Saturday, May 29, 2010

Talking to Angels - The Executive Summary

I said it many times in these posts, but it is worth repeating. If you want to communicate to Angel Investors, your challenge is to be brief and exciting at the same time.  Angels read dozens of plans and pitches a week, thus develop a short fuse stretched to its limit and a deja vu mindset. Every single word you use should be valued as an opportunity to break that fuse and lose your audience.  Furthermore, the specific words used must strike a balance between creating "excitement, belief, opportunity-to-change-the-world,  high expected returns" and projecting a perspective of "naive, smoke-and-mirrors, improbable deal, too-good-to-be-true".
Angelsoft is the software most angel groups now use to manage deal flow, presentations, investors collaboration, etc. They developed a great template for an executive summary. If you apply to present to a group that uses Angelsoft you'll end up supplying information in that format.
The same template, however is great for writing your executive summary of any deal regardless if presented to an angel group.  Here it is

Thursday, May 27, 2010

Learn from The Master

How to pitch to today's angels

Video still
Serial tech entrepreneur and renowned angel investor David S. Rose talks about the growth of angel investing, and offers advice on how to successfully pitch to potential investors

Wednesday, May 26, 2010

More "Talking to Angels" - The PowerPoint Slides

In a prior post Talking to Angels  I described the guidelines the Arizona Angels recommend to produce PowerPoint slides for presentations to our screening committee and members.  Since then I've been asked to provide concrete examples.  Unfortunately most presentations are confidential and cannot be published here.  Therefore I prepared a presentation for a fictitious company, albeit a little tongue in cheek, to provide the desired example.  I hope it helps.

Marco Messina

Saturday, May 15, 2010

The Myth of The Outsider

Innovators are by nature curious people with a strong desire to improve the world around them.  Upon encountering a problem, an inconvenience, or a task too cumbersome, instinctively they seek to find a remedy for it.  That drive has been at the foundation of innovation since the invention of the wheel, the first disruptive technology shaped by man (fire and stone tools were not invented, were "found" and nurtured).

Since then, innovators have nurtured the romantic idea that a single bright mind can find an answer to a vexing need and be recognized (financially or otherwise) for it.  Over the centuries it has certainly occurred, but in modern day, that notion may not hold as well. I lost count of the many ventures I have seen presented whose business plan calls for commercializing  Joe-Invenor's "idea or solution" the viability of which has was vetted only by Joe's friends and other supporters devoid of domain knowledge and experience.

Indeed, "people from outside the industry" have, occasionally, succeeded in seeing solutions insiders did not, but I believe those were the exceptions, or, more often, that conclusion was reached with incomplete information.  For instance, in the popular culture many believe the myth of: "bright college drop out (Bill Gates) develops a computer operating system that mighty IBM could not, thereby creating a bright new world".  The reality, however, is that Gates, due to a most unlikely coincidence, had over 10,000 hours of programming experience before going to college, was indeed very bright, and dropped out to make a microcomputer version of a programming language (BASIC) previously developed by others when Gates was 9, not an operating system.  The staggering success that followed came thanks to a lot of hard work to be sure, but also more coincidences, personal and family connections, quick thinking and, in the end, the wisdom of assembling a team with the brightest industry experts. IBM conversely had all the resources and talents to make their own solution, but simply chose the buy vs. make route. Due to more coincidences it unwittingly helped a major competitor to be born. A similar review would correct the popular myths on the birth of Google or Netscape or Apple and others.

If we dig deep enough for details, there are very few demonstrable cases of successful innovation by an "outsider" blessed with "new eyes" vision. Invention is another matter since invention (including a patent) requires only a "novel idea" with no consideration to any practical implementation potential, let alone actual implementation.  The world is covered with ideas. Most do not see even an attempt at implementation because that requires hard work well beyond "imagineering". A few ideas see implementation only to die early for lack of  practical underpinnings, or of a value proposition that moves customers to act (these are the solutions in search of a problem).

Today, innovations cannot stand alone.  They have to integrate in a complex web of interfaces, other products, services, regulations, business processes, cultures, vested interests, user habits, etc.  On its own each "new idea" may be commendable, but, if its implementation requires changing the world all around it, it is probably dead on arrival.  The same goes for creating new standards or modifying existing ones.

New eyes may appear to see new solutions, but, often, only because they do not see the reasons why the new idea cannot interface well enough with the reality around it.  The only fix for that blind spot is to bring into the team the best domain experts available.

