In the last post, I described the two most important characteristics of a fundable deal, that is, the entrepreneur/management team and the scalability of the business model. So what are the additional features that can make or break an entrepreneur’s business plan?
Angels prefer to invest in local companies. Why? Angels want to be able to kick the tires before investing and then coach, mentor and serve on boards of directors of portfolio companies. Considering that most angels are part-time investors with multiple interests, investing in companies near home just makes sense.
Angels fund ventures with customer-ready products or services. Investors want to talk to customers or potential customers to confirm that the product or service meets an important need – a “must have” for users. Angels invest in painkillers, not vitamin pills. Entrepreneurs with products that are not quite customer-ready should be self-funded with the help of their friends and family.
A competitive advantage is important to angel investors. This could be a patent, trade secret or huge head start. Investors do not fund companies with products that can be easily duplicated by more mature companies with deep pockets.
Angels seek companies with solid sales and marketing plans. Too many entrepreneurs assume that products or services will sell themselves, which is never true. Angels want to fund entrepreneurs who understand the channels to be used for reaching customers with their products.
Angels expect entrepreneurs to have an exit strategy that will enable both the entrepreneur and investors to sell the start-up within five to 10 years to a larger public company, providing all shareholders with a substantial return.
It’s a GREAT time to be an angel. Find a group and jump in!
Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com
The two most important attributes of a fundable deal for angels is the quality of the entrepreneur and management team and the scalability of the venture.
We would love to invest in entrepreneurs with prior CEO experience, but angels are most often approached by first time entrepreneurs. So, what are the key differentiators for investors?
Integrity – We seek to invest in people with absolute integrity. One “little white lie” and we move on to the next deal.
Coachability – Since angels invest both time and money in companies, we want to make sure entrepreneurs seek our advice and counsel.
Commitment – Angels invest in entrepreneurs with “both feet in,” that is, people who have all their resources tied up in the business and are spending all their time on the business.
Vertical experience – Fundable entrepreneurs must have a good knowledge of the business segments and markets defined by the product.
Leadership – Entrepreneurs are expected to lead teams. Experience in leadership is important.
While we would also prefer investing in teams with good business experience balance and experience in working together, the startup ventures we fund have seldom completed the building of these teams.
Scalability is the second critical attribute of fundable companies. As was described in my last post, we angels must invest in companies capable of increasing the value of the company to twenty times the value at the time of investment. This is best represented by rapid growth in revenues. We seek companies that can demonstrate potential revenues of at least $25 million in 5-7 years from the time of our investment.
But the management team quality and scalability of the venture are not the only characteristics of a fundable company. In the next post, I describe the other characteristics of fundable startup ventures.
It’s a GREAT time to be an angel. Find a group and jump in!
Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com
NZ Angels that were at last year’s NZ Angel Association Summit will remember Jordan Green, deputy chairman of the Australian Association of Angel Investors. Jordan recently appeared on the Frank Peters Show, a weekly-ish podcast with the strapline “Startup Stories in Angel Investment and Venture Capital”.
It’s interesting to listen to an American angel interviewing an Australian angel and triangulating our position here in New Zealand. Jordan puts in a plug for this yesr’s New Zealand Angel Summit. He also talks up New Zealand’s SCIF. It’s nice to get some external validation and buzz about what’s happening here.
Jordan also talks about
syndication in Australia and its development
problems in the Australian VC space
strategic exits
the importance of appearing to be a local company in the country in which you’re operating
You may have thought that the angel space is small, and this statistic certainly reinforces that. Basil Peters suggests a number of reasons that there aren’t more angel blogs:
Angels eat what they kill
Angels are “a little older”, and not as tech-savvy
Angel investing is not the primary activity of most angel investors
Angel investing is still quite new.
Of course, Basil doesn’t point out the received wisdom is that many angels are reluctant to share their knowledge with others, fearful that letting others in on information my “cut their own lunch”. Nothing could be further from the truth, even in a small market like New Zealand – the more syndication, the better – by letting each other in on what’s happening, we can make the pie bigger for everyone.
Business Week published an interesting article on “Super Angels” – small firms unfettered by the corporate machinery of the bigger VC firms, and focussing on larger-percentage stakes in smaller seed-stage investments, launching startups for “only” $1M.
From time to time I refer to New Zealand as “honey I shrunk the country”, and so even though the scales at play in the US are different from here by orders of magnitude, we still have the “super angel” phenomenon, although we’ve approached it from the other direction.
