Angel Calc Revisited

Do you know when your young business venture is "fit" to attract angel investor financing?

There are many theories and rules of thumb about how angels investors seek their ROI targets. To understand their motivations and ROI targets, let's look at how they work and the risks they face when writing a check:

Experienced Angels are the real Angels you want to work with. Most work in groups to share the heavy burden of due diligence research required to invest intelligently. To vet deals they try to include scientists, engineers and management experts in different industries and technologies. They ask a lot of questions and then more questions and then proof and supporting documentation. They generally do not move fast but cover their bases well. When they invest they will stay involved and help the management team with seasoned advice and working their contacts to help your business succeed. These are true ANGELS to entrepreneurs.

A High Risk Game
Research by the Kaufman Foundation (KF) shows that Experienced and committed angels' returns are on average quite attractive at 2.6 times their investment in 3.5 years. That, however, is balanced by the sobering fact that on average 52% of investments are a total loss and only 10-19% are a home run. Successful deals need on average 7 years to exit.

In my early days in this "bloody contact sport" my mentors cautioned me that a good rule of thumb was to consider a very early stage deal only if I could see a potential to earn 30 times my investment in about 5 years. Later on I tried to reconcile the KF statistics, my experience and the very demanding ROI target I was advised.  Eventually I modeled that all factors can be reconciled if one presumes that the probability of success of a well researched deal is only about 10-12%.

From experience I believe that it is a reasonable and not overly pessimistic expectation considering that the typical early stage business reflects most of these characteristics: Little or no sales, limited proof of market, may have lab tested technology, but little or no production, no proof of scalability, little or no delivery and distribution experience. Moreover, any of the following may apply:  a. in "some other garage" a similar or better mousetrap may be ready to come to market, b. the management team may have or may develop unforeseeable weaknesses (e.g. sociopathy leading to financial embezzlement, personality incompatibilities, office love affairs, divorces, loss of key talent due to death, accident, distraction, etc. - Over 35 years I experienced all of them as causes of aborted successful businesses); c. "effective" IP protection may prove difficult to obtain, may be revoked if prior art appears unexpectedly (see my posts on patents), inadequate funds to protect owned patents, exposure to Patent Trolls;  d. government regulations that may prevent or delay market acceptance, unforeseen vested interests that may create insurmountable barriers to market acceptance.

All considered the 10-12% probability may even be optimistic, but it appears to be what angels use implicitly if not explicitly.  To balance this somewhat dark view, we play this game  for the few successes that give us the satisfaction of helping turn dreams into reality, sometimes making a difference in the world and perhaps history while making a ton of money (in only 10% of cases)

So, with all this in mind, below is AngelCalc (copyright Marco Messina 2007-2013). Its intent is to help you test if your business has sufficiently high growth and profitability potential in an industry with sufficiently high exit valuations to satisfy the requirements of experienced Angels.  This is generally unlikely unless you have a unique IP component, market dominance potential, very rapid scalability. If your business cannot meet the angels' criteria, your funding efforts will be better put elsewhere. F&F (friends and family) may be an alternative at least until the criteria may be met.

A different analysis that comes to the same 30X ROI target is found in the section What do angels target for returns?  at page 3 of this KF paper

AngelCalc - Calculating with Angels
This model attempts to explain the finance-ability of a business based on angel investors' required returns.

The prime objective is not to set a valuation, although it can be used to back into or to validate a valuation that investors could live with. Primarily, it seeks to determine whether the relationship among the following factors allows a viable solution that meets investors criteria.

There are two paths each with its own factors:

P/E-Multiple Valuation (as for a public company):

1.  time horizon is 5 yrs, 
2.  future EBITA,
3.  future PE and market cap (from current comparables),
4.  investor's average returns and required return,
5.  the ASK needed to implement the plan
6.  The % equity to give up for the ASK

Revenues Multiples Valuation (most often for M&A sale of the company)

1.  Time horizon is 5 years
2.  Revenues in year 5
3.  Applicable multiplier for comparable companies sold
4.  investor's average returns and required return,
5.  the ASK needed to implement the plan
6.  The % equity to give up for the ASK

With both valuation methods the implied probability of success is 12% because it reconciles the return multiple identified by the Kaufman Foundation research (2.6 times return in 3.5 years) with the rule of thumb often quoted of "30 times the investment".  It can be adjusted to reflect the maturity (de-risking) of the company (e.g. VCs who invest at later stages often target 10X or 38% probability of success)

See input instructions above

Questons or comments? I'd love to hear from you, particulalry if you disagree.

