Category Archives: Angel investment

On Building a Business Because the World Needs It

Angel investment, Starting a Business, , , ,

I’ve posted about Arcimoto on Up and Running almost two years ago. It’s a local (Eugene OR) business based on building cool, fun, and economically accessible electric cars, like the one shown here.

Arcimoto2012.jpg

It was a startup then, one with a believable team and a vision to build on. Two years later, it’s still a startup, still got a strong team, and sticking to its vision. So time hasn’t been wasted. They’ve been engineering for fun and manufacturing at scale, and they’ve been talking it up too. Search YouTube for Nathon Fillion, the hollywood star, and Arcimoto, and you’ll see what I mean.

Meanwhile, founder Mark Frohnmayer explained the vision behind the startup, a new vision of clean and green transportation, at a recent TEDx conference in Portland. I’m embedding it here because I think he’s got some really important points that go beyond his specific electric car. He titled it “Dude — Where’s My Car.”

If you don’t see that video here, you can click here for the original on YouTube.

This is not an easy startup to build. Founder Mark Frohnmayer has been at it for several years now, has recruited and held onto a team of leaders experienced from the nearby recreational vehicle industry, has raised several million dollars, and has spent a million or more of his own, money he had from a successful exit of a computer games company. I’m still watching with interest, and hoping they make it.

No, by the way, I have no investment in Arcimoto, no financial relationship whatsoever. I just like the company, its founder, and its ideals. And I do want them to get to market. I can’t promise I’m going to spend $20K to own one of these next year, but I do like the idea.

(Image: a screen shot from a business plan … hoping Mark won’t mind that I posted it up here)

Blogger About Angel Investment: “Confused, Scared, and More Than a Little Ashamed”

Angel investment, , ,

(Note: I posted this first on the blog at gust.com, my favorite site for entrepreneurs and angel investors. I’m reposting it here because I want to make my points under my own banner too.)

Rick's PostNow there’s a great title for a blog post. Writing about angel investment, on his Portland-based Silicon Forest entrepreneurship etc. blog, Rick Turoczy titled his post: I’m confused, scared, and more than a little ashamed. Don’t even try to tell me that doesn’t make you curious. Rick’s a smart guy, very well known in Portland (OR), and his blog matters. So here’s his problem:

WTF Angel Oregon? This is one of your concept companies? Blanket Booster? Again… WTF?

Yes, it turns out that the Portland angel group called OEN Angel Oregon just announced an investment in a startup making a bar that goes on a bed to hold the blankets up so they don’t weigh down the feet. What’s the problem?

I’m struggling to grasp how a rail that holds your blanket off of your feet is a better investment than the hundreds of concept companies I’ve talked to in the past six months.

Rick likes high tech. He’s a techie, entrepreneur, and startup expert, deeply immersed in a local incubator. (And I get that, I’m a techie too. Look at my bio.)  He says this shows two problems:

  1. Angel investing in our region is decidedly weak in tech. And with good reason. Very few of the Angels in our region have a tech background. As such, they’re not very confident investing in tech. Angels invest in what they know. I get that.
  2. You didn’t even enter the race. You didn’t even have the confidence to take your awesome idea to Angel Oregon. That you didn’t feel like you had something worthy of investment. That you didn’t think your startup was worth submitting to a selection committee.

I like the way Rick writes. His point number two is golden. I hope it’s clear he’s talking to all the techie entrepreneurs in his incubator, on his blog, and working in Portland. You didn’t enter. Touche. Well said.

Posting here as a very active member of an Oregon angel investment group — not Angel Oregon, but one in Eugene and Corvallis, the Willamette Angel Conference (WAC), I’m not comfortable with Rick’s summary of Oregon angel investor tech background. Our group has 35 members and more than half of them have come out of software, web business, or computer hardware. We have two major universities in our two towns, and there’s a huge Hewlett Packard installation in Corvallis. We’ve made three investments so far, two of them software companies, one a clean-and-green personal product. I don’t think we’re weak on tech. But Rick’s talking about the group in Portland, 100 miles north.

