Throw your old investments and econ books in the bin, we’re no longer valuing companies on their streams of future revenues, but instead investing in what they deem the future liquidity of those star-ups.

Good? Sure for early investors who can often expect to see 10-30x of their investment come back to them within the context of a few years, but the question is, is this model sustainable?

Take for example Facebook, which was recently valued at $41B, that’s 41 billion in market capitalization of a company, which undeniably, has had one of the, if not the biggest impact on the web since Google. But where are the streams of future cash flows coming from?

With Facebook, it’s more evident, with twitter, that is now valued at $3B the cash flow situation becomes a bit more hazy. Surely the sponsored hash tags bring in marginal revenues for twitter, and I’m sure somewhere it must charge to remove API limits. But these two companies are tech darlings that have created a monumental impact on the dissemination of global information and data. Should they not have a more standard and embedded business model? Should they have not been making money from the onset, or is the value of each user / subscriber so little in today’s tech space, that you need 100 million users+ monthly to turn a profit?

Internet darlings aside, the idea that investing in the proposed liquidity of a company without a business model is silly, what it does is it creates false equity perceptions on the idea that any of these said liquidity investments will result in the invested company becoming the “next big thing”. The sad fact is, that the majority of these liquidity investments will not become twitters and Facebooks of the future, they will require additional capital investments to stay afloat for two, four, six years, and if they do not become large enough to deploy sustainable and scalable business models then what?

They will implode, and the bubble will pop. Just like in ‘00/’01, and just like in ’08, but the repercussions of this bubble will be different. It will put a vice on the flow of private capital into new companies, into companies that can from day one show that scalable and sustainable growth.

Which also begs the question, why are we not seeing mote IPO’s? Surely it would suit a company whose market cap is 41B, just 16B shy of the Ford Motor Company, or even game developer Funcom whose market cap is around 200M to offer a public offering.

Or do we not see these companies offering IPO’s because of the VC secondary markets or simply because their valuations wouldn’t be able to perform under the scrutiny of an efficient market? Food for thought.

Be it the three F’s (Friends Family & Fools), Grants, Loans, Business Angel Investment and / or Venture Capital the vast majority of startups will need some form of capital to grow. What type of capital you need often depends on what your business does, what stage of growth it’s in and what industry space your company is in.

Which brings us to the point of this article. While it may seem obvious to many, entrepreneurs when faced with the need for Angel or Venture Capital will more often than not seek this anywhere they can find. Meaning, it’s not uncommon to see a business plan for a promising clean tech startup winding up in the bins of Business Angel networks and Venture Capital firms.

This happens predominantly due to two factors.

One. Entrepreneurs send their B-Plans (or we should say executive summaries because you never want to send a 25+ page business plan to a potential investor) to anyone and everyone whose address they can find.

This practice is detrimental for a few reasons.

First. Approaching all BA’s and VC’s in this manner will create negative buzz within the industry. In more mature markets investors speak with one another and a company who has presented everywhere will look amateurish, and this by itself will hinder the possibility of any future investment.

Secondly, this shows that you have not taken the time to conduct due diligence on those people who you want to become eventual business partners in your project. Meaning, if you care so little about who you have invest in your business, why would they take the time to conduct due diligence on you and your company and waste valuable resources that could be applied to a project which will fit their portfolio.

Two. Which leads us to the second point. Do your due diligence. Study the BA networks, he VC’s that actively invest in your industry. Identify what stage in the lifecycle their funds (that apply to you) are in.

This is exceptionally important, because if a fund is nearly exhausted the investor by taking you into their portfolio will not have any contingency capital in the event things go sour.

And most importantly try to get a hold of the management / entrepreneurs that these BA’s and VC’s have invested in to ask how the process when, whether the investor was fair, how they work with the company that has been invested in and /or / if they offer any assistance in terms of strategy.

In closing, you’re offering the investor a product, as they are offering you their services, it’s a two way street and due diligence needs to be conducted by both parties. Not only will this lead to increased synergies between you and the investor, but create a positive working relationship that in all likelihood will also increase your start-ups chances of success.

More than often young entrepreneurs believe that once they have an idea, it in itself is sufficient enough to acquire that Business Angel (BA) investment to get to entrepreneurship Level 2; and while BA’s typically provide billions annually in early stage funding to young companies, they also have a number of set criteria that will indicate the investment readiness of those companies that come across their table.

But what are those criteria? This is what you’ll find out in Angel Investing 101.

Management Team – First and foremost, BA’s look for teams of high-quality entrepreneurs with a track record of leadership and performance in either the specific industry the start-up plans to operate in, or in previous ventures. This also includes the ability to inspire confidence in all the stakeholders, current and future within the company, and finally malleability. Meaning, is the team a pleasure to work with, is it comfortable to receiving

Market opportunity - Do you address major problems for significantly large target markets (i.e. a $100+ million market). The startup has to have a strategy to claim a large share of the market, and while criteria differ between Angel groups, a good target to shoot for is 20%.

