Business Angel and First VC Round Funding
Business Angels can be roughly divided in two: individuals with resources who are prepared to invest in maybe only one venture; and the other portfolio "angels" who are actually self made high risk fund-managers in effect. Now both have their value in bringing not only money but well needed guidance and goal setting for the real world ie 'window dressing' the company for the next round of funding.
Angels fund of course, but also most usually match other resources to the start-up's needs as well: most often that means people with talent, as employees on the initial management team, or consultants to help the team, and often the key members of the board of directors. Some will also marry premises, or actually are property owners with suites ready for expanind businesses.
Start up enterprises should be sensitive to conflict of interests in both these areas above: human resource allocations and premises:
1) croni-ism: It is all very well for the business angel to have given the seal of approval in bringing someone in, but by not advertising generally then you do not actually know if this person is best suited in experience to your company and your market. The Angel may well shoe-horn someone into business development or engineering who has been successful in their portfolio, but who may not be ideal: On the other hand at least their work capacity and motivation will be QA'ed which is a large part of the battle
2) In terms of property and services, some business angels (and management "guns for hire") are far from angelic: they look for ROI in terms of direct revnue back to them, and subsidiary capital gains: so they may push you into buying property, so they enjoy you paying it off with revenues eventually, or actually rent you property they have an interest in. Also they may want consultancy fees or a direct salary.
3) Stand alone business "angels" who have limited experience, and maybe not even a portfolio, will probably want more of the action than they should: they will want to be directly on the board themselves or even actually be an operational manager or internal consultant. This must be weighed up with 2. above as to their intentions, and also their own skill base and personal network : is their market and resource access really good enough?
4) Other personal biases: Angels will have personal biases which may fall on the down side of all the above potential conflicts: furthermore they may have a bias to a market player, partner, university or IPR source which is actually not the ideal route for the company. The route may be completely counter productive because the initial positive personal contact mediated by the "angel" dries up to being a deal which could be of higher value with a competitor to them.
Show Me The Money......
These days in either software, hardware, consultancy or business services a highly profitable company with high growth potential can be hitting its KPIs and milestones in Y1 and Y2 on first round Y1 funding of half to a million dollars/ Euros and one to two millions in the Y2.
Angels will often want to pick up on the next round too, because they see the potential overlooked by VC or the VCs are not "in" that industry / sector of industry at that time. VC invests in industries and high growth sectors by in large, and not individual companies per se. They will have expertise in a segment or buy that in when the KPIs look more rewarding than others. So VC can be high value-niche product shy, because they have bet on other growing sectors as attractive and are hunting for companies who are in there.
Alternatively one fortuity of portfolio Angels is that VCs trust them, and when they are looking to invest extra monies or sectors they have looked into go sour, then they may back a wild-card horse from the trusted portfolio. Some VCs in Silicon Valley probably just take companies "screened" by their favourite portfolio angels.
Business angels without portfolios, say with just a few companies, are going to be more hands on, while those with portfolios are going to be more dogmatic and prescriptive: the latter will want to see the management team and board being of a proven calibre, and this has its expenses in terms of salaries and arrogance of managers coming in to ride and steer the founding entrepreneur's ideas.
Backdoor references: are often looked for, unsolicited networking to assess the qualities of personnel. So there are ongoing issues for the entrepreneur and core "engineering" team in accepting new personnel and being assessed for their own "personal brand" off the record.
Business Angels and Venture Screening : Why the "The Elevator Pitch" ??
The two groups of investors behave on the ground floor of things, quite similarily: they both screen potential companies to invest in based on their "elevator pitch" as the first major screen, and even then there has probably been a "triage" whereby the company pitching is
recommended or screened by an associate.
So the elevator pitch has to explain the product or service, the USP and the size and growth of the market in a very concise and attractive way.
VC will also be doing a further job in finding what industries to invest in: where there is growth and margin, where there is need for supply. Whereas the Angel is probably entrenched in the industry or just has a more open mind to high risk backing a good concept.
Practically a portfolio manager or angel will see between 5 pitches a week and 5 a day. Any pitches that get through the "elevator" exec summary stage then get screened by looking at those unsolicted references, the CVs of the founders, the supply chain, and an idea of what people pay for products and services already in that area. The knock out rate here is therefore high.
This means though that even with a good pitch, you are actually only as good as 1) the attractiveness of your industry to the VC or Angel 2) how good the other pitches were that day, week, month or quarter.
So the elevator pitch is just a function of human buying behaviour: we browse, we feel branding, we pick the best from the shelf to match our thinking on that day. We don't spend time reading the best Harvard MBA business plans, risk assessmetns and financial scenario algorythmic results : we take short cuts based on highly summarised information, a concise presentation of the idea, and the quality of the concept itself.
Attrition and Success Rates for Angel Supported Companies
50 to one ? A third go bust, a third return their original investment plus interest maybe, while the top third make the large multiples in ROI: In terms of the 100% (2x) , 500% or 1000% Y2 ROI in their valuation when they are sold further or floated by FPO. The large ROI on the one third stars must of course pay for the fail-third and the "stake back on your bet" third.
An independent angel without a portfolio may conversely, have such a good grasp of the concept and be able to offer so many open doors and resources that they choose to invest and the marraige is successful. Not only there by, but because the Angel is prepared to put time and shoe leather into supporting the business.
