New entrepreneurs seeking funding from angel investors often appear surprised by the multitude of considerations and requirements they must satisfy to get funded. If they can keep both the big picture and the details in perspective, the puzzle is not so difficult to solve.
Working backwards from the investors' requirements and preferences one can create a proposal that will "sell" provided that all the underlying reasoning, projections and plan are supported and convincing. Conversely, if you cannot make a credible case that your venture meets the investors' criteria time may be better spent seeking other forms of financing.
You can navigate the roadmap below opening and closing various branches to look into the details and reasoning behind them, or hide them to stay focused on specific HOW and WHY of various aspects of the problem.
I am experimenting with this method of communication. It allows you to switch between details and summary views. Your comments would be greatly appreciated. Is this method effective for you or not? In either case why? Thanks Email me
Mobile Apps Development. Formerly Startup and Angel Pitch Mentoring
Showing posts with label angel investor. Show all posts
Showing posts with label angel investor. Show all posts
Tuesday, April 16, 2013
Thursday, April 28, 2011
LUCKY OR SMART? Secrets To An Entrepreneurial Life
A refreshing an honest reflection on: luck, making one's luck and knowing the difference; discovering what we are psychologically fit for and what not; learning to look for luck where we are fit and able to create it. Great lessons in business and self understanding.
Read the whole series of posts here
Marco Messina
Thursday, April 21, 2011
Learning to dance
Ballroom dancing is not an innate skill. Most people have to learn the basic technique that most other dancers are likely to use because it is the shared knowledge that makes possible for two near-strangers to move in step and unison on a dance floor. It often pas to learn it before stepping on the dance floor with a new date, or a new in-law at one's wedding.
The same can be said of learning to deal with investors. It is not an innate skill, although, as in dancing, some have an easier time than others. Learning the skills and preparing the relationships before being in a hurry to close a funding deal is likely to help the entrepreneur find a better match and a smoother dance when the time comes. Like in dancing it goes both ways, investors too can gain by being open to meeting not-yet-ready but up-and-coming entrepreneurs.
The following post says it well. Take a look.
If you can't buy your investor a beer, don't take their money - Sachin's Posterous
Shall we dance?
Marco Messina
Friday, September 10, 2010
The Magic Ten
Sales are the only unquestionable proof that anyone on the planet values and wants what you make (or plan to make). Therefore it is the only proof that your business has any potential of being a viable, even a successful venture for you and your investors.Of course your business may still fail for a thousand reasons some related to you (management skills), some beyond you (timing and economic cycle). But if no one wants to buy, it is proof that there is no potential - change what you make or go invent something else.
The trouble is that this sales "acid test" is almost never performed soon enough. Innovators waste untold resources on whimsical notions that the world needs X because they thought so and without ever asking anyone if it is true, except perhaps for overly sympathetic family and friends. The genetic make up of the inventor/innovator is to instinctively seek solutions to perceived problems, then develop total belief in the solution found, often with smug disregard for the opinion of the less innovative. Unfortunately, those less innovative folks are the customers that should buy your product (BTW they probably innovate in their domain just as much, just do not appear so to you). Because their focus is elsewhere, almost always they will have different perceptions than you. BUT, if they do not like your offering, your product is crap: beautiful, genial, elegant perhaps, but business-wise it is still crap.
Before investing a great deal of energy developing prototypes, let alone finished products, do yourself a great favor:
1 Get out of your office or garage
2 Look for 10, TEN, not two, TEN prospective buyers of your product
3 Find a way to explain in 45 seconds: what you offer, and its value proposition
4 Continue to search until you have found ten that say they would buy whatever you intend to make5 After TEN people say they will buy at the price you envision, go prototype your product.
6 Then go back to validate with your ten prospects if they would still buy it.
7 If less then ten would, use the feedback to explore design modifications and
8 go back to searching for prospective buyers until you are back to ten
9 Repeat the loop for every prototype iteration
10 If you have less than ten fans or buyers go back to look for more - Remember TEN
Clearly this formula calls for good walking shoes and door knocking stamina far more than an MBA. The latter in fact will give you countless excuses to stay in your office to over analyze your own questionable notions of reality until, eventually failure will lead you to forget the textbooks and fancy formulas codified years ago, then get good sneakers and go talk to customers about what they want NOW.
