If you have bootstrapped your startup to the point where you have a business that both merits and would benefit from outside investment then you may need to consider seeking investment. Here are some common formats we have seen for an investor presentation.
If you want to be a succeed as a bootstrapper, start with what you’ve got: you have an insight into an opportunity, a marketing edge, a particular problem where you’re going to bring distinctive value.
A Bootstrapper Doesn’t Wait For Investor Approval
Don’t wait to get started until an investor tells you there is a market and they will invest. An investor cannot validate whether there’s a market or not. Worse, the process of seeking investment rarely teaches you more about customer needs.
The converse is even more important: don’t be dissuaded if an investor does not believe that there is a market.
Or Their Friends’ Approval
It’s OK to ask your friends if it’s a good idea. But sometimes they will tell you they like the idea just so that you will stop talking about it and get out of their living room or office.
And again, if they don’t think it’s a good idea you should weight their perspective by whether they are a prospect or not.
You Have To Start Selling
Which ultimately means that you have to build a minimum viable product and start selling.
When a prospect tells you that they have problem that you want to solve for them, that’s good. When they write a check or give you their credit card, that’s validation. Now you are a bootstrapper.
But just because they have quantified their love for your idea it doesn’t mean that you are done. You need to follow through and see that you delivered the benefits that you promised to them.
More bootstrappers go wrong by not conserving trust than not conserving cash. Cash is important, but if you don’t keep your promises you cannot bootstrap successfully.
It’s primarily about selling and customer satisfaction. There may be challenges in building the product or getting it to work reliably when it leaves your hands. But the primary challenge is building something that people will pay for and order again (or extend their subscription) because it delivered the value that you promised.
Many of the people who are attracted to startups are drawn to a technology or a craft or the idea of being their own boss. Those are great reasons to become a bootstrapper. But success requires developing an empathy and rapport for your customers and delivering value.
The key differentiators are your ability to sell and ensure customer satisfaction.
Related Blog Posts
Conor Neil has a great quote in “If You Can’t Explain what You do in a Paragraph, You’ve Got a Problem” (great title but he admits he cribbed it from Brad Feld)
“I believe the major risk of early stage startups is getting customers to buy, and showing that you can sell.”
Dan Scheinman (@dscheinm) graduated from Duke Law School in 1988 and went to work as an associate at DLA Piper before joining the Cisco legal department. Once inside he worked his way up to General Counsel, then ran corporate development which included managing minority investments and acquisitions, and finally was general manager for Cisco’s Media Solutions Group before striking out on his own in 2011 as an Angel investor with an unusual–for Silicon Valley–investment thesis: supply “seed plus” financing to entrepreneurs with track records (another way of saying “over 35″). From his Angel List profile:
I am looking to fund great companies who are going to run out of seed money but are not ready for the A round yet. Operationally useful (helped Cisco go from 80M in sales to 40B), but also useful at ground zero. Invested/on boards at Tango, Arista, Zoom and more. To date, have funded 7 companies.
Sarah McBride profiled him in December 2012 with “Moneyball, valley-style: Investor uses age bias to advantage, funds older entrepreneurs,” noting:
When he started looking around for start-ups in which to invest, Dan Scheinman noticed something: twenty-something entrepreneurs building Internet companies usually had a much easier time lining up early financing from venture capitalists compared to their forty- and fifty- something counterparts.
Age bias, increasingly acknowledged as a widespread phenomenon in Silicon Valley, has created opportunity too. “I was so excited you would not believe when I saw the pattern,” Scheinman, the former head of mergers and acquisitions at Cisco Systems (CSCO), recalls.
Scheinman generally invests $50,000-$250,000 as part of a $1-$2 million funding round. He takes an active role, helping to line up other investors, generally taking a board seat, and providing strategy advice. Scheinman says he is pro-entrepreneur, no matter the age, but finds it easier to invest off the beaten track.
Scheinman elaborates on his strategy in a January 2013 profile by James Grundvig: ” ‘Moneyball’ Comes to Silicon Valley: What Technology Investor Dan Scheinman Sees”
“Venture capitalists of Silicon Valley won’t invest in founders who are more than thirty-five years old. They don’t do it. Knowing that, I look at being a contrarian — an opportunist — to find opportunities where the herd isn’t,” he said.
