharing the science or technology. I want to hear about the business, not the physics, not the biology, not the chemistry. Pitches and plans are not the right place to show off all of your knowledge.
  10. Not needing the money. If you don’t need the money then don’t seek investment. Own it yourself. Never seek outsider money you don’t really need. People who can live off of their generated cash flow are never going to exit
  11. (bonus point) Stock words and phrases like “game changer” and “disruptive.” Don’t tell us that you are either that. Cross your fingers, and hope we tell you that you could be.

This is another of my Quora answers. The original is at: What are the things that annoy you when entrepreneurs pitch to you Angels and VC? And someday I’m going to answer the question what annoys me about my fellow investors. Because writing these items generates a thought about that side of the table too.

What Are the Normal Steps for Angel Investment?

Angel investment, Business Pitch

Question: What are the normal steps for angel investment? What’s involved in submitting a business plan?

I decided to answer this question here because I see it so often in email and in question and answer sites on the web, especially Quora, which is where I first saw it and answered it.

Yes you do need a business plan

In the U.S. market the business plan generally stays in the background while investors look at summaries first, then pitches, and only eventually, after a lot of screening, if they are interested enough to do the detailed study called due diligence, then the business plan.

You want a bare-bones lean business plan to guide your summary and pitch deck. You need to know strategy, tactics, milestones, and essential projections. But investors screen startups based on summaries and pitches before they look at full business plans.

But that’s not what you show investors first

So here are the normal steps:

  1. Summary. That’s either summary memo, or profile on Startup Funding & Investing and AngelList, or similar.
  2. If and only if the summary is interesting, then the pitch. There is a lot more information on the business pitch here on bplans. And for more of my posts, on this blog, choose the business pitch category.
  3. If and only if the pitch is interesting, investors will want to see a full business plan for due diligence.

However, this applies as general norm only, and in the U.S. market only. Generalizations are never always true. There are always exceptions.

(note: this first appeared as my Quora answer to What are the steps involved in submitting a business plan?

How to Raise Money and Succeed Long Term (Video)

Angel investment, Venture Capital, ,

Jess Lee (Partner at Sequoia Capital) and Aaron Harris (Partner at YC) discuss raising money as an early stage company, and how to think about the fundraising process. Ali Rowghani (CEO of YC Continuity, previously CFO, COO @ Twitter, CFO @ Pixar) shares his thoughts on how to be a great leader and succeed long-term. Thanks to Stanford Online.

The direct link for the YouTube source is: https://www.youtube.com/watch?v=5ZXU84_sGXo&feature=em-subs_digest

Angel Investment Red Flags

Angel investment

Last week at an angel investment meeting one of our group members asked whether anybody had a list of red flag problems that would immediately eliminate a startup from consideration by angel investors. That seemed like a good idea to me then. And over the weekend somebody asked a similar question in Quora: what are some red flags for people new to angel investment when evaluating companies. 

This blog post is a compilation of my own items and a lot of others contributed to the Quora question. 

My big two: 

  • Issues around trust or integrity. Alternative truths don’t fly. Lies, gross exaggerations, hiding significant information. Fudging past financial data. Not mentioning about or grossly exaggerating their previous business history. Omitting significant facts. the pitch brags about a founder’s previous successful exits that turn out, later, to have been either grossly exaggerated. Founders holding back critical information for problems of perceived confidentiality or trust. Lawsuits that weren’t mentioned. Cap tables that hide things. Gaps in the history.
  • Issues around Leadership. For example, the scientist alone, instead of the scientist in a team with experience in the industry and business sense and experience. Or the team that lacks the CEO and is promising to get one after funding. Or the team of very young people that assigns all C-level positions to team members without realizing they need somebody else.

Four other good ones from Heather Wilde. 