Good luck. May you be so lucky to find a REAL ANGEL.

Marco Messina
The Angel Pitch Guy

A Blind Spot - Reflections on technology and obsolescence

For my friends the young tech-preneurs that follow this blog, I decided to share my 40 years perspective on the growth and decline of new technologies.  It is a personal experience that I hope may help understanding the process at work and may prevent them from repeating some of the blunders I made from incorrect assumptions.

Background
I am 61, grew up in Europe in a family of several generations of entrepreneurs. Went to university in the US ad got a BA in Psychology and MBA in International Business, Finance and Accounting.  From those experiences I developed a curiosity for technology - perhaps I am lazy and I valued technology's leverage to let me do more for less effort. I was blessed to grow up in the dawn of computer technology - I remember at age 9, my father, an engineer, tell me of his wonder at his first encounter with IBM computers and punched cards, etc. in 1960; it was a glimpse of the future and I was sold.  My MBA thesis, 14 years later, would be a FORTRAN program for financial analysis, a box of punched cards (three months of work in 1973 that I replicated in 1983 with Lotus 123 in three hours).
My career as a banker and later as serial entrepreneur was always leveraged by using computing technology from HP calculators to punched cards, to Apple II, to CPM microprocessors to DOS and Windows. I tinkered with these tools sooner and more than most people I knew. I saw the future coming and I wanted to usher it in.

Possible insights
My fascination with digital technology led me to always overestimate how quickly the "computing future" would come, how fast the masses would adopt and how fast "older stuff" would be abandoned. The reality is that except for early adopters, the masses are slow to abandon old habits and do so only when the process of change is easy.  The change that to me was challenging, fun and satisfied my curiosity, to most others was hard work, so broad based technology acceptance was always late.

This blind spot probably was the root of all business failures or slower-than-hoped successes I had. It was really unjustified since I was privileged to insight to the contrary. Shame on me; here is one example:

In 1983 I worked for a company in Seattle, DP Enterprises, that had two existing product lines: 1. selling IBM minicomputers and 2. maintaining the left-over key punch machines still needed to run the first generation mainframes. I was product manager of the minicomputers line, I disdained the old junk keypunches, and longed to transfer to a new upcoming initiative to sell the new-on-the-market IBM PCs (floppy disk only, XTs would come later).  Ed Benshoof, the owner, was making money faster than he could count it and built one of the biggest and nicest office buildings in town, overlooking Lake Union and with his penthouse on top of it . I heard that the profits were coming disproportionately from the "junk dealer business" of scavenging parts, refurbishing and reselling keypunches to companies with very old mainframes that could not afford the conversion costs to migrate to "my" newer minicomputers.
Duh! Even my seven year old son could have drawn the right conclusion. Not me. I was smitten with the future, only too soon.

Countless other ventures followed with too-soon-technologies that would eventually be applauded when I had moved on to.  Some of the ideas I followed paid off well enough, but I could have saved myself a lot of troubles if that blind spot had not been there.

Lessons learned

• Do not bet on fast mass adoption of anything that requires learning, work or effort. It's not that people are dumb, they just have better things to do with their time.
• Fast adoption happens only with super-intuitive products that require virtually no learning (all benefits no costs), like smart phones of the iPhone and Android generation (not the earlier Palm Pilots), or like the iPad and Android tablets (not the Windows tablets of 2002-3)
• Particularly for small businesses (cash strapped) and very large enterprises (logistically bound), obsolescence does not mean that the obsolete product goes into the garbage can.  It will continue in use if no effort or cost is involved in its continued use. It may be re-purposed if the required effort is minimal (e.g. a PC passed down to children, secretaries, assistants, warehouse staff, kiosk, etc.)
• Where complex or critical systems are involved the cost of changeover will be accepted only when the benefit is substantial. The more complex, mission critical the system the slower the changeover
• For most products, changes in User Interface (UI) are very risky as they require users to learn something different: 1. unlearn the familiar and 2. relearn the unfamiliar. If it is hugely beneficial they will do it, else they will resist.  That is why 30% of PCs still run XP after 10 years that sales stopped, that is why it took years for Windows 7 to get market penetration equal to Vista (the epitome of a dog failed product), and why Windows 8 is getting no traction.  It is also the reason why all cars still have steering wheels, sticks to put in gear automatic transmissions !?, keys to start, knobs to control A/C, radio, etc.