“A typical venture capital firm will look at 1,000 business plans each year. They will invest in fifteen of them. They are trained for pattern recognition. By reviewing so many (startups) they see common patterns on which type businesses should succeed,” Mr. Scheinman said. “But there’s a problem.
“I sat on a venture capital pitch before. Some entrepreneurs don’t pitch well. But instead of engaging them, those in the room looked away. I realized I had to go to the source and ask questions. Go deep. Assume nothing. Look beyond the pattern for bigger returns,” he answered. “Like in Moneyball, I look out of pattern. That includes founders who are more than thirty-five years old.”
Noam Scheiber also talks to Scheinman as part of his research on “The Brutal Ageism of Tech:Years of experience, plenty of talent, completely obsolete?”
Though he had ascended to head of acquisitions at Cisco during his 18-year run there, he always felt as if his quirkiness kept him from rising higher. His ideas were unconventional. His rhetorical skills were far from slick. “I’m a crappy presenter,” he told me. “There are people in a room whose talent is to win the first minute. Mine is to win the thirtieth or the sixtieth.” Back in the early 2000s, he proposed that Cisco buy a software company called VMware. It did not go over well. “Cisco is a hardware company,” the suits informed him. Why mess around with software?
Most Silicon Valley investors, he came to believe, were just like the suits at Cisco: highly susceptible to “presentation bias” and, as a result, prone to shallow conventional thinking. “Paul Graham”—the founder of Y Combinator, the world’s best-known start-up incubator—“says the most successful [investor] makes his decisions in twenty-four hours,” Scheinman told me dismissively. It was time to set off on his own.
The only question was what to invest in. “I could see the reality was I had two choices,” Scheinman told me. “One, I could do what everyone else was doing, which is a losing strategy unless you have the most capital.” The alternative was to try to identify a niche that was somehow perceived as less desirable and was therefore less competitive. Finally, during a meeting with two bratty Zuckerberg wannabes, it hit him: Older entrepreneurs were “the mother of all undervalued opportunities.” Indeed, of all the ways that V.C.s could be misled, the allure of youth ranked highest. “The cutoff in investors’ heads is 32,” Graham told The New York Times in 2013. “After 32, they start to be a little skeptical.”
I think the idea of working with older investors on seed plus gives Scheinman several opportunities and creates several risks:
- Longer track records, easier to do due diligence on them as people and managers.
- Older entrepreneurs may see risks more clearly than opportunities but probably better able to execute in the face of setbacks. They are probably better able to dodge some potential setbacks
- Less competition for the deal, potentially a friendlier or at least less adversarial relationship
- Funding amount is commonly sought but not often available, less competition more demand
- Because these are “undesirable” Scheinman will have to help them to transition from “not a good idea” to “numbers are so good how did we miss this.” He will lose the benefit of the doubt going with older entrepreneurs for follow on funding (e.g. an A round after seed).
- Unless he is “last dollar in” (which may also be deals worth searching out) he needs a clear plan to support the team for what they will need for a follow on “A round” presentation at time of funding.
- Three Advantages of Older Entrepreneurs in B2B Startups
- Three Advantages of Younger Entrepreneurs in B2B Startups
- Serious and Competent People
- on “seed plus” see
Q: I’m trying to determine the size of the market of “fine artists” or “creating artists” in the US (painters, sculptors etc.). The issue I have is the following: I’m able to find numbers of professional or semi-professional artists (artist that make money from their works and are somehow registered) but I don’t know how I can determine the number of “hobby-” or “amateur artists” that paint just for fun.
If the answer is 10,000 or 100,000 or 1 million artists how does that affect your strategy?
If they spend $10M or $100M or $1B in a year how does that affect your strategy?
If you are bootstrapping the question is who you can reach that will respond to your message or offer. That Share of Available Market (SAM) may be a small subset of the Total Available Market (TAM).
I normally see TAM/SAM defined by units per year or revenue per year not customer headcount, internal forecasts often uses unit counts but investors will want revenue per year. Two critical variables that you will need to determine (or estimate) to calculate market size as annual revenue are unit/transaction pricing (Average Selling Price) and average transaction frequency per customer.