  • Lack of domain expertise – Anyone can have an idea, but if the person you’re considering has no clue about what’s possible, what’s been done before, or even a tangentially related background – that’s a huge red flag.
  • Lack of Coachability – there’s a certain amount of arrogance expected in an entrepreneur (they need to beat down their competition), but if they aren’t willing to consider outside advice or suggestions, stay away.
  • Terrible Idea – I shouldn’t need to say this, but the majority of ideas are actually just bad, really, really bad. Yes, you are investing in the human, but that doesn’t mean you should throw money at a bad idea in the hopes that something they come up with later might be good.
  • “No Competition” – This is like one of those logic puzzles. Every time I hear someone say “we have no competition” it immediately is a red flag, for two reasons. One, it’s a sign they haven’t done their research, because there’s always competition, or at least something comparable. Two, it’s a sign they might be naive enough to actually think it’s true. Either way it’s a sign to stay away.

Four more from Greg Brown:

  • Awesome team in a small market can figure out how to expand the market opportunity. Mediocre team in a brilliant market will produce mediocrity. Bet on the team.
  • Legal and financing structures that violate the norms are non-starters for me. No need to reinvent the wheel.
  • If a company is pushing too hard to get your investment that’s a bad sign. If it doesn’t yet feel right hold off. It’s OK to miss out on something. There will be other opportunities. You cannot ride every unicorn.
  • Bad co-investors suck. Bad means fundamentally bad people or people who will provide bad advice or influence. Most founders will to some degree bend to the will of their board/investors. Make sure they will be getting good advice.

And a bunch from Terrence Wang

  •  No Deck/No Financial Model. Sending decks are standard unless you are a Siri co-founder working on Viv. VCs want financial models. If you are investing later seed then the startup should send you a financial model where you can see the assumptions and play around with the variables to test different scenarios and outcomes. If founders won’t send you both, red flag.
  • Finders/Brokers/Enthusiasts. At present the vast majority of finders, brokers and enthusiasts who connect founders and investors are working with non-great founders. Red flag.
  • Super Angel or VC Advising, Not Investing. Peter Thiel is advising a PayPay mafia cofounder-CEO. The CEO pitches fellow angel investors and me. We ask if Peter is investing. The CEO says he wants to be careful about asking Peter to invest. So why are you pitching us then? Red flag.
  • Product Not Needed. If someone loves a startup’s product and service, that could be because the product is free and a good time filler. Doesn’t mean they will spend money on the product or service. Maybe they don’t need the product. Red flag.
  • Not Great Sales. A great product with bad sales is often a bad sign. For example, a startup might have a great e-commerce product but Amazon is going to out-sell them about a billion to one. If the product is easily monetizable and they haven’t even tested monetization, that is a red flag.
  • Incompatible Goals. Some angel investors don’t want VCs involved later. This includes at least a couple Harvard Business School Angels who invest in startups that should not need VC funding because the startup is in a smaller market and should get to break-even pretty quickly. But does the founder agree? If you and the founder don’t agree on the financing goals, that is a red flag.
  • No Grit. If the CEO does not have grit, the startup likely won’t work. Red flag.
  • Uncompelling Pitch. CEOs need to be persuasive, regardless of context. They don’t have to be high energy. Elon is more reserved but still charismatic and persuasive. Uncompelling pitches are a red flag.
  • Differing Visions Intra-Team. Talk to the CEO and other core team members individually. Are they on the same page as the CEO? If not, red flag.
  • Can’t Lead. Has the CEO built and led a team successfully before in anything? Sports, clubs, etc.? Her siblings? Anything? If not, red flag.
  • Unanswered Questions. If you have unanswered questions that are important to you about anything related to the startup, the team, the legal documents, etc., make sure the CEO or someone from her team who’s authorized (e.g., her law firm) answers your questions to your satisfaction. If you feel pressure to not ask too many questions, just ask this one
  • Legal and Ethical Issues. Does the CEO do things that are highly unethical or technically crimes? If so, you may have a Theranos or Zenefits on your hands. Red flag.

Finding Dumb Investors is a Dumb Idea

Angel investment,

Are you looking for dumb investors?

investor money
investor money

“How can I find investors who don’t take much equity?”

“How can I find investors who don’t interfere with my running the business?