Here’s part of the comment I left:

One thing I dearly love about business is that almost everything is a marketplace. Buying is voting, and investing is voting. And people are unpredictable. Self interest rules in these markets, and investors are spending their money. Some consider the good of the community, some care more than others about the environment, some want to change the world, most are comfortable with investments in industries they are familiar with, some care only about what gives them the best risk-return relationship. You wind those various factors up like a top or a wind-up doll, and you set them lose, and what happens is what happens. It’s beautiful.

That’s my answer to Rick’s worries. I’m not confused, I’m not scared, and I am not in even the slightest bit ashamed. Hooray for business.

 

Blaming Angels and VCs for Choosing is Like Blaming Up for Down

Angel investment, Bootstrapping, Venture Capital,

I was happily reading Sramana Mitra’s The Other 99% of Entrepreneurs on Read/Write Web, agreeing with every detail, when I ran into a snag. It’s in italics in this quote from Sramana’s post.

Sramana_RWW_Bootstrapping.jpg

Over 99% of entrepreneurs who seek funding get rejected. Yet, the entire world is focused on the 1% that is “fundable.”
The media, when pitched a startup story, is interested in who funded the venture. They seldom ask how much revenue the company has or if it is profitable. Incubators take pride in how exclusive they are and how many “deals” they “reject.” Angels and VCs, of course, discard most of their “deal flow.”And entrepreneurs? They seem to have confused the definition of entrepreneurship altogether. Entrepreneurship, they mistakenly believe, equals financing!

This is wrong.

I agree with her: It is wrong — except for that one extra detail. On the core of it, well, I posted something similar more than three years ago, in a respectful hats off to bootstrapping, on this same subject:

For years now, I’ve complained every so often about how we (in blogs, business plan contests, academia and entrepreneurship in general) tend to idealize the venture capital-financed startup, the SBA loan and the more formalized and carefully planned financial strategy. This is especially true in venture competitions.

This is the real world. Bootstrapping is often the only way to start, build and grow your business.

But don’t blame the investors. That’s like blaming up for down. Angel investors spent about $18 billion last year to fund more than 50,000 startups; of course they have to pick and choose. That’s the nature of investing in startups. And venture capitalists are investing other people’s money. They’re being paid to generate a return on investment. Their job is picking the best deals they can find. It’s for the rest of us to understand and respect bootstrapping.

Sramana Mitra is way too smart for that. I like her work and read her often, and included her in posts on this blog. I think she just got on a roll and added one detail too many. Because everything else in that post makes a lot of sense. And she’s one of the best writers/bloggers/thinkers you can find on startups and investment in general. I love her reengineering capitalism idea. So consider this a small correction for a really good post. On an important subject.

Q&A: The Perfect Letter to Potential Private Lenders

Angel investment, Business Mistakes, Q&A

This is another question received in my ask-me form on my timberry.com website:

I’m hoping you might be able to help direct me in finding the perfect letter that I need to send out to potential private (mainly friends) lenders for a start-up I’m involved.  I need this letter to spell out the details of the lending terms, conversion, etc.  I’m a numbers person (CPA) not a writer but I need this letter to be very appealing to convince them to lend us the start-up capital we are seeking.

My answer:

You’re focusing on the wrong thing. People don’t invest or not because of the perfect letter. Get the details right and the letter will follow. If you’re a CPA you’ve got an education and you can write the facts in correct English. Or, if you have money you don’t know what to do with, pay somebody to write a perfect three-paragraph letter.

The best a letter can do is communicate facts quickly and easily. The facts sell your deal, not the letter. what matters isn’t the letter but the startup, the team in charge, the product-market fit, the deal itself, and of course (as you suggest) the details of the lending terms, conversion, etc.

Start with a conversation, not a letter. Don’t ever think you can find startup investors by sending some letter out to a lot of people. You need to pinpoint the right people, and communicate well. A letter might be useful for following up, but think of it as a cover letter to a legal document. It should be no more than three paragraphs, hit the highlights legally, and that’s it. Then you have all the legal documentation your people will have to read and understand and, eventually, sign.