Growth potential – Grow quickly and scale is the name of the game here. The company must demonstrate plans to generate sufficient revenues beyond the scope of an initial product offering. Does your startup have multiple revenue streams? How about well conceived financial projections, on what assumptions, and how about cash flow growth and consistent profits?

Competitive advantage – What is it that distinguishes you from the competition, and/or provides barriers to entry for that competition? But what conveys competitive advantage – it includes IP (intellectual property), it’s protection, exclusive licenses, marketing and distribution, & scarce human resources among a handful of other things.

Technology – Let’s face it, Angels prefer to invest in new 1^st of a kind ideas rather than augmented concepts of proven products and services. Yet, the technology is not everything, does it have application, is it verifiable? Highly esoteric concepts will be more often than not – treated with caution, and especially if they don’t demonstrate a clear path towards commercialization. Remember, just because it’s new, doesn’t mean it’s good business. Newton anyone.

Use of proceeds – The money invested will be used to accelerate business activity within your startup in order to achieve key milestones and increase the overall value of the company. Funding will often be directed towards R&D activities, sales & marketing, and hiring key personnel.

Exit strategy – Think return 30x, however many angels will invest in a 10x return within a 7-10 year time frame. But how do you attain a 10x return that depends largely on your exit (sale), be it through future funding rounds (VC), sale to a larger industry player, or perhaps IPO. When writing this part of your business plan, be sure to research your industry and look at current trends, everyone wants an IPO or a sale, but sometimes it’s just not feasible.

Fit – Remember that Angels are more than just investors, they are individuals with ample executive experience in a number of fields who will actively coach and help you and your company move forward and succeed. If that personal fit isn’t there, the advice and help you will receive will be greatly compromised and henceforth most Angels tend not to invest in companies where they don’t see a fit happening.

Consumer internet is still the hottest US VC investment category, swiftly followed by clean tech and energy

The sector was voted the hottest growth area in the industry with 73.5% of those VCs polled backing it. Cleantech and energy is the second hottest growth area in the venture capital industry, according to more than half of (53.1 per cent) venture capital executives, third place goes to Internet Marketing with 40.8%.

Perhaps the question for those hunting more innovative products and business models at better valuations is whether they should be following this trend? Although it is a positive sign for early stage growth companies whose investors are looking to exit in upcoming fundraising rounds.

Overall, the annual study’s results indicate optimism in the venture capital scene compared to previous years. Over half, 56 per cent, of US venture capital executives are more confident and optimistic about the industry today, compared to a year ago when an overwhelming number of executives felt the industry was ‘broken’.

The survey found executives to be split down the middle when it comes to which geographical region currently represents the area of hottest investment opportunities, with 42 per cent indicating the east coast, namely Boston and New York, and 42 per cent Silicon Valley.

Seventy-one per cent of respondents are not worried about new deals and 72.9 per cent indicate they expect to see a steady deal-flow over the next six months.

When asked to identify which functional trends they were most concerned about, 62 per cent of the executives indicated they were very worried about the uncertain return of exit markets.

The survey also asked how the tax legislation on carried interest will impact the venture business and 46 per cent indicated it will have a major negative impact, while 16 per cent believe a ‘work around’ will be found.

This (second) annual VC survey was undertaken by Polachi Inc, a provider of Access Executive Search, canvassing VC executives across the US of which more than 98% are partners or managing partners.

I recently came across a commentary that goes along the lines of VCs know what to do with engineers but engineers don’t know how to deal with VCs. As with all good lists, and entrepreneurs like making lists, it centres around recurring issues for the inventor when dealing with a VC. Issues that are worth refreshing in this author’s opinion:

VC’s don’t sign non disclosure agreements – it affords them protection if they like your ideas, but they want to fund someone else to do them. How do you legislate against that when they have all the financial muscle and contatcts? The answer is it is not just about NDAs and patents but core competencies and brand, so approach with caution.

VC’s are sheep – they will either all fund something or none of them will, so if you have an idea that’s too new and too different you may struggle to find funding. Too right! It’s not just about self promotion, you have to promote your sector and hang a big sign over the exit..

VC’s aren’t technical – they dismiss what they don’t understand, your novel ideas, and they focus on what they know, usually irrelevant marketing terms or growth predictions. If your idea’s too new and different for the expert to understand then you may not get funding. BUT isn’t there much more to achieving commercial growth than building a great product? Have you considered treating your VC as your target customer? Maybe engineers should run the world but they don’t – Deepwater Horizon anyone?