I first posted my objections to this kind of thinking nine years ago in Dumb Investors Dumb Idea, one of the earliest posts on this blog. That was before I joined an angel investment group and became one of those investors. My objections then are a lot stronger now. And I still see a stream of this kind of thinking in blogs and at my favorite question and answer site, Quora.com.

Valuation determines equity

The equity share from investment is simple math. If your investors put in $100,000, that’s 10% of a startup valued at $1 million, and 50% of a startup valued at $200,000. So what’s the underlying valuation? Read up on that with 5 things entrepreneurs need to know about valuation and understand startup valuation. So with normal angel investment, the startup founders want a higher valuation and the angel investors want lower. It’s a lot like negotiating to buy a house or a used car. Ultimately, both sides have to agree, or there is no deal.

Angel investors normally care and add value

Angel investors are overwhelmingly amateur investors, investing their own money, investing in industries they know or local startups. They are successful entrepreneurs giving back. They believe in their ability to select startups well, study them well (it’s called due diligence) before deciding on a deal, and to offer valuable advice and experience. I’ve seen dozens of pitches that ended with investors not interested in startups whose founders knew everything and wanted no advice. People who don’t want interference with their business are not going to do well with angel investors.

Normal angels choose angel investment instead of leaving their money with an investment advisor, bank, or some other institution. They know that investing in startups is risky, but they trust themselves and expect to be able to help.

 

 

 

How to Make Money on Your Brilliant Business Idea

Angel investment, Bootstrapping, Starting a Business

A Pile of CashSo you have a brilliant business idea that will be very successful. My congratulations to you. Now read all ideas are brilliant and nobody is going to pay you for your ideas. Are you still sure? All right then, let’s continue.  And – this is important – do not even think about getting investors yet. Do a lean business plan.

1. Gather a team

Can you execute on the brilliant business idea yourself? That does happen. For example, take your browser to KiddoLogic.com. That’s a venture built by one very smart woman, on her own. She used her own money and paid the providers she needed, to get going. If you can do that yourself, without help, then I applaud you. Go for it. Forget investors; just do it. You don’t need them.

For the rest of us, your next step is to gather a team of people who have the skills and experience you need to get going. Look for people different from you who can do what you can’t and who know what you don’t.  If you don’t know anybody, or don’t know the right people, that’s a damn shame; but it’s your problem to solve. If you can’t solve it, then keep your day job. Other people have solved that problem millions of time.

If you can afford to pay them…

If you can find suitable people, then  you have to convince them to join you. If you can afford to pay for their services with your own money, then maybe you don’t have to convince them of the idea. Just pay them. This puts you in the category of the smart person on your own. Just do it. You’re special, the sole entrepreneur with a great idea and the means to execute. Skip to the next section.

However, if you can’t afford to pay people, then you need to convince them to join you as co-founders and work on this idea for free. Don’t feel bad about that; that’s what most successful entrepreneurs had to do. And if you can’t convince the right people to join you, then get a clue. Your idea was one of the many ideas that seem brilliant but won’t work. Keep your day job. Revise your plan. Focus on a subset you can do yourself. Or give up.

Get your people together and revise that early plan. Bring it up to date with what you’ve learned while gathering the team, and what your team members were able to contribute to the plan. Remember that plans are made to be reviewed and revised and kept live and up to date.

2. Execute. Get traction. Prove it.

You have a team and you have a plan. Execute on it. Follow your plan. Go as far as your team can take you towards early website, product prototype, discussions with potential buyers or distributors, so-called minimum viable product. Maybe you go on Kickstarter or one of the other sites for pre-launch selling. Get traction. Prove to yourself and future investors that you idea will work. You’ll have to know what that means in your specific case. It’s different for every business.

3. Seek investment if and only if…

Don’t go for investment unless you really need it.  Never bring in investors unless you need them to address an huge opportunity that makes sharing your business ownership with outside investors good for you and them. Read the startup sweet spot.