Marco Messina

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.

Planets, Aristarchos, Ptolemy, Copernicus and Entrepreneurship

The power of discovery
I just came across this interesting news of one more step forward in the discovery of earth-like planets elsewhere in our galaxy. The increasing frequency of news like this supports the idea that we are getting close to proving once more that our plane is not only "not the center" but is also not unique, in which case various "other life" considerations inevitably follow.

The Greek philosopher Aristarchus of Samos had already figured the "not center" idea in 43 BC; he was ignored for 1500 years and even today is hardly given any credit.
Aristotle and Ptolemy with the flawed but more intuitive idea of Geocentricism (earth at the center of the universe), and with a better "sale pitch" got and controlled mind-share for 1500 years.
Copernicus and Galileo eventually sold Heliocentrism (sun at the center of the planets), a v2.0 of Aristarchus ideas, with better "showmanship" (drop balls from the Tower of Pisa and incarceration for heresy) to win the  mind-share race.

Centrism and Entrepreneurship
Humans would seem to have an instinct to imagine ourselves unique as much as permitted by ignorance, dogma and lack of facts. Possibly there is a survival value in brains intuitively "provincial" since it would limit the amount of data to be dealt with at any given moment: worry about immediate local threats (tigers), less about future and distant ones. With that trait, individually, we can intuitively and locally develop the notion that what we do is unique.  In reality however, we just have not looked for and found our competition.

For innovators and entrepreneurs, the remedy of this blind spot is getting out (talk to customers, talk to others in the same industry) and looking (search the blogosphere, academic research and industry press). Investigation will make us discover "another planet" like us, our competition. Loss of the myth of our uniqueness will require a radical change, a new perspective just as human psychology was impacted by the Copernican revolution. Finding our competition will demand a far less self-congratulatory and more guarded state of mind (i.e.we found the tiger, now what?).

Some more lessons from Aristarchus
Just as it happened to old Aristarchus, as an entrepreneur and innovator you may well have the right answer to "the question", but the market may not be  ready for it (e.g. there is lots of that happening now in the new green energy business!).  Pursuit just the same.

Recognize the possibility that the market will eventually accept your answer, but it may be in a version 2.0 advanced by a more compelling salesman.  The antidote is to strive to become a better salesman.  Meanwhile speak ( and twitt) loudly and consistently  "around" the established thinkers (the Aristotle and Ptolemy of your day).  Don't give up, the mind-share race is won one brain at a time.

Strive to find a way to stay in the game that is not totally dependent on the disputed idea you are championing. Staying power (most often enabled by capital) is the answer to the challenge. If you go out of business pursuing only the unpopular idea you will not survive to the day when reality will prove you right beyond dispute.

Marco Messina

Patents and Due Diligence

I frequently run into investors that seem to find a great deal of confidence in the fact that the company the are doing due diligence on has an "issued" patent.  They seem to believe that once the PTO issues it we are in Safe Land.  I wish I could be that optimistic, instead I often find myself "raining on the parade" suggesting that there are still big questions to be addressed:

Markets covered

If the projected market is global, but the patent is only issued in the US, what will the cost be to cover other countries?  

Is there still time to file abroad in desired markets? 

The rest of the world works on the basis of "first to file", so if someone invented well after the US inventor, but filed first in the country in question, it would be quite hard (not impossible) and expensive to contest the foreign filing.

Cost and means cost of enforcement

The PTO issues a patent but does no enforcement. Protection and enforcement of the rights implicit in the patent are up to the inventor/holder: Does the holder have the means to enforce its rights?  No cash to pay for litigation is about good as no patent.

If a company is granted a permanent irrevocable exclusive license to the patent by the inventor, the holder is the one that has to protect it through litigation, unless the right to prosecute infringers is granted along with the license, which normally isn't since the licensor is expected to protect the patent rights as consideration for the royalties received.  Does the holder have the ability, financial means and will to protect the patent rights? If not and the company does not either, it may have no means to prosecute infringers and in practice have no patent at all.

How "real" is the patent?

This is the question that seldom seems to be considered. In "Patents: what do they mean to you" I referenced the debacle of Research In Motion (RIM the maker of Blackberry) whose issued patent had one claim  invalidated years after being issued.

