Enabling Entrepreneurs

Have you noticed all the great press given to Super Angels by the Business Week and the Wall Street Journal?

First Business Week introduced us to their top 25 angel investors, who have each funded between 5 and 190 deals, averaging about 40 angel investments per angel.  It is a great list!  Then, the Wall Street Journal introduced us to Super Angels Aydin Senkut, Peter Thiel, Ron Conway, Chris Sacca, Dave McClure and Mike Maples.  They have each made many angel investments in seed/startup ventures and several are now managing small funds, which sound a lot like small venture capital funds.  (We tend to define angel funds as pooled investments in which all investor/members vote before investing.  Venture capital managers generally make all investing decisions.)

I love all this high visibility press on angel investing.  We angels have been operating mostly under the radar for a long time.  But, I wonder where Business Week and the Wall Street Journal have been for the past decades?  Angel investors in the US fund about 20,000 new companies each year putting nearly $20 billion to work in new and existing portfolio companies.  Angel groups all over the world fund thousands of new companies each year and have been doing so for years.  The Band of Angels in Silicon Valley has funded 209 companies in the past 15 years.  I suspect there are hundreds of angel investors who have funded 40 companies or more in the US, but did not make the Business Week list.  (Sorry angelic guys and gals!)  But, here is the best news on US angels and angel groups: They are located in every state in the union, not just in Silicon Valley and Boston. 

Angel investing has been around for centuries (J. P. Morgan and members of the Carnegie family provided funding to Thomas Edison to start General Electric in the late 1800s, and they weren’t the first by a long shot!)  While I am delighted that Aydin Senkut, Peter Thiel, Ron Conway, Chris Sacca, Dave McClure and Mike Maples and doing what they are doing, they don’t seem to be breaking any new ground – just providing capital and sharing their business skills with promising startup entrepreneurs.  Thank you, gentlemen!

It’s a GREAT time to be an angel.  Find a group and jump in!

As you may have read in my last post, I believe entrepreneurs should write business plans – for themselves and for investors.  You’ve probably also noticed that business plans come in several flavors.  Let me describe them and explain how, as an investor, I suggest that entrepreneurs use business plans.

Unless specifically asked, DO NOT hand an investor your business plan when you first meet.  You need to first “set the hook”!  Instead, deliver your Elevator Pitch and ask the investor if they would like to read your Executive Summary.  If and when investors are interested in reading your full business plan, they will ask for it.

Here are the versions of business plans that entrepreneurs need to have available:

Elevator Pitch:  An elevator pitch is a 2-3 minute verbal presentation of your entire business plan.  Difficult to do?  Sure!  But, your elevator pitch is the most likely vehicle for creating interest by new potential investors in funding your business.  Don’t just talk about your product.  Discuss how you will build a business and create value for shareholders by delighting customers.  Design your elevator pitch at a level that your third grade teacher would understand it.  And practice it until you can deliver it smoothly and effectively.

Executive Summary:  An executive summary is a two-page written synopsis of your business plan.  Be sure to write it AFTER you complete your full business plan.  Use your elevator pitch and executive summary to set the hook with investors.  As you give your executive summary to investors, ask them if you may call them in a few days to follow-up.  And, be sure to include your contact information in your executive summary (and business plan).  It is surprising how many entrepreneurs forget to do so.

PowerPoint Presentation:  If investors are interested in your business (after hearing your elevator pitch and/or reading your executive summary), they will likely invite you to make a verbal PowerPoint presentation to a small group of investors.  This presentation must include all aspects of your plan, in a rather abbreviated format.  I like the Guy Kawasaki 10:20:30 rules for PowerPoint presentations (from his book The Art of the Start).  Develop ten slides to cover all aspects of your business, with no more than one slide per topic (product, technology, competition, etc.).  Practice and practice a twenty minute presentation, covering all ten slides.  And, limit the number of words per slide by using #30 font, so that all those watching your presentation can read every word.  Great advice from Guy!

Full Business Plan:  A complete business plan is usually about 20 to 50 pages long and covers every aspect of your new venture, including your product, technology, management team, competition, marketing plan, sales channels, capital requirements and a full set of proforma financials for the first five years of operations.  It needs to be written before approaching investors and before creating any of the abbreviated forms of business plans described above.  That said; never give your business plan to investors until they ask for it.  Investors simply will not read your business plan until they express an interest in funding your company.

Stay tuned!  More on business plans in upcoming posts.

It’s a GREAT time to be an angel.  Find a group and jump in!

Business Plans – Why Write Them?

Too often you read about investors who suggest to entrepreneurs that business plans are unimportant and they never read them.  I think this is poor advice for entrepreneurs, because business plans are not just written for investors.  Writing business plans forces entrepreneurs to think through and then describe in writing all aspects of their business.

Entrepreneurs tend to be totally focused on their technology, innovation and/or products, sometimes to the extent that they begin talking to investors before they have given serious consideration to a management team, customers, sales channels, competition or the capital required to be successful.  Writing a business plan forces entrepreneurs to consider all aspects of starting a business and is an excellent experience for entrepreneurs new to starting and running businesses.  Most of the time, going through the process of preparing a plan changes somewhat the design of the product or the direction of the company.  Customers are the key to success of any business.  A serious plan must considers customer satisfaction and customer acquisition, in the face of the competitive environment.