Furthermore, don’t go for investment if you’re not going to get it. Only a few businesses are good investments. Read this self assessment will you get angel investment, 10 things angel investors ask about your plan. And be aware that the advice in those two posts applies to the U.S. market only. The realities of angel investment are vastly different in other markets.

(Note: I have no association with Kiddologic. I saw her pitch for local angel investors and was very impressed.)

Business Pitch: Don’t Confuse Optimism with Business Potential

Angel investment, Business Pitch,

Chart_shutterstock_42227020_by_ArchMan (2)I listen to a lot of business pitches and way too many of them try to make something out of the entrepreneur’s attitude. Commitment is great, but who isn’t committed? Passion is great but who isn’t passionate about their business. Saying that adds nothing. It’s assumed. So too, with optimism. Business pitch optimism is vastly overrated.

Business pitch optimism

This comes up because I heard this the other day:

I love your optimism. What I don’t like is the complete lack of experience that’s causing it.

Ideally, a business pitch is exciting because the business potential is exciting. Optimism ought to be a combination of potential market, product-market fit, scalability, defensibility, and management experience. Better yet, early sales, initial growth rates, proof of concept in buyers or users or subscribers or signups or something equally concrete.

Don’t talk about it. It’s assumed.

Frankly, in a business pitch, I mistrust shows of undue optimism, passion, commitment and resolve. I worry that early-stage entrepreneurs are working towards some mythological promise that they have the will to succeed, as if will alone can make a business successful. I don’t want to invest in passion unless it’s tempered by experience and based on a solid business plan.

You’ll find people talking about showmanship in business pitches. Absolutely. Tell your story well. Tell the story of the market, the need, the solution, the steps along the way, and the team that’s driving it. But it’s about your business, and you fit in as the manager who will drive it. Angel investors will frequently talk about betting on the jockey, not the horse. In that case, it’s betting on the jockey’s skill and experience, not just optimism or passion.

It’s a fine line. Sell your angel investors your business, not your optimism. Not your passion. Not your commitment.

 

10 Myths vs. Reality on Business Plans and Startup Investment

Angel investment, Business Pitch, business plan, Lean Business Plan, Planning Process

I gather from a stream of emails I’ve received that there are a lot of misconceptions on the relationship between a business plan and getting seed money and/or angel investment. So here’s a list of reality checks to apply to all those lists.

  1. business managementBusiness plans are necessary but not sufficient. Even a great business plan won’t get any investment for any startup. Investors invest in the team, the market, the product-market fit, the differentiators, and so forth. And they evaluate the risk-return relationship based on progress made, traction achieved, and market validations. The plan gets information the investors need; it doesn’t sell anything. One of the most serious misconceptions is the idea that the quality of the writing and presentation of a business plan is going to influence its ability to land investment. Sure, if you consider the extremes, a poorly written plan is evidence of sloppy work. If it’s hard to find the important information, that’s a problem. But barring extremely bad plans, what ends up being good or bad is the content – the market, product, team, differentiators, technology, progress made, milestones met, and so forth – not the document.
  2. All businesses should be using business planning regularly. They should have a plan to set strategy and tactics, milestones, metrics, and responsibilities, and to project and manage essential numbers including sales, spending, and cash; and they should keep that plan alive with regular (at least monthly) review and revisions. Business plans are for business planning, and management; not just for investors.
  3. Nobody has ever invested in a business plan, unless you count what they pay business plan writers and consultants. People invest in the business, not the plan. Just like people buy the airplane or car, not the specifications sheet. The plan is a collection of messages about past, present, and future of the business. It’s past facts and future commitments. People invest in milestones met.
  4. The normal process goes from idea, to gathering a team, doing a plan, and executing on the early steps to develop prototype, wireframes, designs, and ideally traction and market validation. And the plan is constantly rewritten as progress is made.
  5. Investors come in only after a lot of initial work is already done. 
  6. The startup process does not – repeat, NOT – go from idea to plan to funding and only then, execution. You don’t go for funding with just a plan. That’s way too early.
  7. Investors do read business plans. Regarding the myth that investors don’t read business plans, I’m in a regional group of angel investors, we’ve had maybe 80 people as members during the eight years since it started, and the vast majority of us would never even consider investing in a company without seeing the business plan.
  8. But investors don’t read all the business plans they get; and they often reject deals without reading the plan. To reconcile this point with the previous, note that investors read the plans during due diligence, as a way to dive into the details of a startup they are interested in. They don’t read them as a screening mechanism. So a lot of startup founders who don’t get investment are telling the truth when they say investors didn’t read their plan. Investors rejected them based on summary information or pitch.
  9. On that same point, the process with angel investment today starts with an introduction or submission through proper channels (gust.com, angellist.co, incubators, 500 startups, and so forth). Investors screen deals based on summary information in the profile or a summary memo. The deals that get through that filter will be invited to do a pitch in person. Those that still look interesting, after the pitch, will go into due diligence, with is a lot of further study of the business, customers, market, legal documentation, and the business plan.
  10. Business plans are never good for more than a few weeks. They need constant revision. Things are always changing. People don’t expect the big full formal plan document anymore, not even investors. Keep a plan lean, review it often, revise it as necessary, and use it to run your business. Use it to steer the business and keep making course corrections. That’s what a plan is supposed to be these days.