What you do need, by the way, is to check with an attorney about anything you say, or write. There are a lot of banking and fraud rules related to these deals. It’s pretty easy to break the law if you don’t know it. And the wrong terms on a letter to potential lenders can screw up your chance for angel investment or venture capital later. Now there’s an expertise you might really need for the letter, and, more important, the loan documents.

Q&A: Finding a Consultant to Find Investors

Angel investment, Starting a Business, , ,

This is another frequently asked question that came from the ask-me-a-question web form on my main site at timberry.com.

Question:

Trying to find a consultant that links me to investors? Does this exist? I’m a 21 yr old entrepreneur. Learning on the fly!

Answer:

  1. You don’t need a consultant to learn about angel investment. There are thousands of good links on the web. Not that mine are necessarily the best, but since you asked me:  Browse though the angel investment articles on this site (click here for a site search for angels). Read the angel investment category on this blog.
  2. Please make sure you have a deal that will interest investors first. It takes a credible experienced startup team, an attractive product-market fit, an interesting market, and defensibility. Way too many people waste their time and — if they hire consultants — trying to find investors with a deal that no investors would ever be interested in. Please read Is Angel Investment Realistic? and be honest with yourself.
  3. If you don’t have the right stuff, don’t spend energy searching for investors. Change your plan. Either gather some more team members to beef up the offering, or focus on what you can implement by yourself. Bootstrap your business. If you still want a consultant, forget paying somebody to link you to investors. Get somebody to tell you what you need to have.
  4. If you do have the right stuff, then you probably don’t need a consultant. Go register at gust.com where you can browse through about 600 angel investment groups and look for one in your local area, or one with interest in your kind of business. Don’t apply to all; don’t send your info bouncing around everywhere; concentrate on the groups that are more likely. Connect with your local small business development center (SBDC). Ask people you know who they know locally who might be interested. Find out about local investors using the SBDC, the chamber of commerce, local business schools, etc.
  5. And if you really want the consultant, and you have money to spend, buy expertise and experience from the consultant, not heavy lifting. Buy very targeted help. There are honest legitimate consultants in this business, but they are rare. Check references carefully. Talk to past clients. And if you have a consultant help with your own business plan and your own business pitch, what you want is coaching, constructive criticism, not writing and formatting.

Don’t Confuse Optimism with Business Potential

Angel investment, Business Pitch, ,

Overheard:

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.

Frankly, in a business pitch, I mistrust shows of undue optimism, passion, 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.

(Note: I posted this first at gust.com earlier this week. I’m posting it here for convenience of my readers here.)

Is Your Startup Positioned in The Funding Gap?

Angel investment, Starting a Business, Venture Capital,

Nice post by Bill Payne called The Funding Gap on the Gust.com Blog. Here’s the summary:

It is clear from this table that Friends and Family, Angel Investors and Venture Capitalists provide 95% of the capital for new ventures. Friends and Family typically invest a few thousand to perhaps $10,000, and only a small number of investors provide more than $50,000. Angel investments range from $100,000 to $1.5 million with a small fraction below and above this range, while venture capitalists fund rounds of investment from $4 million to $100 million with a few above and below this range. So, generally, these three major sources of capital are complementary, not competitive.

After examining the details, he draws the bar chart below, showing the funding gaps he identifies.

Clearly, there is a funding gap between $25,000 and $100,000, and another capital gap between $1.5 million and $4 million. This simply means that there are fewer investors who are willing to provide investments in these two capital gaps than for rounds of investment larger and smaller than these two ranges. To elaborate, seldom can entrepreneurs accumulate $50,000 from Friends and Family, while angels are infrequently willing to provide as little as $75,000 for new ventures. In the gap between $1.5 and $4 million, angels only occasionally fund rounds larger than $1.5 million, while VCs are hardly ever interested in investing less than $4 to $5 million in startup companies. In fact, we estimate that less than 200 investors in the US are routinely investing $2.5 to $3.5 million in entrepreneurial ventures.

bar chart

Interesting discussion. I think I see this in the real world. And what do you, the entrepreneur, do about it? Here’s what Bill says:

So, how should entrepreneurs use this information? Clearly, new companies need to design their achievement milestones with the capital food chain in mind. For example, entrepreneurs who anticipate needing $4 million to achieve positive cash flow need to carefully plan to hit important milestones with perhaps $1 million, and then plan to raise two additional rounds of $1.5 million to eventually achieve positive cash flow. What might these milestones be? Milestones are accomplishments that demonstrate the viability of the business; hence, they increase the valuation of the company. Depending on the company, important milestones may include being granted a patent, receiving a 510k FDA approval, completing a prototype, receiving positive customer feedback on a beta test, achieving first revenues, hitting the goal in annual revenues of $1 million, etc.

(image: from gust.com)

Only Two Numbers Matter

Angel investment, Starting a Business, Web/Tech, , ,

This is Howard Morgan, managing partner at First Round Capital, serial entrepreneur, and former professor at Wharton. He says:

If you have a business that’s based around the internet, there are basically only two numbers you need to know: what’s the cost to acquire a customer, and what’s the lifetime customer value. If the lifetime value is higher than the cost to acquire a customer, then you have a business. If it isn’t, then you don’t.

Here’s the quick video, from gust.com, one of a rich collection of short videos from angel investors. It’s a great resource:

If for any reason you don’t see that video embedded here, you can click here for the link to the original.

You Can Take Your IRR and Shove It

Angel investment, Business Mistakes, Venture Capital, Venture Contests,

In pitches and presentations everywhere, bright young entrepreneur tells cynical skeptical investors, usually with great pride and flourish, about their fabulous IRR for their great new startup. I get a gag reflex.

IRR stands for internal rate of return. You can check wikipedia or investopedia for what that’s supposed to mean and how it’s calculated. It’s supposed to compare cash spent on an investment, over several years, to cash that comes back, which spits out as a percentage. The higher the IRR, the better. They teach it in business schools. It’s kind of an MBA parlor game. It has some very limited usage in comparing past performance of investments, if you can hold all the definitions stable; think of it in a large company context, corporate investments, and corporate budgets.

IRR in a business pitch insults my intelligence. It depends on projected sales, costs, expenses, financing, investment, and some hypothetical valuation at some hypothetical time some years in the future. That, by definition, is a crock. Show me the projects, yes. Show me Sales, costs and expenses. Show me cash flow. Go ahead, guess at a future valuation, what the heck. I’ll look at how the assumptions come together and realism, or lack of it, on how the pieces mesh. But the IRR, which summarizing multiple layers of uncertainty as one single percentage number, is totally irrelevant at best, and downright annoying when entrepreneurs act like a projected IRR actually means anything.

And it gets worse, too: there’s the widespread misunderstanding that angel investors and venture capitalists have IRR targets. There’s the unspoken but felt thought: “jeez, what do these investors want? They turned down an IRR of 105%!” And you’ll see people, all over the web, asking what kind of yields they have to give to interest investors. What are the targets?

Talking of IRR if a projected shows me only that you’re too close to the academics. Investors will look at your plan, your team, your product/market fit, and your projections; and they’ll decide what they guess about your future. Stop sooner, before you get to IRR. Let it go.

3 Financial Statements and 3 Angel Investment questions

Angel investment, Business Financing, Business Planning,

I’ve been busy elsewhere this week, but managed to post two things I’d like to make available to you on this blog, because this is my main blog:

  1. My monthly column on entrepreneur.com came out today, summarizing the three financial guestimates every business plan needs. That one gives you a quick summary of the income (also called profit and loss), the balance sheet, and the cash flow. There are a lot of other tables a business plan might have, but these are the most useful, and the most important. These three put your projections into the same financial format analysts, investors, bankers, and managers are used to seeing.
  2. On Tuesday I posted the three essential questions you have to answer for angel investors, on the angel investment site, gust.com

I hope you find one or both of these useful, and have a great weekend. I’m in New York again this weekend, heading home to Oregon Tuesday, still enjoying a delightful taste of what makes Silicon Alley a high-tech startup hotbed.