It is a simple formula: TEN
Oh, and you can bet heavily on this outcome: If you can show your prospective angel investors that you have done this field market research, or better yet you have actually sold something to somebody, you'll be in a class apart from all the funding seekers they see - you will have the beginnings of a proof of market
Marco Messina
Thursday, August 5, 2010
Business organization for your startup
Thoughts from business experience. For legal opinions, consult your attorney and tax accountant.
Do not start as a sole proprietorship
This is the only recommendation sure to have no dissenters. All else following is meant as a general guideline to use in questioning your attorney on the best course for your particular circumstance.
The LLC - quick, easy, inexpensive
Many would agree that on a minimal budget this is the best alternative to get limited liability protection cheaply and quickly. Most states now have web sites where name availability may be checked and reserved, sample minimum articles of organization are provided, applications may downloaded and filed by mail. If you are in business alone in most states you can be in business in a few weeks, for $100 or less, and have little else to worry besides doing business. Your local SBDC or SCORE chapter will help you free of charge to get it done.
A more complicated picture
The picture of course gets complicated as soon as you propose to add partners and investors. These are my rules of thumb:
Operating Agreement (OA)
Also called Partners Agreement and other similar names, this not required to organize an LLC in many states, but it is required by common sense: If you have even a a single partner, spouse included, you owe it to yourself to have an OA that spells the rules of engagement: how key decisions are made: e.g. sale of the business, personal guarantee of loans, call for incremental investments from founders, approval of financial control processes, access to records, management compensation approvals, etc.
Most importantly you should agree in writing to how you will part ways if needed (spouses included) - who can buy out whom when and how, how to value the business, etc. To promote fairness, strive to implement the old "parting the cookie" technique " (one cuts the cookie, the other picks which half). It is much easier to agree when you are friends than when you will want to separate, probably because of irreconcilable differences If in this negotiation process you learn something about your partner and your partnership dies and untimely death, you won't be the first - better early and with less pain now, before committing time and treasure, than later.
Tax Liability
In most cases, with proper elections filed with the IRS, your LLC will not require separate income tax filings and members report their share on Schedule C of their personal return. Advice from an accountant will cost little and ensure no bad surprises - make it mandatory.
However, regardless of how taxes are filed, members will take the tax liability impact of the LLC's income or loss, so the Operating Agreement should include a requirement that cash be disbursed to cover the members' tax liability. Otherwise you risk having a tax bill due with no cash to pay it. Partners with very different financial postures may have very different perspectives, so agree in writing ahead of time.
Complexity increases further as the number of members and investors increases. In particular, outside investors, angels and VCs, are likely to have a very different tax exposure, cash position, needs and objectives from the founders. Of late many attorneys advertise that an LLC can be set to be govern and to function internally as a C corp with the "proper" Operating Agreement. Perhaps so, but in my experience managing the different needs with amendments of the Operating Agreement will become cumbersome, costly and beneficial only to the attorneys.
Furthermore the flexibility of defining the Operating Agreement however one wants is a two-edged sword that impacts investors' due diligence workload and cost. Corporations' governance is much determined by state statutes which local corporate lawyers know well. LLCs with complex Operating Agreements require careful review because only what is written governs and what is written could be unusual or unexpected and whatever is missing may be litigated later. Many angel investors simply avoid this risk but investing only in a C corp.
Switching to a C Corp.
At some point, switching to a C corp organization may be a desirable option. Professional advice from tax and corporate lawyers is mandatory. Mistakes can have dire consequences.
If you come to this point, be prepared to encounter a painful reconciliation of diverging interests of the owners. This will be particularly so if along the way some "family and friends" investors extorted or were offered a "non-dilutable" clause or "unanimous approval" of funding decisions or changes in organization. You may have % majority interest, but veto power trumps and is costly to remedy and there may not be statutes to help you out. In any event this step will require time, and the less time you have the more leverage the competing interests will have against you - allow plenty of time.