TAM = (Average Selling Price or ASP) X (Average Number of Customer Transactions Per Year) X Customers
If you have no data on competitive pricing, you need treat your price as a hypothesis and re-evaluate it periodically (pricing is a process not a one time decision). At a minimum you should have a theory for how much value your offering will create for your customers and you can price to that while continuing to refine your understanding.
Transaction frequency also has to be estimated, for software this may take the form of an annual subscription which can simplify things a little. Some products have multi-year lifetimes (e.g. automobiles) and transactions per year will be a fraction (e.g. a 4 year lifetime would mean 0.25 transactions per year on average).
TAM is normally an investor question, how are you trying to use it to manage your business model hypotheses?
Q: You are correct I am getting asked this question by possible investors and want to have a defensible answer.
OK, here is a presentation you may find helpful:
Here are some related blog posts:
Tim Draper, founder of the VC firm Draper Fisher Jurvetson, is taking a holistic approach to entrepreneurial education with his “Draper University for Heroes” in San Mateo. Here is a promo video from the school’s website.
[vimeo clip_id=”45872530″ width=”400″ height=”300″ frameborder=”0″]
In a planning document submitted to the City of San Mateo on March 16, 2012 Draper made the following representations for his plan for the University:
The proposal is to provide a school for entrepreneurs, ages 21-24 with a few exceptions, who will come from all over the World. The school generally will teach fundamentals in business combined with creative encouragement.
lt is expected that the school will have regular guest speakers (successful entrepreneurs, lawyers, accountants, bankers, real estate brokers, headhunters, investment bankers, venture capitalists, scientists, artists) from industry and a steady stream of events connecting the students with the entrepreneurial world of the Silicon Valley.
The school will be boarding, both single and double occupancy with a capacity of about 150 […]
The school will have 4 ten-week sessions that ideally coordinate with the Stanford quarterly system, and we expect to be a good fit for top students who want to take a quarter off to try something different. We expect to be able to give students academic credit for their work, but that has not yet been arranged. […]
We expect to easily recruit top students from China, Singapore, Saudi Arabia, Dubai, Russia, Brazil, Vietnam, Korea, India, Pakistan, Europe, as well as the US, because we have strong relationships with people who are well connected with universities in each of those countries. […]
The final two weeks of class will be dedicated to applying everything the students have learned toward creating a business plan. At the end of the ten week period, students will have the opportunity to present business plans to venture capitalists in bullet sessions and follow up with them in a Q&A forum.
The school will also feature an online option for students who fall outside the age group or are not admitted to the boarding school, but still want to participate in the curriculum, the discussions, and the speakers.
It’s interesting that the focus will be on developing a business plan not a working demo for presentation. This is a departure from the focus of a number of recently formed Web 2.0 oriented accelerators and incubators but will allow students to focus on a broader set of entrepreneurial opportunities than web and mobile apps. It’s interesting that the video shows students touring the Tesla plant, a manufacturing/hardware oriented venture.
DFJ Draper University | Students/interns
Monday, June 4th-Friday, June 29th | Ben Franklin Hotel, San Mateo
Draper University is looking for student/interns 18-24 (exceptions up to 29) to come to our pilot entrepreneurial experience from June 4th to June 29th. Interns will have an immersive experience boarding at the Ben Franklin Hotel in San Mateo. They will learn basics of finance, marketing, production, as well as some unusual classes like “future,” yoga, painting, speed reading, public speaking, negotiation, game theory and practice, and hydroponic gardening. There will be a four day offsite for team building and survival training, and there will be a week of business planning and mentoring. The final day will include a pitch to a panel of venture capitalists. Since this is a pilot program, we will not be charging tuition, but will ask the student interns for feedback. Contact Theresa Johnson if interested.
To the extent that innovation requires making connections with people and between diverse bits of know-how and that successful entrepreneurship requires an ongoing commitment to self-improvement, creative expression, and stress management this is probably as useful a curriculum as any and perhaps better than most traditional MBA school or more recent accelerator programs.
The San Mateo County Times profiled Draper’s efforts June 25 as “Unconventional University Takes Shape in San Mateo”
“I hope that when in their travels the students come to a fork in the road, the pledge will help guide them to make the right choices,” he said in an email.
