Angel Investing, Entrepreneurship & Learning

Angel investing is risky. If you were to look at the average portfolio of an angel investor, you would probably only find 1 company that will produce the 10-30x ROI that the angel was expecting. The other 9 investments will most likely fail or “go sideways” (i.e. which means paying the money back without any returns).

One of the best things that an entrepreneur can do is to take as much risk out of the investment as possible. One way that you can do this is to get as far down the road as possible without taking any money. In Bill Payne’s book The Definitive Guide to Raising Money from Angels, he says:

“Seed rounds of investment are usually made in entrepreneurs and their companies at a stage when a product has been developed (or has been prototyped) and after a customer or two have been identified who will buy the product.”

MAIN POINT: It’s important to recognize that most investors do not like to fund the R&D* (research & development) stages of the company. They like to see that you’ve manufactured the product, built the software, finished the web development, etc. so that their money can go to SALES & MARKETING.

*This is not true with all industries (example: life science) and all investors, but will apply to most industries.

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Ok, so I don’t post too many entries on topics that aren’t related to entrepreneurship — but this time, I just can’t resist! I am one of the biggest BYU Football fans the world has ever seen. No matter what is happening or where I am in the world, I do not miss a game (when my wife and I were in Germany, we stayed up in the middle of the night to watch the BYU/UNLV game on the internet).

Anyway, for those of you who don’t know, BYU’s biggest rival is the red “team up north” (the University of Utah). Over the past couple of years, it has pained me to know that BYU has not beaten the Utes since 2001. This year, however, it was a different story…

With 1:19 left in the 4th quarter, BYU got the ball down by 4 points. The game was played in front of a hostile environment at Rice Eccles Stadium, so no one gave them hope. They drove the down the field to have the ball at the Utes 11 yard line with 3.2 seconds left. 1 play left to either win or lose the game. Check out what happened (it’s well worth your time to watch — you’ll be inspired and motivated for the rest of your week )

The Cougs are back! MWC Champs!

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2 weeks ago, I was given the opportunity to travel to Arizona and speak on a panel at the AZ Entrepreneurship Conference. As part of the conference, I had the pleasure of listening to the author of the famous entrepreneurial book The E-Myth: Michael Gerber. Michael did a fantastic job — not only was he very inspiring, his speech was engaging and funny. Here are some of the notes that I took during his keynote:

• He’s predicting a new wave and growth of entrepreneurship over the next 200 years
• He’s got a new book coming out in the Fall of 2007 called Awakening the Entrepreneur Within
• I liked his quote about Man’s desire to create: “If man is born in the image of God, then we are born to create!”

He also discussed a concept that really got my mind thinking… he said, “Every industry will be transformed by someone on the outside.” Let me explain…

He used the example of Ray Kroc, Founder of McDonalds. When Ray Kroc decided to purchase the rights to McDonalds, he was an outsider to the restaurant industry. He knew nothing about flipping burgers or making french fries — he had never had experience in the restaurant space.

Gerber explained that the reason that Ray Kroc was so successful at building up McDonalds is because he “worked on the business, not in the business.” He spent his time creating detailed and efficient systems and processes that he could duplicate in every single franchise. The reason that he was so successful was because he created a standard that customers could expect EVERY SINGLE TIME they visited a franchise. It didn’t matter what country you were in, you knew what you were going to get.

He believes that many industries will be transformed by outsiders (like Ray Kroc) that will find a better, more efficient solution to a problem. This concept was very intriguing to me — and I have to concur. Often times, those that are within the industry have blinders on that prevent them from creating an out-of-box concept.

Who do you know that has successfully created a new concept as an “industry-outsider”? I’d love to hear of more examples.

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Last week, I had the chance to help judge the BYU Idea Competition. There were 10 judges analyzing around 140 business concepts and ideas. While there were some ideas that were a little wacky and others that were not very feasible, I was very impressed with most of the ideas that were presented. Our goal was not to select a winner or even decide if they are “fundable” ideas, but to decide if they are good ideas or not.

Some might say that a “good idea” and a “fundable idea” are synonymous, but I disagree. One of the main reasons that they aren’t the same is because a lot of really good ideas are not scalable. Let me explain…

When investors are analyzing an investment opportunity, they will traditionally look to see if the company will grow very rapidly in the first five to seven years, providing an opportunity for the investors to exit with a high-multiple return on investment. When I say “high-multiple ROI,” we’re talking 10-30 times their money (so if you’re looking for $500k, they are hoping for returns of $5M or more).

There are other businesses that are very good ideas, but don’t pass the “scalability test.” Most investors refer to these ideas as lifestyle businesses. Examples of lifestyle businesses may include: restaurants, real estate, local mom & pop shops, and other human-intense opportunities (i.e. consulting, etc.). These businesses can be very successful and provide a very good living for their founders, but aren’t necessarily good investment opportunities.

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It might sound very cliche to start the list off with the standard answer of “Management Team”; however, time and time again, I have seen that the final decision of the angel rest on his/her confidence in the management team.  I love how Craig Bott, CEO of Grow Utah Ventures, framed this concept:

“Like most investors, we invest in entrepreneurs. We do this because we know that the business plans and all of the projections will probably change. The only one constant will be the entrepreneur.”