Starting as a C corp
This option is of course preferable if you can afford it and particularly if you start with a business vision that includes angel investors, VCs, many shareholders, IPO, publicly trading stock, etc. In this case you'll face significant differences relative to an LLC including:
Marco Messina
Do not start as a sole proprietorship
This is the only recommendation sure to have no dissenters. All else following is meant as a general guideline to use in questioning your attorney on the best course for your particular circumstance.
The LLC - quick, easy, inexpensive
Many would agree that on a minimal budget this is the best alternative to get limited liability protection cheaply and quickly. Most states now have web sites where name availability may be checked and reserved, sample minimum articles of organization are provided, applications may downloaded and filed by mail. If you are in business alone in most states you can be in business in a few weeks, for $100 or less, and have little else to worry besides doing business. Your local SBDC or SCORE chapter will help you free of charge to get it done.
A more complicated picture
The picture of course gets complicated as soon as you propose to add partners and investors. These are my rules of thumb:
Operating Agreement (OA)
Also called Partners Agreement and other similar names, this not required to organize an LLC in many states, but it is required by common sense: If you have even a a single partner, spouse included, you owe it to yourself to have an OA that spells the rules of engagement: how key decisions are made: e.g. sale of the business, personal guarantee of loans, call for incremental investments from founders, approval of financial control processes, access to records, management compensation approvals, etc.
Most importantly you should agree in writing to how you will part ways if needed (spouses included) - who can buy out whom when and how, how to value the business, etc. To promote fairness, strive to implement the old "parting the cookie" technique " (one cuts the cookie, the other picks which half). It is much easier to agree when you are friends than when you will want to separate, probably because of irreconcilable differences If in this negotiation process you learn something about your partner and your partnership dies and untimely death, you won't be the first - better early and with less pain now, before committing time and treasure, than later.
Tax Liability
In most cases, with proper elections filed with the IRS, your LLC will not require separate income tax filings and members report their share on Schedule C of their personal return. Advice from an accountant will cost little and ensure no bad surprises - make it mandatory.
However, regardless of how taxes are filed, members will take the tax liability impact of the LLC's income or loss, so the Operating Agreement should include a requirement that cash be disbursed to cover the members' tax liability. Otherwise you risk having a tax bill due with no cash to pay it. Partners with very different financial postures may have very different perspectives, so agree in writing ahead of time.
Complexity increases further as the number of members and investors increases. In particular, outside investors, angels and VCs, are likely to have a very different tax exposure, cash position, needs and objectives from the founders. Of late many attorneys advertise that an LLC can be set to be govern and to function internally as a C corp with the "proper" Operating Agreement. Perhaps so, but in my experience managing the different needs with amendments of the Operating Agreement will become cumbersome, costly and beneficial only to the attorneys.
Furthermore the flexibility of defining the Operating Agreement however one wants is a two-edged sword that impacts investors' due diligence workload and cost. Corporations' governance is much determined by state statutes which local corporate lawyers know well. LLCs with complex Operating Agreements require careful review because only what is written governs and what is written could be unusual or unexpected and whatever is missing may be litigated later. Many angel investors simply avoid this risk but investing only in a C corp.
Switching to a C Corp.
At some point, switching to a C corp organization may be a desirable option. Professional advice from tax and corporate lawyers is mandatory. Mistakes can have dire consequences.
If you come to this point, be prepared to encounter a painful reconciliation of diverging interests of the owners. This will be particularly so if along the way some "family and friends" investors extorted or were offered a "non-dilutable" clause or "unanimous approval" of funding decisions or changes in organization. You may have % majority interest, but veto power trumps and is costly to remedy and there may not be statutes to help you out. In any event this step will require time, and the less time you have the more leverage the competing interests will have against you - allow plenty of time.