Experts are those that through practice had the opportunity to learn all the interfaces required for any system component to fit its ecosystem. Often they will show why "it" won't work.  I those cases, be grateful: avoiding wasted time, which is even more important than avoiding wasted money.  In the best cases the domain expert may suggest modifying the "new idea" and make it possible to be more than a flash in the pan.

Inventiveness creates ideas.  Innovation creates results through inventiveness checked by practicality.  Beware the single minded genius, particularly yourself.

Whether the entrepreneur or the an angel investor doing due diligence, involve domain experts if you are an outsider. It will lower your risk.

Marco Messina

Thursday, May 13, 2010

Be Mindful Of Your Audience

Entrepreneurs must be able to SELL. Selling, of course, involves all the steps leading to closing a deal such as: understanding the customer's need, presenting a solution, explaining features and benefits, articulating a value proposition, etc. Most entrepreneurs become quite skilled at selling their products and services.
Raising financing for the business, however, involves selling the idea and future prospects of the business to investors.  The entrepreneur must sell a small piece of the company to outsiders to finance its growth.  The process is similar, not the same and angel investors routinely confront skillful business owners who do a poor job of selling the investment deal.Why?  I believe this happens because most often the seller is not mindful of his/her audience.

Let's look at the parameters of  two "Acts" that occur in the "Play" of business building and financing:

Act 1:  Entrepreneur E is pitching Product/service P to prospective Customer C

E understands C's problem well
C understands well and is painfully aware of his problem
C appreciates the difficulty of solving the problem (it is yet fully or partly unsolved)
E has put a lot of time, effort and creativity to find his proposed solution
E is particularly proud of the obstacles encountered and overcome along the way to create the solution being proposed, and explains them in detail to C who is interested in and understands the details and is impressed by E's competence
C is looking for reliable continuing long term performance and support in the solution he buys
E  promises to be around forever to service C's needs in a continuing relationship

Note: Over time Act 1 is repeated regularly, frequently and profitably thereby creating a practiced habit which makes its performance easy and almost automatic.

Eventually when financing is needed to grow the business the Entrepreneur must perform in a new Act with little or no prior practice as follows:

Act 2 - Entrepreneur E  pitches Business B to Investor Group IG

IG need a vehicle to invest their cash at as good a return as they can find
IG decided that buying a piece of a good business (B ?) run by a good operator (E ?) will give them good returns
IG, looking at business B,  are focused on: how fast it will scale, how profitable it is, or will be, and how fast they get their money back, and how many times over
IG, in the first presentation, do not have,  individually, the technical competence to assess or are interested in the minute details of business B's products
E is expected to make his pitch to address the interests of IG.

E instead remains true to his well practiced past presentations:
E focuses on product minutiae that go right over IG's head - IG is confused and bored
E demonstrates his creativity by the complexity of the solution and all the things that went or could go wrong with it, that E had to master - IG is scared by complexities as opportunities to lose money
E is proud of his business plan to create a business that will grow, change the world and last forever - IG see their investment locked inside a business, never to be returned

This performance becomes the concluding Act of a "Tragedy of missed opportunities". Missed opportunities for both the Entrepreneur who gets no funding and for the Investors who were bored and scared away from a business that possibly had real potential.

The fix is for the Entrepreneur to learn about the Investors audience as diligently as he learned about his customers.  Then speak to them on their own terms:

  • KISS - make complexity simple and brief (Elevator Speech and One Page Summary)
  • The company is the object of the pitch not the products - Investors assume the products work, at least in the first presentation.
  • Scalability is the key to big ROI - Convince, why it is possible and likely
  • Specific parameters of  profitability and scalability yield ROI and return multiples that interest angel investors  Few types of businesses can do it (see AngelCalc post) at the right size of investment, do not waste your time otherwise.
  • Business does not happen, a team (more than a founder) makes it happen.  Sell the team, have a team that can be sold, evolve the team it if necessary.
  • If there is no competition, you have not found it yet. Even if true, doing nothing is always an alternative.  Investors are afraid of competition that has not yet been identified, so should you. 
  • Investors love simple solutions to serious painful immediate problems, are leery of solutions in search of a problem and markets needing years of gestation, or of new standards to be created to coerce the world to do it your way.

Mostly, practice KISS: know your audience, speak to them on their terms.

Marco Messina