WEBVTT 00:00:00.000 --> 00:00:15.400 Kia ora koutou. Hello and welcome to episode 2 of nzangels.com, a guide to raising 00:00:15.400 --> 00:00:20.320 angel investment in Aotearoa New Zealand. I'm Dave Moskovitz, one of New Zealand's most 00:00:20.320 --> 00:00:27.320 experienced angel investors. This episode is all about you. We'll answer the question, 00:00:27.320 --> 00:00:31.640 is angel investment right for you and your venture? One of the bits of advice that I'll 00:00:31.640 --> 00:00:38.360 give you repeatedly in this series is get to "no", that is N-O, get to no quickly. 00:00:38.360 --> 00:00:43.400 If angel investment isn't for you, let's try to land that right now. Don't waste time and 00:00:43.400 --> 00:00:51.000 energy and resources chasing impossible dreams. Not all companies are investable and neither 00:00:51.000 --> 00:00:56.280 are all founders. It's also true that not all founders are suited to build startups. 00:00:57.240 --> 00:01:04.519 Let's start there. Building a startup is really hard, hard to the power of hard. It will suck up 00:01:04.519 --> 00:01:12.520 150% of your headspace, energy, finances, and will to live, in most cases for a period of between 00:01:12.520 --> 00:01:18.920 five and 20 years. You'll likely be thinking about your startup 24-7 from before you wake 00:01:19.000 --> 00:01:23.880 up in the morning until after you go to sleep. Should you be lucky enough to get any sleep. 00:01:24.760 --> 00:01:30.840 Your friends and family might not see much of you anymore. Most startups reach a point at least once 00:01:30.840 --> 00:01:35.480 where the directors sit around the board table and wonder, how the hell are we going to make 00:01:35.480 --> 00:01:41.400 payroll on Tuesday? Which is when you figure out how much is left on your credit cards and whether 00:01:41.400 --> 00:01:47.960 that will cover your short-term operating deficit. Paul Graham, the founder of Y Combinator, 00:01:47.960 --> 00:01:52.360 is famous for saying, running a startup is like being punched in the face repeatedly. 00:01:54.039 --> 00:01:58.520 Once you get investors on board, you're committed to other people who have trusted you with their 00:01:58.520 --> 00:02:04.119 hard-earned money to deliver on promises you've made in an investment pitch. Are you sure you 00:02:04.119 --> 00:02:11.480 really want that? Can you manage that level of stress? Is angel investment right for your company? 00:02:12.280 --> 00:02:16.519 You're going to have to give away a chunk of your company in return for the investment you take in 00:02:17.160 --> 00:02:22.600 when your angel investors become shareholders in your company. As time goes on and you raise more 00:02:22.600 --> 00:02:27.320 and more money and give away more and more of your company, your ownership of your company will be 00:02:27.320 --> 00:02:32.680 reduced. Unless you play all of your cards correctly, you may eventually need to cede 00:02:32.680 --> 00:02:38.440 control of your company to your investors who might decide that they want to replace you 00:02:38.440 --> 00:02:45.080 as the CEO of what you thought was your company. This happens. Later in the series, 00:02:45.080 --> 00:02:49.080 we'll talk about ways of mitigating that risk. But when you bring investors in, 00:02:49.080 --> 00:02:55.240 you will no longer be able to call all of the shots. Is your company going to be attractive 00:02:55.240 --> 00:03:00.760 to angel investors? Angels are looking for early-stage companies with high growth potential, 00:03:00.760 --> 00:03:06.600 and teams they believe can realize that potential. Most angels want to see the ability to earn a 00:03:06.600 --> 00:03:12.600 large multiple on their investment, say 10 to 30 times in a seven to 10-year time frame. 00:03:13.079 --> 00:03:18.120 So for example, if they invest 100K in your company, they'd like to see the potential for 00:03:18.120 --> 00:03:24.519 that investment to return 3 million or even more. Again, we'll go into the details later in the 00:03:24.519 --> 00:03:30.680 series, but if you're only planning on growing your company at 10% per year, that's not going 00:03:30.680 --> 00:03:38.040 to be interesting to angels. Angels invest for growth. You need to be able to show in convincing 00:03:38.120 --> 00:03:43.239 and specific ways how the investment cash will be used to grow the company rather than just 00:03:43.239 --> 00:03:49.239 keeping the lights on or repaying debt. Are you planning on issuing dividends? That's not what 00:03:49.239 --> 00:03:54.680 angels are looking for. We want you to plow every cent of free cash back into growing your business, 00:03:54.680 --> 00:03:57.399 and we'll all be happy when we get a solid capital gain. 00:03:59.640 --> 00:04:06.200 Typically, your company will need to have a product, not a service, that you can easily reproduce at 00:04:06.200 --> 00:04:13.160 low marginal cost and that you know how to sell into a clearly identified large and growing market 00:04:13.160 --> 00:04:20.200 probably overseas. With only 5 million people, Aotearoa New Zealand is just too small a market 00:04:20.200 --> 00:04:25.719 for most businesses to grow enough locally to be attractive to investors. If you're selling 00:04:25.719 --> 00:04:31.320 overseas, even in our digital age, that means you'll likely be spending a lot of time in airports. 