-
Website
http://venturebeat.com/ -
Original page
http://entrepreneur.venturebeat.com/2009/11/04/4-ways-to-get-automatically-rejected-by-an-angel-investor/ -
Subscribe
All Comments -
Community
-
-
Top Commenters
-
Popular Threads
- 5 o’clock roundup: Mac fans try to hijack Windows, Emblaze unveils First Else smartphone
- Augmented reality to be a $732 million market by 2014?
- Pixable lets you print out customized calendars from Facebook content
- Blood in the streets?
- Hulu U.S. video streams soar by nearly 50 percent in October, Google’s YouTube flat
It may look/sound good on paper, but if they haven't created an account and are drinking the Kool Aid, I'd pass. Sure, extra money is nice (as we've been offered), if we do decide to take on investors, it would be nice that they use your product first (and "get it").
What Zeppelin says is fundamental and applies to all contributors and providers and counsels for your project. They may be right, as all your non-buyers will be, but you have to make the acid test and know where they stand !
Your best bet is to help an investor evaluate the nature of the risk in their own terms, and let the chips fall where they may. If they pull the trigger, you can be comfortable that you have discharged your responsibility up to that point and that the risk of reaching into their pocket is all theirs.
This is the only thing you can do to try to preserve investor relations through the inevitable twists and turns going forward. It may still not work, but that's life.
"I believe that..." - every entrepreneur *believes* that their business will succeed and become profitable, so belief is not of much use in an presentation to investors. I want to hear the entrepreneur justify, explain, reason and provide evidence for why they're going to succeed, not simply assert it.
"educate the market" - nobody wants the product, but the entrepreneur thinks that with enough clever marketing and persuasion they can make people want it. (Occasionally this phrase is valid, if we're talking about a new solution to an old problem, but I hear it all too often when this isn't the case.)
What amazes me is how often I hear these two exact phrases from so many entrepreneurs.
:-)
Thanks for posting the video too. The more perspective folks get on this, the better.
Actually, "Presenting an exit strategy" should replace "have 5 year projections" in the list. Every business should have five year projections. You know, and they know, that they are only a guess. I'd much rather invest in a business that has a plan for growth than a business that has a plan to exit.
I have to disagree with your comments about 'damaged goods' or 'short timers'. This is a common misconception. There is NOTHING different about managing a company to maximize shareholder value and investment return. In fact, I believe the primary job of every management team is to maximize shareholder value (assuming the company has investors).
I also strongly disagree with your point about an exit opportunity 'presenting itself'. This is another common mistake. The exit is just another business process. An optimum exit requires strategy, planning and execution.
In the end, this discussion is largely philosophical, and I have a feeling we will have to agree to disagree.
If I may weigh in, first it's clear that "Angel" can mean several things, which might be the cause of the disconnect. For example, there's "Angel" as is "before the planned A and B rounds" and "Angel" as in "We shouldn't need any more money than this."
I am writing from the latter perspective; it's possible (correct me!) that e.g. Kerry is writing from the former? In any case, clearly there are different possible motives.
I would agree that if the business is healthy, exit opportunities do appear in the sense that a growing, profitable company of a certain size or higher is always in demand, even as a profitable division of a holding company designed for such things. I also agree that myopically setting you sites on "exit" could damage your perspective on just building a good company.
Still, for an investor it's nice to have possible exits understood. E.g. that it's typical for this industry to consolidate.
But there are other ways -- like balloon loans -- for an Angel to make a good return without worrying about exit at all!
Independent of the above, I feel strongly that EVERY COMPANY, especially those seeking capital, should have a 5 year plan. Its the only way any investor can be sure they have thought through how their business strategy might produce financial success. Agreed it is a guess at best, and the potential investor is free to ignore it if they like. However, every one of my clients is a better company now because of what they learned through the process of developing the 5 year plan.
Great post. I really enjoyed reading each section and your breakdown of the 4 ways to get rejected. Of course, I love your final one! As we are currently in the process of trying to raise funding, I will be sure to keep this post on the fridge.
Best,
John
www.adstruc.com
Building an online marketplace for outdoor advertising.
Competition is healthy because it indicates there's a market. However if you don't have a good story for how you'll carve your niche in that market, then it's not clear that you'll defeat that competition.
Good stuff guys!
Loved your article. Many of our luxury clients are looking for investment, Angel, VC, and PE, great points.
If you would like to connect, please find our information on;
www.linkedin.com look under Diane M. McNulty.