I am often asked to recommend tools to assist entrepreneurs in writing business plans.  Frankly, there are many available, but my favorite is The Business Mentor, available for $24.99 from Kauffman FastTrac by calling the US toll-free number, (877) 450-9800.  (This product is temporarily unavailable online.)

And, by the way…most investors do read entrepreneurs’ business plans during the process of making an investment.  Angels in groups (and VCs) generally do extensive “due diligence” (an in-depth study of the opportunity) prior to investing.  The entrepreneur’s business plan provides the outline for that effort.

Stay tuned!  More on business plans in upcoming posts.

It’s a GREAT time to be an angel.  Find a group and jump in!

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com

Lean Startups – II

In my last post, I poked fun at Eric Ries and Steven Blank for an article posted by the New York Times suggesting that “lean startups” are a fresh new approach, which is likened to bootstrapping. I pointed out that we outside of Silicon Valley have been bootstrapping our startup ventures for decades because venture capital is not nearly as available anywhere in the world than it is in Silicon Valley.

That same article quotes some Silicon Valley veterans as suggesting “a shrinking role for venture capitalists in seeking and backing young entrepreneurs.” And, that the VC role in the capital food chain “is increasingly being taken over by … angel investors….”  Again, I think the New York Times post has it all wrong.  Venture capitalists have had a decreased role in seed and startup stage new ventures for a decade, choosing instead to make larger investments in later stage ventures.  Furthermore, (and unfortunately) the number of venture capital firms and both the number and dollar volume of their investments has also been decreasing in recent years.

It is wonderful that startup entrepreneurs in some verticals can bootstrap their companies to positive cash flow, organic growth and exit with $1 million or less in invested capital.  And, it is a blessing that solo angel investors and angel groups all over the country are actively funding these ventures.  But, the shrinking role of venture capital has been defined by the poor returns of many funds in the industry and the subsequent lack of interest in recent years by institutional limited partners to provide capital to new funds offered by general managers with less than illustrious track records.

The suggestion that bootstrapping entrepreneurs and active angel investors are reducing the role of venture capital is exactly wrong.  The shrinking role of venture capital in backing promising young entrepreneurs has driven those entrepreneurs to “make do” with smaller founds available from super angels and angel groups.  Thanks heavens for angel investors!

It’s a GREAT time to be an angel.  Find a group and jump in!

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com

Lean Startups – I

In all of my travels, I explain to audiences that there are only two places in the world for entrepreneurs starting companies and seeking capital – (1) Silicon Valley … and (2) everyplace else.  Except for those in the Bay Area, almost all the rest of us live and work in fly-over (or fly-around) states and countries.  The innovation in Silicon Valley is amazing and the sources of capital to support startup based on this innovation has been quite robust.  But, sometimes our friends in the Valley need to get out more…and see how the rest of us start and fund companies.

I was quite entertained by an April article posted by the New York Times suggesting that “lean startups” are a fresh new approach.  Attempting to draw an analogy between current startup entrepreneurs and lean manufacturing in Japan decades ago, Eric Ries and Steven Blank suggest that software development costs (using open source tools) are coming down rapidly and that those entrepreneurs who deal early and often with customer have a greater chance of success than their competitors.  Duh.  Open source software dates back to ARPA creation of the Internet in 1969 and Rob Adams has been urging entrepreneurs to talk to 100 customers before adding bells and whistles to their new software products in his book A Good Hard Kick in the Ass: Basic Training for Entrepreneurs since 2002. 

Those of us outside the Valley have never had venture capital readily available.  We have been using the likes of open-source software and Guerilla Marketing (J. C. Levinson, 1984) for a long time.  Funny…we always called it bootstrapping!  Welcome to our world, Mr. Ries and Mr. Blank!

It’s a GREAT time to be an angel.  Find a group and jump in!

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com

As part of the Bill Payne visit to New Zealand, as the BNZ University of Auckland Entrepreneur in Residence he was greatly supported by two outstanding interns from the University of Auckland – Emma Fitzgerald and Eric Chen Liu who competed with so many to get the chance to spend half a year with one of the world’s leading angel investors and educaters.

This report shows the great value these interns received, while also how much it enabled Bill Payne to be effective and to have fun, focusing on what was important.

This intern programme would not have happened without the New Zealand Government funding support, in particular the Foundation for Research Science and Technology.

“Operation Payne” – What We Did on Our Five-Month Vacation in New Zealand

Ann and I have truly enjoyed our five month visit to beautiful New Zealand.  Lovely country and really friendly Kiwis – what a wonderful place!

I’ve been asked to summarize my observations and suggestions related to the entrepreneurial community in New Zealand.  We have traveled from Whangarei to Dunedin and many towns and cities in between.  My final report on Operation Payne can be seen here.

Heartfelt thanks to the many Kiwis who have made our visit so enjoyable!