Starting as a C corp
This option is of course preferable if you can afford it and particularly if you start with a business vision that includes angel investors, VCs, many shareholders, IPO, publicly trading stock, etc. In this case you'll face significant differences relative to an LLC including:
- Higher organization costs
- State corporate filing requirements
- Income tax filing requirements
- Corporate governance statutes
Details on these points are beyond the scope of this post. However, with respect to tax liability management, in the early stages of your startup you may personally benefit from any tax losses by electing to have the corporation taxed as a partnership (S election). The election can be reversed (only once) later when you no longer benefit from that method of taxation or your corporate needs change (e.g. IPO).
With regards to corporate governance, I have mentored many a budding entrepreneurs (mostly MBAs) much concerned with "preferred states of incorporation" (e.g. Delaware, Nevada, etc.). I am certain a case may be made and supported for their relative advantages. However I subscribe to KISS: In all states there are thousands of corporations that manage to do business successfully subject to their local statutes. Relative differences among states become relevant primarily in cases of proxy fights and similar circumstances which are unlikely to occur with a startup (you better figure how to avoid them). Instead, incorporating out of your state of primary operation is sure to require additional costs such as for multiple state filings, "domestication" into the state where your head office is located, retaining a registered agent, and more. In my view, when your business makes it to be part of the S&P Index and you develop high concerns for proxy fights, you'll have the cash to relocate it then whatever state is desired.
In the end all agree: avoid sole proprietorships. Beyond that, be ready to adjust your corporate organization to match your budget requirements of your shareholders and investors.
Monday, July 5, 2010
Invention, Innovation and Entrepreneurship
Working with startups I have the good fortune of dealing regularly with highly motivated energetic and imaginative people who feel a drive to change their world. To some the world is the immediate vicinity, to others it is the whole globe, but in all cases they all see themselves destined to make a big difference. Most, not all, hope to be well compensated for their novel contribution and hard work. Even in this specialized group, however, invention, innovation and entrepreneurship are frequently confused. There are standard dictionary definitions of each readily available, but their frequent interplay complicates things. Let's look at how:
Invention (Inv)
An invention is an idea developed by a person, the inventor. To be recognized as such by the US PTO it requires 1. Novelty and 2.Non-obviousness to others skilled in the domain. Note that there is no reference to usefulness, implementation, results, etc.
Innovation (Inn)
Is the process by which a useful outcome is obtained by a the implementation of either a new idea (an invention) or of an old idea in a new way or under new circumstances. Note that invention is not a requirement, but novelty of application, usefulness and most of all implementation are.
Entrepreneurship (Ent)
The activity of an entrepreneur: from its French root it implies starting something, particularly in business, taking risk for the outcome. Only initiative and risk taking a required, however common sense would also recommend a useful purpose that justifies the risk taking. Neither invention nor innovation are required. By this definition an entrepreneur could be one who opens a delicatessen selling the same products at the same prices and with the same level of service as the competition. So long as there is excess demand to be met the risk would be compensated by happy customers. Growing from there would require innovation.
Most founders of startups I run into have some of all of the above. They are risk takers (Ent), they act (Ent) to achieve a useful purpose or meet a need (Inn, Ent) and they do so in a novel way (Inn) sometimes starting from a new idea (Inv), sometimes from a novel reshuffling of an old one (Inn)
With this in mind, some interesting businesses, inventions and entrepreneurs come to mind
Vannevar Bush
Bush in 1945 (yes '45) in an article "As We May Think" in The Atlantic Monthly conceptualized and defined the specifications of a personal information storage, retrieval and sharing machine, the Memex, remarkably similar to a today's personal computing devices. Note that he did so before the invention of transistors and ICs that made the digital age possible. Reading the referenced article, you may note that it all depended on photographic data compression. Today's high density ICs still depend on the same principle, so Bush was correct in his extrapolation of the fundamental technology and only incomplete in the details of the ovolution. This example begs the question of how much do we recognize something as today's innovation only because of short memories.
Zappos
Zappos is frequently and justly touted as having developed a fanatic level of customer service. It is a correct assessment but only relative to on-line retailing. Anyone who dealt with Nordstrom in Seattle around 1970 (interestingly also a shoe retailer in its beginnings), would instantly recognize the same fanatic commitment to service that built their retailing empire. To wit a story reported by the Seattle papers of a sales clerk running out of Nordstrom to buy from a store next door something a customer wanted but not carried by Nordstrom. Without taking anything away from Zappos this example again begs the question of how much do we recognize something as today's innovation only because of short memories.
