Tag Archives: Angel investment

6 Common Misconceptions About Angel Investors

Management,

The question on Quora was “What do investors ‘get’ that other people don’t?” I answered that question from the point of view of angel investors, specifically … not just investors.

1. Some of the healthiest businesses are not good investments

Many people think that a good business makes a good investment. The truth is not necessarily. Many real good businesses are bad investments …

For example, the founder-driven business that generates enough cash to fund its own growth. It’s founders may choose to not exit soon enough to offer a good return for investors. In these cases, founders are better off without investors. And investors have higher risk of never seeing an exit.

2. Angel investors make money on exits, not profits.

Investors own shares in the business, not revenue, and not profits. They make money when they sell their ownership for money. Increasing valuation generates a return on investment. Profits, without the exit, don’t flow to investors in normal startup situations; dividends are for stable companies, not profits.

Angel investors make money on growth, not profits.

3. There is an interesting underlying trade off between growth and profits; you can’t optimize both. It’s one or the other.

A company that loses money but grows well in terms of revenues, users, subscribers, and so forth can be an excellent investment because most valuations in high-tech startups are based on revenue, not profits.

Ironically, investors may be better off with high-growth that loses money because their money becomes more valuable, and more important, when it is all that stands between growth and not growth. Investment is more likely optimized when it funds growth.

4. Angel investors shoot for the big win, not a minimum

All serious angel investors know that most startups fail. They don’t look for the low risk investment that might yield a more reliable return, because those startups fail too. So they look for the big win, the next big bonanza, the huge success that will pay for all the failures.

5. Angel investors want to see your numbers but don’t believe them

Market estimates, market share potential, sales, costs, and all the rest … investors want to see them because they show what you’re thinking and how well you understand the business. Ideally it shows that you understand the drivers and the fixed costs, plus cash flow problems, and all the rest.

Regarding market numbers, they are going to review them but they will look at your assumptions and decide whether they believe them or not. The best market estimates trigger the dream and the imagination of the investors.

6. Angel investors scoff at analyses like NPV and IRR

Note above that angel investors don’t believe your numbers. How naive to think a number generated by assumptions compounding on assumptions has any actual metric value. My personal opinion is that when startups believe their IRR matters, they are too green, not long enough out of school.

(Here is the link to the original on Quora)

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?

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.

 

 

 

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.

A Great Case for Innovative Angel Loan Financing

Management, ,

I was reminded yesterday that sometimes the best financing for an emerging startup is innovative loan financing, from savvy investors, rather than straight investment or commercial borrowing.

The reminder came in an email from an entrepreneur named Terry (not the real name) who included two PowerPoint pitch decks: one for seeking venture capital, the other for a bridge loan. I’d met Terry in person three years ago, after we’d struck up a friendship in Twitter. I was impressed then with the commitment to the new business despite financial woes and family sacrifices of Terry and spouse, a young couple, with a new baby on the way, their first.

growth chartThree years later, Terry’s slides show 85 percent growth in revenues per year, cash flow break even, and a strong management team. Sales will roughly double in 2011. And the company has a convincing growth plan based on expanding into very closely related markets. I’m very impressed. The illustration here is taken from Terry’s deck. You probably can’t read the numbers and years, but it’s showing sales growing to about $1 million since 2007 and a more conservative growth line in the future, but that’s just to show what it would take to repay a proposed loan. My guess is that growth could be much higher than what’s shown here.

Which brings me to the reminder about the loan idea instead of investment. Here’s the situation:

  • Terry probably can’t just go to a bank and get a big pile of money to finance the expansion, simply because banks are governed by laws that protect depositors and discourage banks taking risks with startups.
  • On the other hand, Terry might not be able to show venture capitalists or angel investors quite enough growth, scalability, and defensibility to make this a great investment for outsiders.
  • Furthermore, Terry may not want to take on investors as partners. That’s like getting another marriage to deal with, great if it works, horrible if they are not compatible. And it means giving away substantial ownership, becoming a partner instead of just a plain owner.
  • So the innovative loan from savvy investors is a great compromise: if it works, it gets the funds for growth, but if the company repays the loan, the founders still own the significant majority of the company.

So what does Terry do? Find savvy local investors with a loan package. The loan offers the investors an interest rate several points higher than what they’d get with banks, CDs, or bonds, plus a small share of equity to give them a shot at a share of a big win if there is one, and a much bigger share of equity if the company fails to repay the loan.

This is a very real alternative, can be attractive to both sides, and it actually happens a lot more than what you’d think from reading startup blogs.

My advice to Terry: go to www.gust.com, register your company, post your loan proposal there, and contact the local angel groups you’ll find there among the 600 angel investment groups.

Gust Streamlines the Angel Investment Process

Angel investment, , , ,

Are you hoping to find angel investment for your startup? Are you looking to invest in startups? Go look at gust.com. It’s a better-than-ever first step.

Gust, is the new platform launched last week to replace angelsoft.net. The angelsoft.net platform is used by 600 angel investor groups, 35,000 angel investors, and 125,000 startups. Gust.com is its replacement. Angelsoft.net redirects to gust.com.

TechCrunch covered the new gust.com last week:

On Gust, entrepreneurs will be able to create their own profile, update their company information, build an investment relations site for their startup, collaborate on funding, and most importantly, get connected with angels interested in funding their efforts. Investors will be able to filter and search through the startups listed on Gust. And only those who have been specifically granted access will be able to see the details of a startup’s financials and progress.