VC’s don’t take risks – VC’s have a reputation as risk takers – they are not. They collect money from rich people to build investment funds. The rich investors take some risk, though their risk is spread across the fund’s investment and is often a tax benefit. Are they solely interested in making blockbusters and sequels? They certainly have a formula and like to stick with it, this is why you need to know A LOT about your investors and choose them carefully. You wouldn’t sell a Ferrarri in a Wal-mart, place your investment just as you place your product and pray you can find some like-minded people with influence and some discretion over the capital in play.

Venture funds are big – If your idea needs a lot of money, then you have a better chance of getting money than an idea that promises the same rate of return for much lower investment. This is because it’s easier for the VC to manage fewer big investments than many smaller ones. True, but most are transparent on deal size, the important thing isn’t how much your company is worth or how much you can spend, but that you spend it well and with purpose.

VCs collude – They price fix by discussing among themselves funding and pricing for candidate start-ups. They will probably between them only fund between two or three companies in an industry – this limits competition and makes success of the few more likely. Absolutely, they hate competition to fund good ideas and the worst thing is they are spoilt, so spoilt they invest next to nothing in enhancing dealflow, how many sponsor or educate & participate in conferences freely? Are they trying to innovate or harvest ideas?

With thanks to Nick Tredennick, Brian Shimamoto and Alan Barrell. To be continued…

The general thought is that if you’ve got a good idea – and no one has done it just yet, or not in the way you’ve conceived it, being first to market means live or die. Here at F3FundIt we think this approach is pretty much wrong.

There are clear benefits to first mover advantage, but there are also a number of other factors that have to be taken into consideration. The first and foremost of these is strategy.

And by strategy we mean launch strategy, short, medium, and long term. One of the biggest problems that we find wrong with start ups, is that they plan ahead for 6 months to one year, and then wing it. However, after those initial six months when the business is already operational, will the management of the company really have the time to create a thorough scenario analysis for the next six months, year, three? The short answer is no, however, they will waste valuable time doing just that when they could instead be spending that time readjusting the business model to best fit the pre-launch misjudgements.

Take for example the case of Lycos, Infoseek, and WebCrawler that all launched in 1995. Then Google comes in three years later, and the rest is history.

Those first search engines had a three year start on Google, but why did they get relegated into the annals of net history while Google took the undisputed heavyweight search crown. It all comes down to strategy.

The code behind Google has already existed prior to its launch, but they decided to hold off a bit. Why? Well in 1998 the internet was just starting to reach its critical mass, the 56k modem came standard with home PC’s and overall connectivity was cheap, $19.95 per month.

In 1995, the facts were a bit different, the equipment was too expensive and and connection speeds too slow for anyone to really use the net outside of institutions.

So the question you should ask yourselves is, is it the right time, are we ready, do we need to be the first, and prepare, prepare, prepare.

And to close, I will quote David Masó who recently told me during a chat “The good entrepreneur is he that resists and pursues their dreams in a smart way”.

Y Combinator’s new 8.25 million USD fund shows that it’s funding model is definitely successful, but the question is can it transfer to other industries?

While Y Combinator may be focused on the web (and by we include mobile as the lines are ever more blurry), this new 8.25M fund shows that Y Combinator’s new approach to investment shows merit. The question however is, can those similar practices be transferable to other industries?

Typically an investment of up to $20k ($5,000 + $5,000 per founder) isn’t exactly big bucks and typically won’t provide sufficient capital to hire a team, program whatever, and devise a strong media campaign. What it does is give the founders of said startup enough cash to live for three months and develop the idea while having their hands held by the incubator.

Specialized business training on the go, or more likely during the building stages? Absolutely, look at the successful entrants, all programmers with little to no business experience, but now with successful companies, Reddit, ClickPass, Zenter.

However, this is the web, where businesses are easily and quickly scalable, but how about if we were to apply the same model to clean tech, could a micro investment also work?

Aside from what is undoubtedly the higher cost of a prototype, the model should be transferrable. Why? Because the recipe is the same.

Inexperienced Engineer in Business + Good Scalable Idea + Capable Mentoring = Higher probability of success

The only difference then is, how much money will a non-web company need, and what is the exit?

First off, we are definitely looking at larger figures of 50-100k+ per clean tech project total seed investment – longer lead times, longer, development times, and longer to market times. Not to mention of course that sales and profit generating activities typically will require more effort but should those same hand holding techniques be applied to a different tech sector we could very well see a paradigm shift in the way we go from prototype to market, and more so how early stage non web companies get financed.

Would be interesting to see if anyone will pick up on such a model in the coming 3 years.

Crowd-financing is a great tool to get your project off the ground, but it takes a lot of work and can often keep you from what you should need to, or are working on – the actual business.

There are of course other forms of crowd-financing, such as crowd financed managed seed/investment funds – but the legalities, specifically from the fund management side can get a bit tricky. That aside, company founders have a plethora of other options when it comes to raising capital – however often times these choices are only available to larger firms with positive income streams.