10 Good Reasons Not to Seek Investors For Your Startup

Angel investment, Starting a Business,

Sure, maybe you need the money. Maybe that’s what your business plan says. But seriously: Do you really want to have investors involved in your dream startup?

I’ve said it before: bootstrapping is underrated. I get frequent emails from people asking how they can get investment for their new startup, and I’ve admitted to being a member of an angel investor group. But let’s not forget, while we’re thinking about it, these 10 good reasons not to seek investors for your startup.

  1. It’s almost impossible to get investment for your very first startup. If you don’t have startup experience, get somebody on your team who does. Chris Dixon said it best: either you’ve started a company or you haven’t. And if you haven’t, and nobody in your team has either, that makes it very hard.
  2. You are selling ownership. Investors write checks to own a serious portion of your business. I admit that’s patently obvious, but you should see the emails I get in which people think of investors as if they were some sort of public agency. Once you get investment, you don’t own your entire company.
  3. Investors are bosses. You are not your own person when you have investors; you’re part of a team. You can’t decide everything by yourself. Politics matter. Investor relations matter. If you screw up, you do it in front of other people, and it hurts those people.
  4. Valuation is critical to them and you. Simply put, valuation means the price. If you want to give only 10 percent of your company to investors who pay $100,000, you’re saying your company is worth $1 million. And so on. Simple math, but wow, not so simple negotiation.
  5. Investors don’t make money until there’s a liquidity event. That’s why we always talk about exit strategies. You can be the world’s happiest, healthiest, most cash-independent company, but your investors won’t be happy until you get them cash back. The win is getting money back out of the company. Some big company stock buyers like dividends. Startup investors don’t.
  6. If it’s not scalable, forget it. The real growth opportunities are scalable. It used to be products only, but now there are some scalable services, like web services, for example. But if doubling your sales means doubling your headcount (that’s called a body shop), then investors aren’t going to be interested.
  7. If it’s not defensible, it’s tough going at best. Not that I trust patents as a defense, but trade secrets, momentum, a combination of trade secrets and patents, plus a good intellectual property defense budget … if anybody can do it, then investors aren’t interested. (Of course, what would I know, I thought Starbucks was a bad idea because I thought that was too easy to copy … there are always exceptions.)
  8. Investors aren’t generic. Some become collaborative partners and even mentors, some are nagging insensitive critics. Some are trojan horses. Some help, some don’t. (Hint: choose carefully which investors you approach.)
  9. Just getting financed doesn’t mean diddly. For an example of what I mean read this piece from the New York Times. You haven’t won the race when you get that check.
  10. Investors sometimes take your company from you. Well-known strategy consultant Sramana Mitra has a couple of eloquent minutes on that them in this two-minute video. She seems to be talking about India, but she’s well known in the Silicon Valley, and what she says applies perfectly well here.