With the flight of VC cash from the NZ market, players like Movac and Sparkbox have moved up the food chain from where they started. And it makes good sense, as the single-digit-millions (NZD) funding rounds, otherwise known as the “valley of death”, have been harder and harder to achieve from VC’s in the last couple of years.
The other key difference between NZ’s super angels and the microcap type funds covered in Business Week is that the NZ firms are true angels – they’re playing with their own money, unlike traditional VC’s who are typically playing with institutional cash.
I like to think that our model is better than their model for purely parochial reasons, and that the choices made by people with 100% of their own skin in the game will be more sensible. But we still have the basic problem in New Zealand that we find it tremendously difficult to scale our companies into international enterprises. And the main issue with that comes back to scale – “honey I shrunk the country”. It isn’t cheap to go offshore, and that’s where we need the supersize resources available in larger economies to make it happen.
But we can have a blended model (seed capital from NZ and expansion capital from offshore), and that’s what most entrepreneurs strive for.
Albert Einstein once said, “the only source of knowledge is experience; information is not knowledge.” There is blend between the two though – it is possible to gain knowledge from others’ experiences. I’d always prefer to be an armchair failure than a real failure and save my real effort for success, but that’s not always possible.
At WebFund, one of our key criteria in evaluating entrepreneurs in new ventures is their experience in failure and what they’ve learned from it.
Basho Technologies, a Massachusetts-based startup offering software to improve sales performance, has had an interesting ride obtaining funding from investors. The Wall Street Journal reports that after a year of trying to secure funding with VC’s, they gave up and were pleasantly surprised by the difference in attitude and approach of angels. They found that angels were much more engaged in meetings, and offered much greater diversity.
According to a University of New Hampshire study, “the number of [US] venture capital deals fell 10% to 2,550 in 2008, according to VentureSource, the number of angel investments dropped only 2.9% to 55,480 deals.”
The Angelsoft blog ran this item today, which was so very good, I thought I’d repost it… I really couldn’t think of anything to add or subtract from it. So good work, Angelsoft … I’d recommend that if you like the nzangels.com blog, you’ll probably want to take a feed from the Angelsoft blog as well.
Update: Paul Graham himself has written an excellent article on How to be an Angel Investor summarising the learnings from Angelconf… by all means read it!
A great write-up of the sage (and virtually unanimous) advice from the participants has been posted on VentureBlog by August Capital’s David Hornik (host of the annual Lobby conference.) Here’s the distilled summary of his summary:
It’s a small community — if you screw one entrepreneur, you’ll be out of the angel business because entrepreneurs talk (Conway)
Angel investing is about learning on the job, which means that you can plan on screwing up your first 10 deals at least (McClure)
If you assume that the money is gone once you’ve invested it — that it is like a lottery ticket — then you will have a better time angel investing (Buchheit)
Work with other angel investors so that you can get the advantage of their expertise (Zurich)
There is no rational way to arrive at valuation, so don’t be overly concerned about getting it right (Graham)
Don’t worry if the idea seems crazy — if it didn’t seem crazy, it would be too late to invest as an angel (Graham)
The lifeblood of angel investors is deal flow — you need huge deal flow to find enough stuff that is worth investing in (Ravikant)
The best deals come from other angels(Ravikant)
Don’t be afraid to throw a little dynamite into the status quo and see what comes out of it — often times interesting stuff emerges (and sometimes nothing does) (Dearing)
The Rule of 12 — you need to invest in 12 companies to have statistical diversity — invest in fewer than 12 deals and you run the risk of them all failing (Maples)
Like in the movie “Oceans 11,” you want to pull together the best team of angel specialists there are out there — it increases the likelihood that the company will succeed (Maples)
Help bring your entrepreneurs together so that they can learn from one another (Poler)
By being a connector, you will see the most interesting stuff and work with the most interesting people (Senkut)
Angel investing is all about the syndicate — you can lead if you want to but it can be lonely until others join in the syndicate (Clavier)
Angel investors need to distinguish themselves from others with money – what do you bring to the table? Contacts. Experience. Advice. (Young)
Only invest in stuff you actually know something about — otherwise you’re just buying a lottery ticket (Young)
“My experience is you need to raise between $500K and a $1M to do almost anything.”
“If you aren’t ready to sell equity in your idea [at a valuation that will be interesting to an Angel], finance it yourself.”
“Almost without exception, I don’t want to own your dream, I want to make money and have a little fun along the way. If you never sell the company, I never realize a gain.”