Cloud Computing
This new holly grail of the information age is a "whole new concept", invention and innovation only to those that began computing in the desktop PC age (the Computing Mesozoic). Any remaining survivors, Homo Calculans, of the computing stone age (the Computing Paleozoic) will recall IBM's TSO (Time Sharing Option). In its day a new concept, TSO promised, and largely delivered, ultra-flexible access to computing resources, centrally managed and backed up, capacity seemlessly reconfigured by the Wizards of Armonk to give us, Homo Calculans, ready access (through monitor-less teletype terminals) to the day's "Software Services" (SaS). The services included pre-Visicalc/Supercalc/Lotus/Quattro/Excel simulation wonders and other similar wizardry. Then the Federal Trade Commission mandated the end of SaS and a new age dawned. On the carcass of TSO Honeywell, CDC, Amdhal came to feed. Eventually they succumbed to more nimble raptors: DEC, WANG, IBM-NASD, Prime, who in turn were hunted into extinction by the micro-raptors Apple, the CP/M herd, the Microsoft/Dell/Clones, IBM-PC/DOS and countless other breeds too small to note. And now the CellPhones and Pads are coming. Few of the species were adaptable enough to come through the ages: IBM, HP and the endlessly adaptable software-jocks that live parasitic lives on any platform. In the end the logic at the foundation of TSO, like a dominant gene survived to see its day again.
We call all this evolution Innovation and Invention for good reason: in all its forms it is always novelty with purpose. The true constant, the DNA of it all, is in the entrepreneurs who have that special gene for taking risks with the purpose of doing something useful, to meet a need. That will not change.
Marco Messina
Invention (Inv)
An invention is an idea developed by a person, the inventor. To be recognized as such by the US PTO it requires 1. Novelty and 2.Non-obviousness to others skilled in the domain. Note that there is no reference to usefulness, implementation, results, etc.
Innovation (Inn)
Is the process by which a useful outcome is obtained by a the implementation of either a new idea (an invention) or of an old idea in a new way or under new circumstances. Note that invention is not a requirement, but novelty of application, usefulness and most of all implementation are.
Entrepreneurship (Ent)
The activity of an entrepreneur: from its French root it implies starting something, particularly in business, taking risk for the outcome. Only initiative and risk taking a required, however common sense would also recommend a useful purpose that justifies the risk taking. Neither invention nor innovation are required. By this definition an entrepreneur could be one who opens a delicatessen selling the same products at the same prices and with the same level of service as the competition. So long as there is excess demand to be met the risk would be compensated by happy customers. Growing from there would require innovation.
Most founders of startups I run into have some of all of the above. They are risk takers (Ent), they act (Ent) to achieve a useful purpose or meet a need (Inn, Ent) and they do so in a novel way (Inn) sometimes starting from a new idea (Inv), sometimes from a novel reshuffling of an old one (Inn)
With this in mind, some interesting businesses, inventions and entrepreneurs come to mind
Vannevar Bush
Bush in 1945 (yes '45) in an article "As We May Think" in The Atlantic Monthly conceptualized and defined the specifications of a personal information storage, retrieval and sharing machine, the Memex, remarkably similar to a today's personal computing devices. Note that he did so before the invention of transistors and ICs that made the digital age possible. Reading the referenced article, you may note that it all depended on photographic data compression. Today's high density ICs still depend on the same principle, so Bush was correct in his extrapolation of the fundamental technology and only incomplete in the details of the ovolution. This example begs the question of how much do we recognize something as today's innovation only because of short memories.
Zappos
Zappos is frequently and justly touted as having developed a fanatic level of customer service. It is a correct assessment but only relative to on-line retailing. Anyone who dealt with Nordstrom in Seattle around 1970 (interestingly also a shoe retailer in its beginnings), would instantly recognize the same fanatic commitment to service that built their retailing empire. To wit a story reported by the Seattle papers of a sales clerk running out of Nordstrom to buy from a store next door something a customer wanted but not carried by Nordstrom. Without taking anything away from Zappos this example again begs the question of how much do we recognize something as today's innovation only because of short memories.
