Working Backwards

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

Working Backwards

Deep Insight - Daniel Kahneman: Beware the ‘inside view’

How many times do you remember projects, ventures and adventures turning out faster or easier than expected?  Better than expected returns, financial or otherwise, are not uncommon, but easier or faster, next to never.  Why?

Here is Daniel Kahneman's  insight in his words (whole post reported below):

Why the inside view didn’t work   (a book writing project)

This embarrassing episode remains one of the most instructive experiences of my professional life. I had stumbled onto a distinction between two profoundly different approaches to forecasting, which Amos Tversky1 and I later labeled the inside view and the outside view.

The inside view is the one that all of us, including Seymour, spontaneously adopted to assess the future of our project. We focused on our specific circumstances and searched for evidence in our own experiences. We had a sketchy plan: we knew how many chapters we were going to write, and we had an idea of how long it had taken us to write the two that we had already done. The more cautious among us probably added a few months as a margin of error.

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.

LUCKY OR SMART? Secrets To An Entrepreneurial Life

Read the whole series of posts here

Marco Messina

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: 

• 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

Here is an example taken from "one billboard at a well known California pond":
      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

At other ponds the billboards list:

• 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

How to P... off an angel

I considered holding this post off.  Then I realized that my raw response to the circumstance that originated it may be a useful component of the lesson.

Background
Last week I met a college student intent in starting a new business and looking for help financing and marketing his venture. Admittedly I am a deal junky and cannot resist helping a startup along; here is the result.

Anatomy of a (lost?) deal
The young man I first met (P1) seemed quick thinking (+), amiable (+), articulate (+) and entrepreneurially flexible and opportunistic (+)
At our first meeting he gave me no means to contact him (-) but he followed up and contacted me (+) [if you want to appear like you can play, at least get some $5-precut-forms-inkjet-home-printed business card]
The business idea may have legs (+)
I have a lead into a potential customer and stated so (+)
The prospect, on my recommendation, may be willing to pay for a pilot test (+)
I asked for a follow up meeting specifying what  I needed for my due diligence before pitching their deal to my prospect.  To T-up the meeting I emailed that: i) I'd be willing to sign an NDA, ii) I need to know material costs to figure the financial commitment required to do a pilot (particularly if I and friends are to be angels), iii) I need to satisfy myself that there is a really working system capable of doing what is proposed, before I go put my good name on the line.
The meeting was scheduled but no information requested was sent ahead of time (-)
At the meeting I met Partner #2 (P2)
P2 from the outset displayed a surly and arrogant attitude apparently intent to require my demonstration of why I should be granted an audience (-)
P2 barely introduced himself [another one with no business cards] and gave no additional details about himself or his experience (-)
P2 pointedly asked whether I had a resume to demonstrate I deserved any attention (-)
P2 shoved in front of me an NDA of 4 pages (filled by hand with the company name), folded open to the signature page requesting I sign (apparently without reading it) before we continued (-)
After a few years experience with hyper-self-important student entrepreneurs, this was not a total surprise. Rewind to 1973 and probably there go I. I declined signing an NDA I could not review for lack of time. I proposed to limit the conversation to information not requiring NDA.
As expected, I got none of the information I sought (-)
P1 tried to mend fences offering whatever information he could without agitating P2 (+)
P2 spoke in roundabout ways of their IP, yet unfiled, unsearched, unsubstantiated (-)
At first sight P2 has little sense that his "idea" is unlikely to be defensible from competition (-), particularly because all components of hardware and software are readily commercially available (-) and the idea was already published by many including Steve Wosniak five or six years ago (-)
Speed to market is their ace, P1 gets it (+) P2 doesn't (-)

Conclusion
The odds that I will find the time and motivation to try again have dropped by 90% (-)

Lesson to be  learned
Angels invest in people first.
Beware the partners you have and display in public.  In a single session they can trash whatever you had carefully T'd-up.  For student entrepreneurs there will be many more chances. Later in the career path you may be betting the house on a losing hand.

Marco Messina

Brevity, Impact and the "P&G 1 Page Memo"

Since I routinely recommend maximum brevity in communications with angel investors and with the world in general), I am often asked if this need for brevity is a result of the age of the Internet, of information overload, of shortened attentions spans, etc. It isn't. In what we now regard as the near-stone-age of the 1970's Proctor and Gamble became famous for its "1 Page Memo".  Whatever you wanted to propose at P&G had to written to fit in a single page, and followed a fixed format. Its objective and value rested in the need to think very carefully all the aspects of whatever is proposed and summarize it clearly and effectively.