Cheers,
Diane
Founder and CEO
360 Degrees Luxury Development, Ltd.
Diane.McNulty@360DegreesLuxuryDevelopmentltd.com
The reason?
They know the numbers are crap but the projections are invaluable in showing your thinking, your assumptions, whether you really understand your market, and what you think is going to happen to it. I guess this would be valid for angels too, but if the person or firm funding you expects you to hit the sort of imaginary numbers you're pulling out of Excel, think twice about whether you want them to fund you in the first place.
I agree that VCs want to see it, but I disagree that it's useful. I understand about the thought process, but you can talk about that without actually inventing numbers.
Angels are usually very different than VCs in the type of companies they want to invest in. This really depends on whether you expect to ONLY raise Angel or whether Angel is the round before round A. If the latter, you're right. If the former, the type of investor is different.
Perhaps a better way to put it would be: Have a reasonable path to profitability, but not hard numbers to hit in 3 years.
Finally, if your Angel or VC is adamant about those projections, consider that perhaps you don't want their money, because they're already not thinking properly about business.
I am scheduled to teach an online entrepreneurship course in early 2010--I'd like to use this material as "required reading" for my students. Please contact me (Ask_Karen on Twitter). Thanks.
I'm going to put this statement to the test. I have absolutely no way to know how my first business will do in a year, nevermind five. As a first time founder, probably the most common situation that angels are involved with, I have zero past experience that would even give me a slight chance of predicting the future. Even large corporations that have decades of experience often miss their QUARTERLY projections. As you suggested, the best I can do is have a solid plan towards getting cash flow positive as quickly as possible. At that point I can begin to provide limited future projections. Even if they're wrong I'll still be in the green and as far away from the "job boards" as possible.
For a follow-up post, I'd like to see the 4 things that will get you an angel investment.
I look forward to part two. Also, I watched Basil Peters (one of the commenters) 30 minute presentation, and thought he had some interesting perspectives.
Ron Hodson, CEO & budding pitch writer
www.wheresurl.com
I do agree that in other industries it can be easier to make projections because costs and customer acquisition can be more quantifiable.
Still, I challenge you (for example) to find an industry in which a "5 year project" for a BRAND NEW COMPANY has any validity.
this guy wrote a book, and is publishing it. sells it at these work shops, so far I have found his same wording in here. ever heard of cut and paste.
I agree with you that IF the 5-year proj seemed reasonable, PERHAPS that would be a good sign. In my experience, however, that hasn't happened even once.
What I *do* want to hear is *how* revenue and costs will be handled, which I talked about in detail in the article. But the projection itself is useless to me.
So I *was* going to say "What about old school angels who think you are crap and disrespectful if you didn't create the five year projection?"
But then the answer was obvious:
a) Those investors probably don't have the best track record
b) They don't get web so why partner with someone who doesn't know your industry?
That's all. Keep it up!
Marsh Sutherland
http://socialgrow.com
@socialgrow
Traditional angels don't necessarily have a bad track record. However, my point of view is that if they significantly disagree on a significant number of these points (and stay tuned for 4 more in a subsequent article!), IMO they're not being reasonable or practical, and therefore they're probably a bad influence over your business.
Seriously, I do. But allow me to defend my style choice:
1. Being strong-worded is more brief and powerful than hedging.
2. Hedging barely adds to the content, but hampers readability.
3. If you read more of my work (http://blog.asmartbear.com) you'll see that I'm transparent and honest about all sorts of things, and *often* talk about my mistakes and how I've changed my mind.
However:
1. I've been successful three times, so the Black Swan argument is harder to make.
2. All of the points above are good business tips regardless.
3. I agree many people don't need investment at all! But that doesn't mean Angels == Greedy. In fact, I'm wondering where you got that idea...
I would describe it as how to move from generalities to the specifics.
So many people have become so used to general theory that they have no idea how to apply that in practice.
I reckon every budding entrepreneur should read your list and try to stick to it
http://www.onesherpa.com
Also when I am asked about the 5 year plan I always say we can take out the magic 8 ball and see what it says.
Investors don't like my answers to much.
Great post.
shreyas
Re-educating myself and shedding corporate marketing speak, AKA; all the no-no's of this article - then applying general best practices of web2.0, AKA; WYSIWYG, total transparency, etc is the goal - but, you have to catch yourself!
Thanks Jason - help us keep it real ;o)
jason@cityryde.com