Draper, who already owns the Benjamin Franklin and a former bank on Fourth Avenue, recently purchased a third building in downtown San Mateo. He paid $6.75 million for the Tudor-style edifice on Third Avenue across from the hotel, bringing his total investment in downtown real estate to $15.15, plus more than $1 million in renovations to the Benjamin Franklin.
“With the town’s support,” he said, “we hope to open what we expect to become the premier entrepreneurial development school and environment in the world.”
Draper has pursued a career in in venture capital like his father and grandfather before him. I get a clear sense of his carrying the family business, especially in the closing scenes of the promo video that highlight a conversation with his grandfather. I think this commitment will enable him to persevere with this holistic approach to fostering entrepreneurship until it achieves his goal: “teaching students the importance of doing well while also doing good.”
h/t to Peggy Aycinena for pointing out Draper’s new initiative.
This is reposted excerpt from a sequence of Christmas Day Hackers news comments made by Ryan Waggoner ( http://news.ycombinator.com/user?id=ryanwaggoner ) hyperlinks added for context. The initial comment triggered an extended conversation with Paul Graham and others that makes for interesting reading. I agree with Ryan’s perspective and didn’t want it see lost in the dusty archives of Hacker News.
In 2009 I started a company with another guy, and I used to read articles like this, about how startups are so very difficult, and how you have to put everything on the line, your health, your wealth, your relationships, everything. It’s a very common theme in startup-land, and I constantly hear from founders who sacrificed their marriages, worked 19 hour days, slept under their desks, and racked up tens of thousands in credit card debt, all to make their dream a reality. The message is very clear: you have to be willing to do anything to succeed. Articles like this fed my ego, and made me feel like I was part of an elite cadre of founders.
Then my startup failed, leaving myself and my cofounder with tens of thousands in debt and a pretty rough mess to clean up.
In the meantime, a good friend of mine who started a little project on the side slowly grew it over a period of a couple years into something that supports his family very well and has a good shot at doing millions in revenue within the next 5-10 years. And I don’t think he’s been very stressed while doing it. He loves what he does, has tons of time for his family, etc. The cynical among us might term this a “lifestyle business” and they’d be right. But I don’t think that bothers him and I can’t say I blame him.
There’s this really ugly side of the startup world that drives founders to completely unreasonable levels in pursuit of fast wealth creation, and it comes as a result of two factors: founders are naturally ambitious, driven people, and investors are in a hit-driven business. So the result is that investors naturally gravitate towards founders who either hit a billion dollars in a few years, or die trying (sometimes literally), and then investors and founders both are incentivized to craft this story that they only way to win is to win big, fast, and with all your chips on the line.
And these things become self-reinforcing, so you have investors talking about how the real reason startups are so valuable is that founders can work so hard that they accomplish a career’s worth of work in just a few years. The message is clear: you need to work 90 hours a week and either be the next Dropbox or flame out. And for the model most investors work under, that’s the only way they really make money.
But the more I look around, the more I wonder if there’s really much correlation between blowing your life up and startup success. Yes, you hear a lot of successful founders talking about how they killed themselves to get there. But thanks to survivorship bias, you don’t hear from all the ones who risked everything, turned their lives and relationships and health upside down, and then lost. And increasingly, I’m seeing a lot of examples of very successful founders who definitely work hard, but keep an eye on themselves, their health, their relationships, etc. and have lines they’re just not willing to cross. 37signals is the classic example here, but there are scores of others, many of them right here on HN. The key seems to be patience and humility, two things a lot of 20-something founders (including myself) have in very short supply
Maybe startups are so hard because we’re doing them wrong.
Building a sustainable growing business does not preclude seeking investment. It allows you to develop a business plan predicated on achievable growth that merits investment. Or you can continue to run a business that can support your family.
MyPermissions: Checks for third party application access to your Facebook, Twitter, Google, Yahoo, LinkedIn, Dropbox, Instagram, and Flickr accounts.
SocialMention: Allows you to do keyword and phrase search across more than one hundred social media sites including Twitter, Facebook, FriendFeed, YouTube, Digg, Google, etc…
Isaac Garcia, co-founder and CEO of Central Desktop, will share “Lessons Learned Bootstrapping Central Desktop” at the Milpitas Bootstrappers Breakfast® on February 11, 2011 at 7:30am. Central Desktop delivers a SaaS collaboration platform that helps businesses manage projects and documents in the cloud with colleagues, customers and partners.