Cloud Computing
This new holly grail of the information age is a "whole new concept", invention and innovation only to those that began computing in the desktop PC age (the Computing Mesozoic). Any remaining survivors, Homo Calculans, of the computing stone age (the Computing Paleozoic) will recall IBM's TSO (Time Sharing Option). In its day a new concept, TSO promised, and largely delivered, ultra-flexible access to computing resources, centrally managed and backed up, capacity seemlessly reconfigured by the Wizards of Armonk to give us, Homo Calculans, ready access (through monitor-less teletype terminals) to the day's "Software Services" (SaS). The services included pre-Visicalc/Supercalc/Lotus/Quattro/Excel simulation wonders and other similar wizardry. Then the Federal Trade Commission mandated the end of SaS and a new age dawned. On the carcass of TSO Honeywell, CDC, Amdhal came to feed. Eventually they succumbed to more nimble raptors: DEC, WANG, IBM-NASD, Prime, who in turn were hunted into extinction by the micro-raptors Apple, the CP/M herd, the Microsoft/Dell/Clones, IBM-PC/DOS and countless other breeds too small to note. And now the CellPhones and Pads are coming. Few of the species were adaptable enough to come through the ages: IBM, HP and the endlessly adaptable software-jocks that live parasitic lives on any platform. In the end the logic at the foundation of TSO, like a dominant gene survived to see its day again.
We call all this evolution Innovation and Invention for good reason: in all its forms it is always novelty with purpose. The true constant, the DNA of it all, is in the entrepreneurs who have that special gene for taking risks with the purpose of doing something useful, to meet a need. That will not change.
Marco Messina
Saturday, June 19, 2010
Did you just say THAT to an angel?
Just like bees, angels have adverse responses to certain stimuli. Keeping those in mind will make getting to their honey far more likely. Following are some examples of statements (S) often made by "honey seekers" and the mental responses (R) they are likely to stimulate in the angels. Depending on the mood of the moment, the responses may or may not be verbalized. Often, in front of a large audience, the "honey seeker" is better off if the response is just a silent smile.
S We have no competition
R Either you have not researched it, haven't found it, or are so deluded to not recognize it...
R If no one does it, perhaps it's because no one needs it
S We have made very conservative projections
R Sure. So did the 1000's that came before you; and you are not even smart enough not to say it
R If you are conservative you are no entrepreneur, buddy, you better go work for the Census surveys
S We researched it so much, this is now a sure thing
R The only sure things are death and taxes. We do not like sure things.
S We are creating a market
R Excellent! This is an answer in search of a problem, that will be a real quixotic adventure
R Cool! If I wanted to create "futures" I'd be buying into a kindergarten or a primary school
S Our solution will become the standard
R My goodness! We only have to stop the people who today are doing whatever by the current standard and force/train them to do it a new way. Along the way we only have to redesign all regulations, training programs, certifications, cajole all vested interests, etc. AND we make no money until it's done. Where is my checkbook.
S If we get 1% of .... to buy our product we'll make millions
R Ah! Here comes the 1%er again. If I could only have a dollar for only 1% of the 1%ers that presented plans I'd have the best performing fund at next years ACA Summit
R Sure buddy, and we are going to do it all with viral marketing too
S I am the only resource but I'll have key man insurance
R I like that! So for an early exit all I have to do is to pray for trucks to hit you. This is so new a strategy, we could write a white paper for HBR
R We could optimize this plan by doubling the premium and make you open a branch office in Darfur
S We are co-managers
R No way. We want to know which throat to choke when things don't work. Only one throat.
R So, we are supposed to pay two to make decisions that one should be able to do?
S We only have to scale...
R But of course! The difference between your local taco stand and McDonald's is only scale. Same for mom's kitchen and Campbell Soup or my kids' tree-house and the Sears tower. It's only scale.
Lastly there are the responses that "seekers" give including an implied "you dumb ass" commentary. They are always a good bet for making angry bees out of angels:
you have to understand...
