While attending a session at Lowenstein LLP for the inauguration of the 2013 First Growth Venture Network, I had the pleasure to speak with and listen to some of NY and the Valley’s top investors. Some of this advice on how to navigate the VC landscape comes from them.
You quit your job, labored months building a product, and found some traction. Then, you looked at your bank account and thought to yourself: “crap, I’ve got two months of runway left, three maybe if I stretch it. What do we do?”
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 1st 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.
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.