Isaac Garcia (@isaacgarcia) oversees business strategy and sales for the company. Isaac’s talk will draw on his experience at both early-stage technology companies and in enterprise sales & marketing. He was a founding partner at Upgradebase, where he oversaw all business development and sales for the company. Isaac served as a Director of North America Enterprise Sales for CNET Channel. He was responsible for the acquisition, sales and management of global partnerships with Microsoft, Google, eBay, Yahoo and Best Buy. Isaac led and managed CNET’s global partnership with Microsoft to launch the Windows Marketplace campaign in 14 countries. He received a BA in English from Ambassador University and a Masters degree in English Literature from the University of Northern Colorado.
Isaac and Arnold Hsu, CTO of Central Desktop, were interviewed by the Techzing in February of 2010 on the need for relentless execution, see 34: TZ Interview – Central Desktop / Relentless Execution by techzing
Isaac noted the following in an E-mail exchange with Phil Wainwright in 2007 in answer to the question “Do SaaS Ventures Need VCs?”
“In many ways, SaaS companies are not VC plays — at least, not in the traditional sense. Once established with a product to market, a properly run SaaS company can accurately predict its revenues and growth — which means that it can also predict, with relative accuracy, exactly how much cash it needs for expansion and when and how much of an ROI the lender/investor will receive. This time frame is usually much shorter than traditional VC horizons and less risky. This also means that the terms are different than most deals.”
When: Feb-11-2011 7:30am to 9:00am
Cost: $5 in advance / $10 at the door (plus breakfast, tax, and tip).
Where: Omega Restaurant, 90 S. Park Victoria Milpitas, CA, 95035
“Some buildings need air conditioning because they have air conditioning. Because they were designed to be air conditioned, they have no natural ventilation and would be miserable to inhabit without air conditioning.”
John Cook in “Maybe You Only Need It Because You Have It“
I wonder if the same thing happens to some fraction of venture backed startups.
If the founders don’t start with a focus on revenue and organic growth but instead seek funding, I think it can sometimes create this ongoing focus on fund raising. It’s nice if they can raise an initial round as this enables salaries and a number of other perks. But, like a man who has lost his balance and is running faster and faster to regain it, they continue to plan on new funding to maintain their “venture lifestyle business.”
I first noticed this a couple of years ago when we first offered our “Getting More Customers” workshop. We attracted a venture backed team that was running out of funds. Their whole focus was to document strategies in their updated business plan that would justify incremental investment. They were not interested in actually trying to get more customers, just to be able to demonstrate that they had a plan that they could execute if they were able to raise another round.
I am not against Angel or VC funded startups. But I am disappointed when founders focus on writing a business plan–meaning one that’s a sales pitch for investors not an actual operating plan for their startup–instead of building a business that merits investment.
“Every time I read an About or Team page I think, ‘Why do they need so many people?’ Oh right, they have to. They took funding.”
Ed Weissman @edw519
Many entrepreneurs planning their first software startup get stuck on funding and ownership issues. Here are some simple rules of thumb that may help you reframe an issue:
- Revenue, especially break even revenue, is never dilutive of your ownership.
- The right co-founders, while dilutive, substantially increase your chances of success: they give you a smaller piece of a much more valuable pie.
- Paying customers are real proof that there is demand for your product. Getting funded is proof that an investor thinks there will be demand for your product.
- A software startup in 2009 normally doesn’t need more than 10-25K to get started, if the founding team can provide the bulk of the labor to develop and market the first version of the product.
- If the founding team cannot provide the bulk of the labor to develop and market the first product, think about adding co-founders not seeking funding.
- If you need a salary from day one of your software startup don’t seek investment. Instead keep working at your day job, save your money, lower your burn rate, and work on your startup part time. This is hard.
- Your most important investors are your spouse, friends, and family who will provide you with emotional support on the entrepreneurial roller coaster.
- Professional investors don’t want control of your business, they want a return on their investment.