Another interesting case is that of so called "bogus patents" as this "Must Read" case reported by ReadWriteWeb.com: 

The notorious U.S. patent 6,411,947, a broad "method" for automatically classifying and responding to email inquiries known as the Firepond/Polaris patent, has finally been invalidated after 12 years on the books. (continue)

The warning here is: if it looks to you to be too easy, too obvious to be patentable, have an expert check the details, not just validate that the patent is issued. If it does not quack like a duck, it may not be one regardless of the stamp put on by the PTO or it may be so only for a short while.

Are patents useful?

Of course they are.  They certify to a good degree the novelty of an idea if not to its economic value. By virtue of the prior art research done, they attest to the difficulty of finding competitors.  Competitors could well exist that have prior art but never bothered to file a patent and they could come out later as they did for RIM.

Should inventors file them? Of course, but with the awareness that they grant no explicit protection. They only give one the right to spend money in litigation  to protect the rights implicit in the patent. 

Should investor value them?  Certainly, but, in my view, subject to the above considerations and making sure that due diligence includes looking carefully under the hood.

Marco Messina

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:

• 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.  

Marco Messina

Markets, Customers and Angels' Risk Aversion

Famous entrepreneur and Stanford Technology Ventures Program lecturer,Steve Blank reports that business failure from technology failure (the business' technology encounters operational conditions under which it cannot perform as hoped) is about 10%. Business failure from misunderstood and miscalculated markets, market failure, is about 90%. Why?  I propose that the nature of the "entrepreneurial brain" has much to do with it.

Entrepreneurs by nature are innovators, problem solvers: they perceive a need (more convenience, more speed, less cost, whatever) and instinctively start seeking a solution, a fix. That initiative and independent thinking is the power of entrepreneurs, but is also a curse. Asking  "what do others think" does not come as automatically. So, the entrepreneur finds a solution to "the problem", a problem possibly perceived by only one person, himself, and presumes it is a widespread need.  Then, enamored with the conceptual "solution" (s)he commits time, effort and treasure to create a prototype.  Sometime for lack of sufficient resources a detour is needed into fund raising to finance the idea now morphed into a business venture.  

Eventually a product is ready for sale and the surprises start coming: customers are not as enthusiastic about it as hoped, they have difficulty using the product because of a million reasons, or they could benefit from using it, but other circumstances prevent its adoption (e.g. supply chain disruption, legacy systems, not invented here, etc.). In a few words our entrepreneur has invented a Bricklin or a Segway, an innovative design with definite benefits but overall unsuitable for the larger market originally targeted. The outcome is then outright failure or a walking zombie of a business.

In product and software development there are long standing disciplines (use case analysis) to ensure that acceptable performance will be possible in specific instances of use.  Use case is a discipline that forces  asking questions, and more questions, and more questions.  The same discipline is needed with respect to markets and customers. Here are the questions to ask:

What are your customers top problems?
How much will they pay to solve them?

      Could they do nothing and get by?
Does your product concept solve them?
      Do your prospective customers agree with you on this? [Your guess that they do is the issue we are trying to avoid!]
Draw a day-in-the-life of a customer (the customer's use case) 

      before & after your product adoption

      what will the product improve

      what will the product hinder/change/complicate

Draw the org chart of users & buyers

     are they the same?

     we must satisfy both, but buyers control

     who has a vested interest in favor or against adoption?

     who is the loser if adopted?

     can your customer afford to upset the loser?

Are there enough buyers NOW to make it worthwhile?

Can we scale our processes to match the market size?

The only way to know for sure is for the founders to go out (out of the office, in the real world) and ask the customers.  Go out and ask are obvious, but would marketing consultants be able or even better at doing this research? Definitely NOT.  Consultants can go out with clipboards to get data and analyze it, but at this stage the critical component is intimate understanding of BOTH the customer and the product concept/prototype.  Only the founders-inventors can "feel" both sides of the equation and catalyze a workable solution based on the customers' responses.  If the consultants could do it, they would have been the inventors-founders.

So, early on, even before prototypes, go out and ask your intended customers how your product will meet their needs and what issues it will cause and LISTEN. The product will almost inevitably be modified by this effort, but at much lower cost than building and rebuilding prototypes or final products. You may discover that your product is perfect at a perfect price with the expected benefits, etc.  Too bad that its adoption would kill another more important part of your customer business and therefore your customer would have to be mad to adopt your product.

Validating your value proposition in person and directly with the customers (taking into account all vested interests involved)  may just reduce the probability of your business' market failure from 90% to something less. Any improvement will likely appease your angel investors' risk aversion.

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