Dr Andrew Abela summarized it best as consisting of  five parts.

1. The Idea. What are you proposing? This is typically one sentence.

2. Background. What conditions have arisen that led you to this recommendation? Only include facts and information that everyone agrees upon - this is the basis for discussion, so it needs to be non-debatable.

3. How it Works. The details. In addition to How, also What, Who, When, Where.

4. Key Benefits. This is the "Why?" There are usually three benefits: the recommended action is: i) on previously agreed strategy, ii) already proven (e.g. in test market or in another business unit), iii) will be profitable. You can think of these three in terms of the old Total Quality mantra of "doing right things right." The first (on strategy) means you're doing the right thing. The second and third mean you're doing things the right way, because you're being effective (proven to work) and efficient (profitable).

5. Next Steps. Who has to do what and by when for this to happen?

Clearly a 1 Page Memo is no easy task and neither was working at P&G.  The outcome of that guideline was that off-the-cuff proposals were few, those made were thought through carefully, were clear and actionable. The old maxim of thinking before talking applies to writing too.  Striving for brevity increases thinking and reduces fluff.

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

Two Ways To Invest in Green

In the last few weeks I attended several presentations from companies presenting their business plans and experiences as “green businesses”. Two stood out in my mind at the extremes of what’s out there for angel investors to seek. Since in some cases I signed NDAs I’ll keep all companies confidential but it may not be difficult to deduct their names with a little research and detective work.

Company1

Purpose of the presentation: Present a business plan for investment by accredited investors to raise several million dollars

The Idea behind the business (as stated in the presentation): Take advantage of the huge amount of government money promoting technological migration to a “greener” world.

Competitive advantage: Far out patent pending technologies invented by undiscovered brilliant inventors with no industry track record of delivering working products or systems – the power of the outsider to think out of the box.

Business model: promote the patents through associates, consultants and green enthusiasts, license the patents to major industry players to make and market and collect royalties

Secret sauce: patent pending untested technology that must be kept secret from the big competing interests in the industry, therefore little can be disclosed.

Use of funds: Promotional expenses, R&D to prototype and demonstrate the technology, salaries to management and marketing team, filing more patents, pay licensing fees to the inventors (50% of funds raised) for untested technologies.

Take away: Too good to be true? Perhaps so judging from the response of several attendees. The technologies presented promise a) cars running on various fuels (including H2) continuously converted on demand from water, b) energy from waste water to feed the utility grid, c) solar plant daytime energy storage for redistribution at night and/or to distant locations at higher prices. One alone would be a holly grail, but diversification calls for all three and the markets are ripe for it. Buyers beware.

Company2

Purpose of the presentation: Educate entrepreneurs on a “green business” perspective derived from ten years of R&D and product marketing.

The Idea: “green” has taken an unfortunate connotation of either fashionably exploitable business angle or expensive luxury that costs businesses a lot. Both are wrong.

Products: Water-based, human and environment safe chemical cleaning products for industrial processes, aviation, gun cleaning, and more to come.

Use of funds: N/A – Company2 need none, they are offered more they want to take, the business is profitable and fast growing

Take away: Company2 has demonstrated, over ten years, that environmental and human safety offer a) profitable markets for the producers and b) can be demonstrated to reduce TCO for the customer that switches from noxious chemicals (the only ones available in the past) to the more worker and environment safe products available today. C) There are great opportunities for entrepreneurs, and their angels, that want to pursue a similar business strategy.

The key to Company2’s market penetration was and is to effectively communicate and demonstrate the value proposition to prospective customers who are frequently under great pressure and incentives from legacy suppliers to continue past practices. It takes time, commitment and tenacity. The pay off takes time.

So why does this matter? Because in the current euphoria to go green with our investments and to benefit from the ongoing global technological transition, it is easy to seek an end-run with some magic sauce. It may be possible but unlikely. More probably the returns we seek will come from: innovation that creates incremental improvements, education, rigorous analysis of alternatives and serious commitment to a mission. Technological transitions have never been an overnight affair (see railroads, automotives, semiconductors, internet, telecoms, etc) and angel investors will need now as ever due diligence and patience. More importantly, we should seek credible business models, not promoters’ wild promises of world changing magic.

Republished from http://marcoessina.com