When an investor is considering a possible investment in your company, she must have total confidence in you as an entrepreneur.  Because angel investing is risky (only 1 out of 10 investments are likely to produce a large return), they have to trust that you will execute with their investment.  Not only are they giving you their money, they are trusting you with the keys to the car!

Here are a couple ways that you can show that you have a passionate management team:

1. Put “skin in the game.”  What are you sacrificing in order to make the company successful?  Have you put your own money into the company?  Have you worked for free?
2. Bootstrap.  Can you show that you can execute on little or no cash?  Negotiate with your customers to get up-front payments or with your vendors to delay payments.

Here are a couple ways to show your integrity:

1. Be completely honest in everything you do or say.  Make sure that you are “fudging” or exaggerating your business plan.  As soon as an investor finds out about 1 red flag, she will have reason to believe that there will be more red flags.
2. Say “I don’t know.”  How many times have you tried to wing it when someone asks you a question?  It’s easy to see when people are starting to wing it, so don’t do it.  You can honestly say that you don’t know the answer and then take advantage of the opportunity to follow-up the next day with the answer to a question.

Of course, all of the passion and integrity in the world can not replace talent; but, I will go out on a limb to say that talent + passion + integrity CAN replace experience.  It is not requisite to have an experienced management team — there are other ways around that (i’ll go into more detail in a future entry).

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This past week, I had the opportunity to do a podcast with angel-investing expert John May.  John is the Chairman of the Angel Capital Association and a long-time angel investor.  The conversation was very intriguing because of his natural passion for angel investing.  He loves to learn, study, and teach on the subject.  I was impressed with John and look forward to listening the final edit of the podcast (it will be released within the week at FundingUniverse.com).

One of the topics that we covered in detail was “the signs of a fundable company.”  In this series of blog posts, I will discuss 10 different signs that will help any company be attractive to an angel investor.

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If you are an entrepreneur or an angel investor and haven’t seen the new FundingUniverse digs, you need to check it out!

About 6 months ago, we started on a journey to build a service that accomplished one major goal: GET DEALS DONE. With that goal in mind, our team (led by Matt Bradley) started the performing in-depth customer research; surveys were conducted, informal interviews were organized, and customers were contacted. In addition to the customer research, a benchmarking study was also arranged in order to study out some of the most effective and most successful online subscription services (i.e. Ancestry.com, Monster.com, WallStreetJournal.com, eHarmony.com, and more).

After 4-6 weeks of research and product planning, we began the development process. Trent Miskin led the development efforts that included revamping the entire FundingUniverse brand/website and creating subscription services for both entrepreneurs and angel investors.

So how do our services help to get deals done?

• The entire system is built around a proprietary rating system that we have developed to analyzed each of the business plans that have been posted on FundingUniverse. The rating system analyzes 4 key areas:

1. Management Team
2. Market Opportunity
3. Sustainable Competitive Advantage
4. Traction

• Angel Investors: because of the implementation of the rating system, investors will now enjoy the convenience of pre-screened deal flow. The top-rated plans will be at the top of the InvestorGallery making it easier for them to find those deals that are AngelReady.

• Entrepreneurs: the rating system provides you valuable feedback on how your plan stacks up to all of the other plans in the nation. Based on your rating score, we will do 1 of 2 things: 1) Your plan will be pushed to our investor base through the website, VideoPitching, LivePitching, and SpeedPitching. 2) We will recommend that you continue to polish and refine your business/investment opportunity by taking advantage of our AngelReady Subscription or our AngelReady Consulting Packages.

I’m totally stoked about the AngelReady monthly membership for entrepreneurs. If you are seeking to raise angel capital (or will be in the future), the package will shorten your learning curve and provided needed exposure to angels. The package includes:

1. Valuable Feedback: get your idea/business plan rated once a month. Also see how many angels are looking at your plan.
2. Education: participate in a weekly online chat and a monthly online webinar with expert angel investors.
3. Exposure: record and upload a VideoPitch.

Bottom line: entrepreneurs will be more prepared and will receive more exposure + investors will more conveniently find good deals = MORE DEALS DONE!

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So don’t you hate when you get onto somebody’s blog and the entry says: “Sorry that I have written for a while. I’ve been so busy, but I’m committing to do better!”? It’s even worse when you see that like 4 or 5 times throughout their blog.

Since I know you don’t like that, I won’t do it.

It’s been a crazy month of October. Here are the highlights:

• Successful SpeedPitching Luncheons in the Bay Area and in Houston. Most of the major angel groups were in attendance (Sandhill Angels, The Angels Forum, Houston Angels, Keiretsu Forum, Draper Fisher Jurvetson, Amidzad Ventures, Siemens Technology Ventures, US Angels, etc.) and we had 18 fantastic companies that presented.
• My wife and I enjoyed a wonderful vacation to Europe — what an amazingly gorgeous place! See some of the highlights by clicking here…
• I had the opportunity to participate in a speaking panel at the first-ever University Start-Ups Conference in Washington D.C.
• The team at FundingUniverse worked tirelessly to launch the new FundingUniverse subscription. Check out our new diggs (I’ll blog more about this in a different entry).

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