It’s a GREAT time to be an angel.  Find a group and jump in!

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com

An Angel’s Perspective on Tech Transfer

I think tech transfer (TT) out of publicly-funded research organizations is really, really hard to do.    Here are a series of bullet points expressing my point of view on TT:

• TT is essentially a person-to-person activity.  Innovator to businessperson.  It is not about legal documents, royalties or equity positions.  Transferred technology creates jobs, taxable income and wealth and often improves the standard of living of citizens.  Public money goes into research activities and the outcome should be jobs, taxes and improvements in standards of living for tax payers who, incidentally, funded the research.
• We need to motivate TT officers to do deals.  Most are not.  Giving away innovations is fine as long as commercialization creates jobs, taxes and improvements in standards of living.
• There are two models for TT – depending solely on the nature of the technology:
  • 80% is most appropriate when licensed into existing, larger corporations.
  • 20% or less is appropriate for new startups ventures.  And, for licensed startups, the following are generally true:
    • Technology is never worth more than 10% of the equity of the venture.
    • The key to the success of these new ventures is always the management team, not the technology.  It is all about execution of the business plan.
    • Very, very few investors walk the halls of laboratories looking for technology to commercialize.  We investors fund companies, not technology.
    • Most private sector investors (angels/VCs) ignore public sector technology.  TT is simply too difficult, due primarily to TT offices.  There are simply too many opportunities out there to consider busting our picks on laboratory TT.  In the US, we estimate that only 5 to 10% of VC funding goes into TT deals.  US VCs invest in about 1000 new companies per year – 50 to 100 of which are TT deals.
    • Angels and VCs invest in management teams (already in place) to fund implementation with customers and growth, not further product development.

 It is estimated that angels provide first-time, seed/startup funding to 20,000 companies per year in the US.  Only a tiny fraction (<1%) are TT deals.  Unfortunately, TT deals are just too difficult. 

Nonetheless…

It’s a GREAT time to be an angel.  Find a group and jump in!

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com

Brad Feld on Angel Investing

My friend, Brad Feld, is a prolific angel and venture capital investor.  More importantly, he is really smart and a genuinely right-minded proponent of entrepreneurs.  Brad wrote an insightful article on June 2nd for Business Insider entitled After More Than 75 Angel Investments, Here’s What I’ve Learned.  This is must reading for all angel investors and entrepreneurs seeking angel capital.

I cannot over emphasize Brad’s point on diversification.  I’ve made 52 investments over the same period of time as Brad has been investing and have learned the same lessons.  Investing smaller amounts of money in lots of deals is the only road to success in this investment class.

Angel investing is an individual sport which allows many variations on the theme.  I tend to do more due diligence than does Brad.  Most of us simply cannot get our minds around a startup investment opportunity over one lunch, as Brad seems to do.  (I told you – he is a smart cookie!)  And, the statistics suggest that good due diligence improves returns to angels in groups.  As I pointed in a December 2009 post Due Diligence Pays Off for Angels in Groups, angel groups who expend a total of 60 or more hours on due diligence per deal can expect returns seven times higher than angel groups who devote, on average, less than 20 hours per deal!  That huge multiplier is the difference between good returns and poor returns for angels.

Brad is a great angel investor, perhaps the best I know.  He has the capability to quickly grasp opportunities presented to him.  For the rest of us, good due diligence is generally required to assure decent returns on investment.

It’s a GREAT time to be an angel.  Find a group and jump in!

Solo Angel Investing Versus Joining a Group

I was a solo angel investor from 1980 until 2000 and made a significant fraction of my 52 angel investments during that period.  Solo angel investing is just plain hard work.  I found that, as a solo angel, it was difficult to complete adequate due diligence and very time-consuming to provide sufficient mentoring to portfolio companies.  Furthermore, soliciting financial investment from other accredited investors was limited to those in my personal network.

Shortly after joining my first angel group in 2000, I decided that all future angel investments would be made through angel groups.  Here are some of the reasons:

• Angel groups see lots of applications for funding coming over the transom.  High deal flow, alone, is a great reason to join an angel organization.
• When due diligence is divided among a committee of 4-6 investors, it is much less daunting.  Statistics suggest that angels that do a minimum of 60 hours of due diligence (in sum among the committee members) achieve seven times the returns as angels who spend less than 20 hours reviewing deals.
• Groups of 30-50 angels can usually find a member with expertise in almost any business sector.  These members can be very helpful, both in due diligence of target companies and in mentoring companies after investment.
• Angels in groups are all expected to pitch in and help do the work of the organization.  But, with 30 or more sets of hands, individual can pick and choose among the many chores of the organization and are not burdened with doing all the various jobs of a solo angel.
• Angels investing with groups can more easily find larger sums of money that entrepreneurs need to achieve positive cash flow, rather than digging deeper into solo angel’s pockets to find these funds.
• And, finally, an unintended outcome of joining an angel group is that I have found myself enjoying the company of many new friends, like-minded folks with similar interests.

It’s a GREAT time to be an angel.  Find a group and jump in!

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com