That same post included this quote from David Rose, founder of both angelsoft.net and gust.com:

We’ve integrated powerful investor relations tools with direct access to the largest community of established, organized investors, thus supporting the entire ‘pitch-to-exit’ business life cycle. What’s most important is that our platform has gained the trust of the world’s most demanding investor and entrepreneur organizations.

In answer on quora, David added:

The enormous change with Gust is that now the *company* creates a single profile, which is always live and under the entrepreneur’s control. That profile stands alone as a protected web site (with both public and private areas) to which the entrepreneur can provide access to any individual investor he or she wants, whether or not the investor is part of an angel group or venture fund.

I have personal experience with angelsoft.net, so I’m looking forward to switching up to gust.com. We used angelsoft.net to organize the submission and filtering process for investment in the Willamette Angel Conference, in Western Oregon, of which I’m an investor member. Companies submitted their information to us as summaries, videos, and business plans, and we reviewed them. It also managed our communication within the group. And it was free, easy to use, and powerful. I’ve also used angelsoft.net as a judge in several major business plan competitions that use it as a convenient platform for managing submissions and information.

This looks to me like a good structured and organized answer to something people have been asking for since the early 1980s. And that’s from both sides of that table, the investors and the entrepreneurs. People wanting funding for new ventures faced a bewildering maze of possibilities, trying to find interested angel investors, looking for groups, forums, and so on. People wanting to invest had to connect one way or another to deal flow.

And for a good 18-minute view of David Rose, watch his 15-minute TED talk on pitching to investors.

Disclosure: I’m going to be posting on the gust.com blog; and Palo Alto Software products, for business planning, are compatible with the platform.
(Image: screenshot from gust.com)

Finding Your Financing: Is Angel Investment Realistic?

Advice, Angel investment, ,

I was talking to a group of determined entrepreneurs, a food business boot camp in Corvallis, Oregon, and finishing up on business plans when one of them asked me:

What do you recommend for getting angel investment?

I recommend that unless you have a good investment opportunity, you don’t waste your time. cash pile

What’s a good investment opportunity?

  1. First, it has to be something scalable, defensible, that can grow. That means it’s either a product business, or one of those web services that scale easily. Can you add sales without adding employees? That’s a good clue to scalability.
  2. Second, you need people on board with experience in startups. It’s tough if you’re just beginning, but investors worry about risk and nothing reduces risk like having some experience. If you haven’t been involved in a startup, it’s really almost impossible to get investors to take a chance on you. Look for partners or team members who’ve had some startup experience. Ironically, having failed with a startup isn’t always bad; failure is better than no experience at all.
  3. Third, you need a believable exit strategy. And you need to be able to convince investors you really want that. Investors don’t want just a small piece of a healthy growing business; they don’t make money unless that business wants to be sold in a few years, meaning it gets acquired by a larger company, and investors get to convert their ownership back into money.

The hard part, as a speaker talking to entrepreneurs, is entrepreneurs want encouragement. But then when I think of how much time and effort some people spend trying to get investment that’s never going to happen, I try to just tell the truth.

If You Can’t Get Funding, It’s You, Not Them

Advice, Angel investment, ,

You can’t get your new business funded? Damn, that’s disappointing. But does it prove that the world is unfair? All those other people get funded and you don’t? Or that the world is stupid?

I don’t think so. I think what it proves is that you don’t have the deal right. Investors don’t want it. Advisers don’t think you’re ready. Fix it or forget it.

Investors don’t buy into your business out of fairness, respect for your idea, or because they know you and like you; they invest in your business because they believe the money they spend buying a piece of it today has a fair chance of becoming a lot more money later. Investment is about business, plain and simple. And it’s their money. They have every right to say no. They are not a public service.

Yesterday I posted A Seasoned Angel Investor Highlights These 4 Factors here. Factor number one is previous startup experience. And yes, there is a catch 22 problem:no experience means no funding, but without funding, how do you get the experience?

It’s a trick question. If you don’t have any previous startup experience, don’t blame the world, get some. Work with a startup. Get partners who have experience. Maybe scale down the plan. Bootstrap it.

If your plan can’t get funded, don’t blame everybody else. Change the plan.

Angel Investors Focusing on Political Power

Weblogs, ,

I like this: a new angel investor group built around new ventures related to “progressive political power.” It’s a bit new for angel investment, which is normally focused on interesting startups with good risk-return prospects. But why not?

Money MachineI read about New Media Ventures last week on Read/Write Web, and then two days later at the Wall Street Journal’s WSJ.com. And there was an initial announcement on the Huffington Post.

At the website, newmediaventures.org, founders make no bones about the underlying political purpose:

New Media Ventures is the first national network of early stage investors who are investing their time and money into new, cutting edge, start-ups focused on building progressive political power.

While political power is not exactly a traditional business objective, consider what “angel investment” is: individuals investing their own money.

I think it’s sort of funny that in entrepreneurship we call small-time individual investors angel investors. Return on investment is so rarely angelic. SEC rules require that investors be relatively wealthy individuals, but say nothing about halos, conscience, motivation, or doing good.

Maybe you don’t like their politics, but I hope we see more of this. I thought there were angel investment groups focusing on green business, although I just Googled, and couldn’t find any. I’d like to find some. And this kind of more-than-money motivation is at the very least quite common among local angel groups including the one I’m a member of, (Willamette Angel Conference) that focus mainly on local startups.

Can politically motivated angel investment be good business? Can it be a good way to invest money, with some reasonable hope of return? I think so. I hope so. And if you look carefully at founder Mike Mathieu’s bio here, it looks like he’s pulling that off already.

(Image: Vitaly Korovin/Shutterstock)