Jason Calacanis has gone a little bit off the dial on “why startups shouldn’t have to pay to pitch angel investors” but he is nonetheless correct that you should not pay large fees to potential investors for consideration or the right to present.
Our focus is helping bootstrapping technology startups but we do get startups at the Bootstrappers Breakfast who ask whether they should “pay to play” as well as those that have. I have yet to meet anyone in a startup who was happy with the outcome after paying a large fee to present. And by large I mean more than $100. There are a number of pitch preparation groups in Silicon Valley (e.g. VC Task Force, SDForum VC Funding SIG, SVB Competition, Under the Radar, Launch Silicon Valley) that are worth exploring before you write a large check to an Angel group in hopes of getting a larger check back.
ACA Guidelines on Charging Entrepreneurs Fees for Applications and Presentations
In 2008, ACA recommends that angel groups charge entrepreneurs no more than nominal fees for applying for and/or making presentations for angel capital and that all fees are fully disclosed, ideally appearing on the group’s Web site. The fees should be no more than a few hundred dollars for applications and no more than $500 for presentations. Transparency to entrepreneurs is of utmost importance, so full information about fee amounts and what the fees are for should be included on the group’s home page and/or other prominent portions of the site and other important promotional materials. Angel groups should also provide a consistent program of high quality coaching, preparation and feedback to entrepreneurs participating in screening and presentation activities.
These guidelines match the practices of the great majority of ACA member groups, based on a 2008 survey. About two-thirds of responding members charge no application or presentation fees, and the other third mostly charged nominal fees. […]
ACA is an inclusive association that welcomes membership from any angel organization meeting the application criteria, but it does not endorse the practices of any group that levies large fees and/or does not forthrightly explain its potential fees to the entrepreneurial community.
- We are a small, stable and committed investor group with long history of investing together and low turnover. TAF only has 1-2 openings per year for new angels members.
- All of our deals are reviewed and the due diligence is carried out by the angel investors, not by consultants looking for business opportunities.
- Investments are always made via a single investing LLC. This not only simplifies the entrepreneurs’ process but also protects our investing members’ privacy. The aforementioned TAF LLC will often lead the A round and be instrumental in bringing in venture coinvestors.
- Entrepreneurs are not charged any fees to present, we don’t have “success” fees or any other fees for that matter.
- TAF only invests in Northern California headquartered companies in order to devote sufficient attention and resources to the management and encourage their success.
Sometimes engineers feel that it would be more efficient just to get all of the possible investors in one room, make a single presentation, and get an answer right away. It’s somewhat similar to the challenge of finding early customers, the presentations are entirely different and the negotiation dynamics are different, but the process of improving your presentation is very similar. In fact someone asked this question on a mailing list I am on:
Ask yourself which is better:
Scenario A): Spend 2 weeks preparing biz plan/ppt/talk and $3,000 to present to 40-50 angels
Scenario B): Spend 20 weeks and $1,000 (coffee/lunch/gas/printing) and talk 1:1 with 20-30 angels
If you get feedback from each (or most) of the 20-30 angels on an individual basis that you use to improve your plan and your presentation then the 20 weeks is well spent. It’s not clear from your hypothetical situation whether you are able to make progress on your business in the absence of funding, but assuming that you can taking a retail approach (selling one by one vs. “wholesale” trying to sell all of them at once) allows you to improve your presentation and increases your odds for success substantially.
Look at it another way, let’s say that there were still two or three things missing/wrong from your presentation to the group of 40 Angels, what are your chances of being able to approach them again once they have heard you once. What are the odds that you will get feedback from more than a handful of them in a group setting? Talking to 40 at once seems more efficient of your time but it has a much lower chance of success than 20 or 30 sequential presentations–providing you take the time to get feedback and improve your presentation as you go, if you give the same presentation to the 20th as you gave the first you are wasting your time and the time of your potential investors.
Update Mon-Oct-12: following up on a comment left by Benjamin Kuo on an earlier post by Jason I came across two good posts by Joe Platnick of the Pasadena Angels, (I have highlighted some key quotes from each).
- “Angel Investors – Do They Charge Fees?”