Nimble and Lean Burn is Important to Angels and VCs
Being "nimble" means being able to move quickly to take advantage of changing conditions in your supply chain: It means most of all, being open minded to morphing the business to a new direction. This can include:
- Picking up on new potential revenue streams quickly and converting them
- Redefine who and where the customer is in the supply chain and in the world
- Being able prototype rapidly and test market: Slide dot com tests 4 to 6 ( NPI ) products A DAY!
- Open mindedness of moving the shell of the business into a completely new direction based on fortuity, or rationalisation of the current route being unprofitable or low in ROI.
- Dropping poor routes or products and carrying on with the good ones or looking for the direction presented above, to use the shell to do something new they have encountered potential within.
- Capability to "breath", in expanding by using right-sizing and outsourcing such that projects can be delivered without committment to overhead. This could be even short term, in a matter of weeks in terms of hiring and firing costs.
- Low Base Cash Burn: being able to return to a low base cash burn rate while still holding and building value in the proposition.
Alternatively a company may reach a bottle neck: There may be no properly experienced Java programmers in "the valley" at that time to implement the product. Therefore it may be worth putting the company on ice while the labour market loosens.
Low burn rate in itself enables nimbleness, because companies can survive when trying out new directions. So trial and error can be a positive experience which the company comes out stronger from.
Nimbleness appears the exact opposite of strategy: it is more tactical and reationary than earlier concepts of "core business" and "mission statements". Indeed it seems that strategy is now both a wider direction, while also a focus on the abilities and will to win of the team. Overall you are likely to have a strategy in a market, and that may begin in one niche or direction. You therefore have a strategy to build the initial team of 5 to 8 people and take them in the market and client groups they aim their bow towards.
Right Sizing and Out Sourcing : Risks and Rewards for being Nimble
The problem with outsourcing or using contract labour is that your business concept and IPR are revealed to the personnel who have no definable loyalty to the company or knowledge of IPR laws even. In software for example, they may be able to implement a very similar solution in C++ you have done in Java, thus circumventing copyright and US software patents at least. However some suppliers specialise in secretive projects for start ups or companies needing "breathing " capacity.
Looking for suppliers in this way, addressing top management under CDA is also a very good means of approaching merger and acquistion potential partnerships. It may be a jobbing engineering workshop who do a lot of one-offs and prototypes would want to move into steadier high value production. Or a Java hot shop may be looking to partner to the next "facebook" entrepreneur.
Milestones Should Be Market and Quality Oriented
Businesses should indeed set NPI or earlier prototyping and proof of concept milestones: sometimes with no contact with the market which could expose the IPR too early. However soon the company should be setting alternative milestones and KPIs: breadth of client and partner contact, and depth of business development penetration.
- Number of presentations at CEO Level,
- number of call backs.
- Ranking contacts and meeting outcomes for their quality, and the match between the customer.
- Number of escalations
- Conversion Rate in the Funnel
For a consumer oriented business: it should be rapid prototyping and feedback from significant numbers of potential users on as wide a geographic basis as practical.
The level of benefit over other competing products and services must in fact be assessed by customers and not internal staff. This is a key ground for that high tech companies fail: they are myopic to their own solution as being unique and better, while missing the concept of value-increment and adoption-risk pay off for customers.
So a key milestone must be that the NPI does deliver x% better, and that this is more than a just-noticeable-difference. It must be a real threshold which will take early adopters and not just innovator "geeks" at the front edge of introduction and word-of-mouth marketing.
What is Better? What do consumers like in NPI?
In fact the big brands on the internet do really very little that was not done by the mid to late nineties: Twitter, you can trace back to newsgroups and even before, perhaps even phone phreaks and early pre TCPIP notes.
The Facebook concept has had various guises since "personal home pages" became first popular in Universities in the mid ninetees: friends reunited amongst others. DIgg and My Space too, could all essentially be found in the 1990s, and "tweet / Blogg" Decks relate back to the 1990s "Jump Stations" .
Alta Vista and FAST had leading, performant search engines which rivaled Yahoo and Google in the mid ninetees. Why did they not win a normal market share ?
Why are the big brands then, all massive successes?
On the "Product" side, they provide a more cohesive user experience which is in fact, simple and often this means faster to both use and grasp the facets of the service. Also you could say the products were in the right place right time for the mobile device explosion into media rich web sites.
Perhaps many people had gained experiences with the earlier products and so were warmed up to adopt a tighter and neater execution, funded soley by discreet advertising. The last point cannot be stressed enough: intrusive advertising and pay-for-contact social web sites were doomed to reach their limits in utility for building a social network and communicating to them on line.
Certainly there is a lot to be said for the interplay of early adopters, good-simple-branding, a performant NPI concept, and a level of familiarity and readiness for the wider market to adopt these new social media platforms.
What Chance the Start Up?
One thing all the big internet brands have in common, is that they all have got funding and personnel in Silicon valley. At that time it was the only place where a critical mass could be achieved. Like Microsoft and IBM in Seattle before, and the big brands and Madison Avenue in the hey days of TV and Press advertising.
So place to seed in is going to be important, and for any given industry a labour supply is also key
People and ideas have become more important than numbers and projections. Perhaps you need the "excuse" of starting up to do X, Y and maybe not Z right now in a fast growing market.
But wait up here, before facebook came, off search engine advertising was a scarey business model? How did FB swing the balance?
Well the cost of gaining a critical mass to enable the huge social-word-of-mouth marketing snowball to roll, was actually relatively inexpensive and once it attained exponential growth, the advertisers wanted on, as an alternative to Google.
So for the start up there is hope but you have to get on the train perhaps at the right station.