00:04:32.120 --> 00:04:35.320 There are exceptions to this rule, but they're few and far between. 00:04:36.760 --> 00:04:41.640 So if you have a business that is dependent on a variant of selling people's time to make money, 00:04:41.640 --> 00:04:47.240 like consulting or hospitality, you're probably not going to be of interest to angel investors. 00:04:49.080 --> 00:04:52.520 You also want to be doing something unique that's hard for others to replicate. 00:04:53.560 --> 00:04:58.280 Patents are good for some types of company, and not necessarily for others, but if someone else 00:04:58.280 --> 00:05:04.520 can easily copy what you're doing at scale, that's a problem. This criterion also rules out 00:05:04.520 --> 00:05:11.960 the entire class of businesses that are X for NZ. Even if they can score an exclusive license for NZ, 00:05:11.960 --> 00:05:16.280 our market size here will place a limit on the ultimate maximum size of your venture. 00:05:17.320 --> 00:05:24.359 Not investable. How much investment money do you need? A typical angel round is in the hundreds of 00:05:24.360 --> 00:05:30.040 thousands of dollars per round. If you need millions in one go, angel investment is probably 00:05:30.040 --> 00:05:35.960 not the right solution for you. Conversely, if you only need a few thousand, angels are unlikely to 00:05:35.960 --> 00:05:42.920 be interested. Again, we'll discuss this in detail later in the series. When do you need the money? 00:05:43.560 --> 00:05:47.880 A typical angel round usually takes three to six months from your first pitch until money in the 00:05:47.880 --> 00:05:53.960 bank, all going well. If you need the money next week, angel investment is not for you. 00:05:55.320 --> 00:06:01.720 So in short, for angel investment to be right for you, you need to be ready to work harder than 00:06:01.720 --> 00:06:06.760 you've ever worked for what could be many years. You need to be prepared to give away significant 00:06:06.760 --> 00:06:11.320 ownership of your company. You need to have an ambitious venture that can grow quickly. 00:06:12.120 --> 00:06:17.480 You need to have a strong team. You need to know how to sell your product locally and have an idea 00:06:17.480 --> 00:06:23.080 about how to distribute globally. You need to be unique. You need to require somewhere in the range 00:06:23.159 --> 00:06:27.800 of hundreds of thousands of dollars. You need to be able to show the how the investment will 00:06:27.800 --> 00:06:32.440 directly contribute to growth. And you need to convince investors that you have a team that can 00:06:32.440 --> 00:06:38.360 execute your plan. We'll talk about all these things in more detail later in the series. 00:06:38.360 --> 00:06:42.360 But the key thing for now is that if you don't think you can ever fit these criteria, 00:06:43.000 --> 00:06:49.159 angel investment is probably not for you. Don't waste your time and avoid a world of pain. 00:06:50.040 --> 00:06:53.160 There are other options available to you for financing your company. 00:06:53.800 --> 00:06:58.840 Bank debt is always a good place to start. It's not diluting. Depending on your age, 00:06:58.840 --> 00:07:03.640 the bank of mum and dad might be an option. You might be able to find someone in your industry 00:07:03.640 --> 00:07:08.680 who wants to buy into your business. But if you don't fit the profile of the types of companies 00:07:08.680 --> 00:07:15.480 that angels invest in, early stage, strong team, high growth, large market, internationally 00:07:15.480 --> 00:07:22.360 scalable, then you might find it more productive to put your effort elsewhere. On the other hand, 00:07:22.360 --> 00:07:28.440 if you think that you can meet these criteria, then game on. Let's do this. Your homework for 00:07:28.440 --> 00:07:33.240 today's episode is to look at those criteria and explain how you'll eventually meet them, 00:07:33.240 --> 00:07:41.000 even if you can't meet them today. The pithy quote from the episode today is, "Get to NO quickly." 00:07:41.800 --> 00:07:48.680 Now the next episode is about me. I'll tell you my story and how I became one of Aotearoa New 00:07:48.680 --> 00:07:54.120 Zealand's most experienced angel investors and my motivations for making the series. This will give 00:07:54.120 --> 00:07:58.520 you context about the advice I give you and confidence that I'm sharing firsthand knowledge 00:07:58.520 --> 00:08:06.280 that was hard won, not just random factoids that I picked up on social media. That's it for now. 00:08:06.280 --> 00:08:08.360 Until next time, ka kite!