- “The best Angels make money the old fashioned way—working with entrepreneurs to generate investment returns upon exit“
- “Some reputable Angel organizations charge a nominal fee (~$50-100) to submit a funding application. The intent here is not to use this as a money making opportunity, but to provide a filter or sincerity test for the entrepreneur and to reduce the number of poor and incomplete business plans (aka junk) that get submitted.”
- “Friday Random Ramblings”
- “These pay-for-play scams remind me of the “modeling agencies” that charge people for representation, acting lessons and to have their headshots done.”
- “Beware of for-profit angel groups based on a franchise model–as those are typically the ones that charge companies. If they don’t make money the old fashioned way and exclusively through investment returns, then they aren’t worth talking to.“
- “I’ve personally made around 75 angel investments during two periods of time – 1994 – 1997 and 2006 – 2007.” [For details read the full post].
- “I give you this background so that my statement below has some credibility. I think it is grotesque that an organized angel investor group would charge an entrepreneur to present to their members. “
- And many of the members of organized angel groups aren’t actually angel investors. I’d like to suggest that to “qualify” as an angel investor, you have to have made at least one equity investment of at least $25,000 in the past 12 months. If you haven’t done this, you can’t call yourself an angel investor.
Update Tue-Oct-13: Jason Calacanis has posted a follow-up in “and now for some smoking guns (or part two of angels that charge)” that has a number of sourced comments on the problem. Worth reading, it’s written in a more temperate voice.
“While I don’t fully understand the inner workings of Keiretsu, what I think I have learned thus far is 40%- 50% (huge numbers) of the startups that pay significant fees to Keiretsu get no funding.”
“In fact, I believe that Keiretsu’s incentives would be more properly aligned if they did have a stake in the outcome of the startups they represent. As it is, they have no incentive to ensure that every startup they put in front of their cadre of investors has a better chance than a coin flip of getting funded. [..] For example, Keiretsu could only take fees from startups who actually get funding, i.e., a success fee.”
“I would support a pay for performance model where the angel aggregator group only gets paid if they are successful in making a good match between their investors and the companies they charge fees to–no funding, no fees. Charging, say, a 2% – 4% success fee is utterly reasonable and in this scenario, the angel group has it’s incentives aligned with the startups and the investors, i.e., to make successful matches between entrepreneurs and investors.”
Update Tue-Oct-20 (more): Deborah Gage at PE Hub reports that “Keiretsu Forum to Drop Fees For Early Stage Startups” part of their Keiretsu Forum Thread.
Williams said the change is not a response to the recent attacks on the fees launched by investor Jason Calacanis […] but have been in the works for several months. Keiretsu also has no plans to drop fees for other entrepreneurs.
I was still mulling over the implications of yesterday’s briefing by Nate Burgess when I came across “Prediction: Angel investing in 2009 will be up?” by Alexander Muse on the Texas Startup blog. Briefly his thesis is:
The angel investment market hovers around $12 billion each year. I predict that the turmoil on Wall Street will actually improve the ability of startups to access investments from angels. The logic is fairly simple, wealthy individual investors no longer trust Wall Street, but they still need to invest their capital. […] With the failure of the major brokerage houses investors may start looking locally to invest their capital. They may seek out ventures in their own backyard where they can exercise some level of control and oversight.
More and more angels I know have been moving more and more funds out of their brokerage accounts and into their bank accounts. […] The lack of professional private equity will only increase the opportunities for angels to make great investments and their access to greater percentages of their own capital will mean startups will get more.
I have come to a different conclusion.
The current worldwide economic recession is lowering the wealth of many current and would be angel investors. Exits are driven primarily by acquisition. Companies who are potential acquirers are for the most part opting for expense and headcount controls in response to this recession. This means that acquisitions will be driven primarily by market consolidation objectives and not a desire for strategic advantage. This will drive acquisition prices much lower and make venture/angel investing less attractive. As ugly as the stock market has become, minority equity investments in private firms are not at all liquid and routinely subject to complete loss. I cannot see Angel investment growing next year.
This does not mean zero. But Angels can sit on the sidelines in a way that VC’s cannot: the VC’s have raised funds for the purpose of investment and are accountable to their limited partners for the management fees they are collecting, while Angels are investing their own funds and are only accountable to themselves (and spouses).