No buddy, I have the cash and do not have to do anything, you have to make me understand
everybody knows...
Ah well, I must be the only idiot that doesn't. I stand corrected. Thank you so much for that clarification.
as I said before...
Excuuuse us! We are either forgetful, slow or inattentive. We'll do better next time... since you ain't getting any "honey" this time around.
Conclusion
Much has been written about human communications since Dale Carnegie wrote his masterpiece, little of substance has been added. It remains one of the best manuals around: you might read it again with your angels in mind.
Marco Messina
Tuesday, June 8, 2010
Fishing for Angel Fish
The scarcest resource of entrepreneurs is not money, is time. Money, when you can get it, is just a means to increase available time by hiring outsiders to do for you whatever you are smart enough to delegate and manage. Conversely, all the money in the world will achieve nothing more than the going rate of interest in a bank account (3%) unless one puts it to work with time and energy. SO, NEVER WASTE TIME.
One way I see many entrepreneurs wasting time is chasing funding from angel investors with propositions that do not come close to having any chance of success. It is like going fishing for the wrong fish in the wrong pond with the wrong bait - most unlikely to make dinner tonight.
So in the interest of better fishing let's study the angel fish. It is easy because:
Tech Coast Angel members invest in southern California companies, only. We look for products and services that can achieve rapid adoption in very large markets. Some of our criteria:
One way I see many entrepreneurs wasting time is chasing funding from angel investors with propositions that do not come close to having any chance of success. It is like going fishing for the wrong fish in the wrong pond with the wrong bait - most unlikely to make dinner tonight.
So in the interest of better fishing let's study the angel fish. It is easy because:
- these days most angel fish school in groups
- most states and regions have well advertised (web) ponds,
- the fish have the kindness to spell out in advance what bait they will strike
Tech Coast Angel members invest in southern California companies, only. We look for products and services that can achieve rapid adoption in very large markets. Some of our criteria:
- Scale: annual revenue potential of at least $50 million
- Market: a compelling, well articulated strategy for capturing and defending a significant market share
- Barriers to entry: patents or proprietary technology
- Team: a strong, not necessarily complete, team
- Exit strategy: some idea of who will eventually acquire your company
- How we fit: a desire for advice and coaching
- Valuation: you must fit within our risk/reward expectations
- specific industries (because the fish have expertise in them)
- level of business development (no pre-revenue plans)
So, figure out what business (bait) you have and decide if you stand a chance to catch angel fish. If not, go fish for other species that bite on different bait, presumably the one you have. Here are examples:
Friends and Family: this species bites on you personally and your trust factor with them. Returns are hoped for but often the motivation is to help you along with the world changing idea you shared with them.
Banks: They still have money and do lend it if your business is the right bait for them. You'll need collateral and cash flow to have an chance. Beware of lines of credit that appear to be a strike, but you cannot count on for very long.
Factors and Receivable Discounters: They bite on (and take a good chunk of) invoices you carry as receivables from financially reliable customers (they bite on someone else credit).
There are many more, each specialized in different aspects and needs of your business.
Back to that favorite species: the angel fish. The words that carry value with them (shiners in the fishing parlance) include:
Scalable: 1. the business can grow into a big business, 2. you and your team are capable to grow it
Market size and dominance: "1% of the world" is probably meaningless, "80% of left handed investment bankers with an income over 500k" is a concept one can measure and relate to. Attractive markets have size and allow some level of dominance.
Early Exit: a plan with an Exit is a requirement (remember: angel fish get to eat only at exit time). Early Exit is golden. More on this in a forthcoming post.
Barrier to Entry: the stronger your position, the less spooky the fish will be
Risk: This is the monster from the dark depths that scares angel fish away. They know it is part of the game, but they hate it. To manage their fear, show that you have identified fall back positions and fail safe conditions at every step; be able to simulate the cash flow projections accordingly.
BE BRIEF: this is the most impatient fish in the world
Happy fishing. There is fish in that pond for the right bait. Do not waste time otherwise.
Marco Messina
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