So what’s an entrepreneur to do in this world? Well the good news is that there has recently been some innovation on the field, and it’s a concept that fundamentally crowd-sources start-ups and invests in 100-200 of them per year, so at a minimum, you’re seeing 2investments per week. Compare that to your traditional model of 5-10 annually and you’ll see why this is financially innovative.

So who’s ballsy enough to lead the way on this – it’s a group out of California called Right Side Capital Management. And if you think about it, it makes a lot of sense.

You’re basically taking the roulette table approach, if you spread your money across the table, one will eventually hit, the difference here is, that in this start-up version of the popular Vegas classis, more than one may hit, in fact 2-3-4 may hit, and one of those will hit big – and then there’s your flip.

While there may be problems involved in startup corporate governance, and especially with the way they’ve got their logistics set up, the concept as a whole is absolutely brilliant when it comes to getting money out to those companies that need it.

But how do you go about making investments into 100+ companies, clearly aside from having to increase your deal flow by a substantial amount, you need to employ a very different project valuation methodology rather than the traditional VC model.

From the RSCM website, and specifically the application page, it seems that they are very heavily focusing on the team makeup, and those individuals cash position or personal financial health. Meaning, good credit, probably some money saved up in the bank, or similar – so that you as an entrepreneur can maintain yourself while developing said product and going to market.

After all, an entrepreneur that has no money is one that isn’t going to devote his/her full time to the project. So if we’re right, I bet the assessment criteria would be 1. Team 2. Project 3. Progress.

Any thoughts on this? Let us know.

There is good news for start-ups this Monday. Index Ventures, a EU based firm has launched a new fund focusing on early stage deals, and plans to invest in twenty companies over the coming 24 months. Aside from the positive indicator that money is being raised in order to invest in new companies and that we’re seeing signs of life from the VC sector, what really differentiates this move by Index Ventures is its strong focus on the startup, and it’s approach to investment in them.

What this means is that the partners of the firm will take an active stake in the start-ups by joining their boards, this is a shift away from the status-quo of larger firms whose partners typically don’t engage the startup team due to time constraints or otherwise.

Index Ventures new seed fund is exactly what needs to happen in the VC industry. VC’s need to take a more hands on approach in their invested firms to ensure a greater success to failure ratio, and at the same time, they need to fill the gap in early stage capital that is lacking in many European markets. Some of Index Ventures prior investments are MySQL, Skype, Playfish and RightScale.

In more financing news, the Guaridan has reported that Luke Johnson, the man who brought Pizza Express to market in the 1990’s has acquired a 27% stake in the Beer & Partners angel investment network.

As a whole, good indicators, and again it seems that those who will lead the world out of its current slump will once again be entrepreneurs.

Something to the effect of 80% of Angel invested businesses go under, and when looking at angel investor activity from those individuals who have been actively investing in the industry the rate drops to approximately 60%. meaning, 2/3 investments will fail even under the guidance of experienced investors, and 4/5 as a whole. Quite the number.

Every single investment requires the following three things to be in place, if any of these are missing chances are that the investment will fail. These three things are.

1. A great business idea
2. A great management team
3. A great mentor

If any of these three factors is lacking, chances are that the business is unlikely to succeed, and an established angel investor would be wise to keep their money in their pocket until the sartuppers manage to make any one of the weakened factors rock solid.

Mind you this type of feedback will only come from good angels, as they will have the ample experience necessary to critique and analyze the idea. A new Business Angel may become influenced by the energy of a new entrepreneur who wholeheartedly believes in his / her idea, and like others in the general vicinity of the BA too becomes enamored with the idea.

As an entrepreneur yourself, you have to look at the BA’s you’re pitching too and working with, and seeing if they see you and your business objectively or if they’re just another member of the crowd jumping on the bandwagon. Mind you as an entrepreneur this is a very difficult task, as you’re probably thinking your primary goal is securing capital to help in delivering your business to the next level, and while in part that’s true, the greater picture is that as an entrepreneur, you should be more concerned with ensuring the success of your enterprise – rather than running after the first buck.

Oftentimes, BA’s will also say that that they would rather back a good team rather than a good idea, this is preposterous – any good team will only go so far with a mediocre idea and never provide the 30x returns that any BA should be looking for, these are not the risk takes that will back the next big thing, and if you’re idea is truly cutting edge, you’re chances with these folks are slim.

The good and successful BA, will remain cool, and over a period of weeks maybe a month to three decide if the proposal is right, it’s the right business idea, the right management team, and has the right mentors to see it grow, the business angel, will also know the market and understand the current business environment.

Ensuring your BA holds all these characteristics chances are you’ll wind up in the 44% of well thought out investments that actually make it, and when dealing with BA’s, it’s like anyone else, a give and take relationship.