Update Nov-10 Susan Campbell did a follow up “Interesting Finding on Venture Investment in 2009” referencing these dueling predictions and citing first half 2009 results compiled by University of New Hampshire Center for Venture Research report “Angel Investor Market Declines in First Half 2009“
Update Tue-Sep-23: Sold Out, No Walk-ins. We will offer it again: you can sign-up to be notified of upcoming workshops
We just finished our last rehearsal for next Wednesday’s (Sep-24) “Financial Modeling for Startups” workshop we are doing jointly with Nathan Beckord of Venture Archetypes. I think it will be a good lunch and learn opportunity (of course I am biased).
The workshop attempts to offer an approach for modeling your start-up that spans bootstrapping and developing a business plan that merits investment. Nathan addresses the first question that many entrepreneurs have about developing a financial plan: Why Bother?
- A good financial model is an operating plan and roadmap for your business…sales targets, hiring plan, marketing, etc…
- A financial model is a framework for thinking through key assumptions regarding growth rates, pricing, costs, etc
- A good financial model is a mark of credibility and can help convince investors of the overall potential of your opportunity
- A well thought out financial model gives you an idea of how much money you need to raise and when, as well as overall ROI.
It’s an interesting mix of topics that address the needs of teams that are bootstrapping and want a roadmap as well as teams that are preparing to seek outside investment:
- Philosophy of Modeling: Top Ten To-Do’s
- Getting Started: Revenue Build-Up
- Cracking The Pricing Code
- Prospect’s View of Cost
- Product Mix Strategies
- Forecasting Expenses
- Hiring Plan Hat Chart
- Roll It Up and Analyzing It
- Adjusting Forecasts for the Real World
- Pitching the Numbers
It’s only $20 if you sign up by tomorrow and includes lunch. It’s Wed. Sept. 24 at 11:30 to 1 at Plug & Play, more details and registration here: http://www.skmurphy.com/services/workshops/financial-modeling-for-startups-080924/
- Whenever you are planning to take an investment from someone the calculation you have to make–and that they should agree with–is will you be able to satisfy their return on investment requirements. So, maintaining a certain level of ownership, while very important to you, will matter less to them than how much and when you plan to pay them back.
- You also need to be very clear as to why you need the money. In particular, your need to keep the business operating or to be paid a salary are not compelling. It’s best if you can present a plan for accelerating an existing business based on proven success and a clear understanding of the market.
- Take careful notice that the terms and conditions that come with a financing (in particular liquidity preferences) and have your own attorney review them. They can often have a much larger impact on how much money you put in your pocket when your (former) business (goes public or) is acquired than the percentage of common stock you own after the first round of financing.
Our focus is on helping teams that are bootstrapping find early customers and early revenue, enabling the possibility that they build a business that deserves investment. So we bring a set of biases to fund raising questions. Four other sources of good information you should consult–in addition to your own attorney–would be
Are you trying to raise venture capital? If so, the Plug and Play Tech Center Expo is the place to be. The full day agenda included presentations from thirty-one companies to a panelist of investors from Norwest Venture Partners, Menlo Ventures, Foundation Capital, Amidzad Ventures, and Mohr Davidow Ventures. The Expo consisted of two parts; the presentation room and the conference room. Since the investors can only ask questions during the presentation, the conference room allows attendees to walk the show floor and speak with the presenting companies at their demo tables.
My overall thoughts and comments on the presentations:
It was obvious that most of these presentations were unrehearsed. It was shocking to see so many entrepreneurs stumbled over words, read word for word off their note cards, and speak completely on the technology. Overall, I felt with a little practice and more organization in the flow of their key points, many of the presentations could have been much better. However, from the entrepreneurs perspective; how do you know if your presentation needs improvement? One resource we highly recommend is Peter Cohan’s book “Great Demo!“ It is an outline for giving compelling presentations.
The reason why we stress the need for entrepreneurs to practice, practice, practice is because of the bigger picture. You do not get a second chance to make a first impression. Nine out of ten times, the investor is interested in you and not the technology. Besides understanding the market opportunity, the presentation allows investors to evaluate whether or not you would be easy to work with. If you can not clearly state the problem you solve, the value you bring to your customer, and confidently speak to strangers, it will be hard to obtain a second meeting. Remember the object of the pitch is not to sell them on the spot. It is to get the next meeting.