High impact angel investing in the major venture capital centers is not without its special challenges. That said, problems like a target rich environment of experienced entrepreneurs and a plethora of alternative funding options are, as they say, pretty high quality problems to have. Outside of the major venture centers, angels face another set of problems; problems that on the whole make successful angel investing in these locales more challenging than it is for their venture center counterparts.
While Convertible Debt with a “kicker” of some sort (typically either in the form of warrants or a discount on the conversion price) was first used primarily as a structure for bridging companies between rounds of traditional venture capital financing, more recently it has become a popular vehicle for seed financing in advance of the first (“A”) round of venture investment. The structure offers two major plusses for entrepreneurs and investors.
Many high impact entrepreneurs have outsized personalities. They combine a big ego with incredible creativity, drive and energy. Pretty much all of them that I have known have had at least one serious personality … quirk. That said, there are quirks and there are flaws, the latter being defined, for my purposes here, as traits that rub most venture capital investors the wrong way.
In Part 1 of this post, I focused on issues entrepreneurs and angels should think about as a seed deal comes together. Today, I want to focus on how angels can engage with entrepreneurs after the money changes hands. Foremost among post-closing advice for angel investors is this: never forget that as an angel investor you are a coach, not an athlete.
At a time when lean startups often require considerably less than $1 million dollars to develop the proverbial minimum viable product and even validate the same with some customers, angel investors are playing an increasingly important role in startup financings. And that’s a good thing, particularly in places outside of the major venture capital centers, where institutional venture capital is scarce.
Having been around the high impact startup and venture capital business for almost 30 years, on both coasts and now here in Wisconsin, I’ve developed a pretty good set of rules of thumb. One of them is that while all kinds of folks like to think they can duplicate the success of venture-center accelerators like YCombinator, most of them – particularly in flyover country – can’t. The fact is, very few folks in the accelerator business have the skills, experience, networks and capital to even approach the value add proposition of a YCombinator.
One question high impact entrepreneurs often struggle with is how various members of the board of directors should be compensated. Directors come in a variety of flavors, and should be compensated accordingly. Now, while every situation is unique, there are some good rules of thumb that entrepreneurs should keep in mind—if only as a place to start.
Marissa Mayer, over at Yahoo!, is making a fair amount of news these days, most recently for reversing the company’s longstanding embrace of telecommuting and insisting that employees work at the company’s offices. A lot of people were surprised by the move either because it seems to go against the idea that the workplace of the future, enabled by modern technology, is best defined by where people are than where they are supposed to be.
With the ascendance of the lean startup model, with its emphasis on early and constant customer feedback and startup pivots reflecting the same, more and more entrepreneurs are asking themselves, “Why bother with a business plan? It won’t survive long enough to be worth the effort to create it.” Count me as a contrarian here. In my view, even lean startups should start with a business plan, even if the expected life of the same can be measured in months or even weeks.
One of the more material, contentious and potentially confusing issues in negotiating venture capital term sheets is the structure of the so-called liquidation preference. Perhaps better thought of as the “exit preference” this is the term that spells out how the proceeds from a sale of the business are divided between the common shareholders and the various investors holding shares of preferred stock. Since the vast majority of successful exits involve selling the company, the structure of the liquidation preference is a critical part of the investment terms.
Willie Sutton once famously quipped that the reason he robbed banks was “because that’s where the money is.” Wisconsin and other flyover country entrepreneurs can, I think, learn something from Willie’s thinking. To wit, when looking for risk capital, at least think about going where the money is. Which is to say the west and east coast venture centers.
The “lean startup model” is all the rage in the entrepreneurial world these days, and well it should be – for the right kind of startups. Which is to say, for startups that can realistically talk about delivering the model’s “minimum viable product” (MVP) to market for very little money (say, tens of thousands of dollars) in very little time (say a few weeks or months). Which is to say, web app startups and such.
The angel investment community in Wisconsin has been growing steadily for several years now, and given the limited availability of professional venture capital in the State this is good news. My purpose today is to offer some of the newer and prospective angel investors in our State some ideas they should think about in terms of what they want to get out of their angel investing activities, and some of the things they should consider in terms of accomplishing those goals. As in all of my blogs, the focus is on high impact angel entrepreneurship and investing.
In Part 1 of this blog, I wrote about why so many angels, venture investors and even entrepreneurs continue pouring resources into investment lemons well after they should have pruned them and moved on. It is well known in the venture business that the deals investors most regret are not those that crash and burn quickly, but rather those that never get anywhere worth going but never completely fail either: the proverbial land of the living dead.
I don’t know about real lemons, but they say in the venture capital business that investment lemons ripen early. That is, deals that are going to go south tend to reach their destination before deals going north reach theirs. This makes the timely pruning of investment lemons an important venture capital skill.
Earlier this week, I had the pleasure of participating on a panel on term sheet negotiations at this year’s edition of the Wisconsin Early Stage Symposium in Madison Wisconsin, an annual event that brings together several hundred entrepreneurs, investors and what are gently referred to as service providers interested in growing the high impact business community in Wisconsin and the upper Midwest. It’s always a great event, book-ending as it does the annual Wisconsin Early Stage Conference, a gathering of similar folks with similar interests (i.e. mostly the same folks with mostly the same interests) that takes place early each summer.
One thing you notice pretty fast if you compare what constitutes a big exit for a deal in one of the venture capital centers (let’s call these “Venture Center” deals) with what constitutes a big exit most everywhere else (let’s call these “Wilderness Deals” is that you need at least one extra zero at the end of a Venture Center deal to call it a home run. Is that because Wilderness Deal entrepreneurs don’t have ideas as big as their Venture Center counterparts? Maybe, but I don’t think so.
One of the conundrums facing entrepreneurs seeking venture or high impact angel financing is when and what to disclose about the entrepreneur’s intellectual property. Venture capital-worthy businesses often have some sort of “secret sauce” that is a critical part of the “unfair competitive advantage” that makes them so attractive to investors willing to take high risks in pursuit of lofty returns.
As anyone familiar with the conventional wisdom on investing in the stock market knows, the most fundamental rule of investing is to diversify your investments across a number of different stocks in different businesses. And while there is some room for argument as to whether some small subset of investors can consistently beat the market over time, for the vast majority of investors following a diversification strategy to mimic the market’s overall return is pretty solid advice.
When high impact entrepreneurs and their investors talk about risk, the “big three” categories are usually Team, Market and Technology. In taking an idea and turning it into a business/investment opportunity, entrepreneurs spend (or should spend) a lot of energy understanding and managing each of these risk factors. More often than not, the proximate cause of high impact business failure is attributable to one of these risk factors (usually Team risk – but that is another subject).