Angel Investing: Do good by doing well (WTN News)

An article worth reading:

Angel Investing: Do good by doing well (WTN News): "But the giving back is not about lowering investment standards, it’s about providing more active assistance than most VCs can provide in terms of helping entrepreneurs meet those standards. It’s about working with entrepreneurs that combine world-class ideas with the rough edges typical of high impact entrepreneurs that are new to the game and/or otherwise do not have the polish and experience – yet – to pass muster with more seasoned professional investors."

And I would go one step farther...good angel investing is not just about overlooking rough edges, but instead it is about taking well thought out and calculated risks at a very early stage in the life cycle of a high growth business, thus there are apt to be more rough edges in a typical deal than in deals done by later stage investors.

The simple economics look like this:

1. "Successful" deal(s) return 30x or more of investment (e.g. $100k investment equals $3mm or more on exit);

2. Approx 1 in 10 deals are successful *;

3. Approx. 50% return less than the investment*;

4. Average hold period for a successful exit is approx. 6 years*; thus

5. Average IRR of angel deals is approx. 27%*.

Nonetheless, despite the lofty economic motives there is significant "goodwill" (founders, community, employees, etc.) because many of those companies simply would not exist without the investment and support of early stage angel investors.

*(Numbers based on national averages included in a number of different studies. See Marion Kaufman Foundation for just a few.)

Don't mind the media, southern angel investors still wanted!!! *a southern view of a west coast commentary

Mark Suster (generally, one of my favorite writers about angel/VC investing) wrote an article yesterday called "Here's What Angel Investing And Florida Condos Have in Common" and made several points that I think are worth considering in a southeaster context.

His points were primarily:

• angel investing is currently a hot fad;
• there are too many startups being formed for the historical ratio to be successful;
• the VC market is overheated, so it is masking the problem of too many startups;
• we won't fully realize the bubble for another 5-6 years;
• angel investors, like other investors tend to pick poorly and buy high then sell low; and 
• if investors pick the right sectors there are still good startups available.

These are interesting for a number of reason, but mainly because of how west coast influenced they seem to be.

"Hot Fad" - Angel investing may be a hot fad in LA or Boston, but in the southeast angel investors are still few and far between and the resulting investment gap is large.  If you question that statement, then I would encourage you to ask your local VC groups because I bet they will tell you they are still searching hard for qualified deals and that they really don't have a good place to refer companies that are too early stage for their investment criteria.

"VC market overheated" - just a couple of weeks ago at the southeastern ACA meeting we heard over and over  again how difficult the current market is for raising a new venture fund.  Without new funds it is hard for a market to get overheated.  Also, the hot VC markets don't reach well into other geographies, so even if certain pockets are hot it still doesn't reach.  Brad Feld ( I think it was Brad) explained it well a month or so ago when he pointed out that because of limited time, he really had to spend his time looking at deals in his core travel routes.

"Bubble" - this point I agree with...at least to the extent that I agree that angel deals are no different than other businesses and need to be supported by solid economic fundamentals.  Thankfully, we are able to wait and pick through deals that don't seem to have solid fundamentals (i.e. actual sales and even profits...jaw dropping for west coast angels I know).

"Investors buy high and sell low" - this is a trait where I think southerners can claim some superiority in angel investing because southerners by nature are less prone to jump onto the bandwagon of the last hot trend.  Southerners are used to being considered uncool on a national basis and some even revel in it, so pragmatism is a bit more apt to rule the day.   **I realize the real estate boom hurt southerners too, but the desire to own land is a particularly southern weakness that I think overruled our otherwise general pragmatism.

"Certain sectors are still good" - I want to agree with this point, but I don't because it just sounds too much like the same fad based investing Mark was railing against in the article.  Instead, I will say that good businesses and good business opportunities can make for successful investments in any market. 

Overall, I will say that the southeast is still an undiscovered gem for many investors and that it is good business to be a part of companies that are growing and successful, which is exactly what our southern angels are seeking to do.

**If you want to see what I mean come check out a local ACA group meeting (BirminghamAngels.com) and I think you will find there is still plenty of room for good business people that have vision and practicality, both as entrepreneurs and investors.

BAN Meeting - Update

Just a quick update.

We (BAN) met last Thursday at Innovation Depot and had a packed house.  TransactionTree (www.transactiontree.com) presented for us and even gave a live demo of their e-receipt product using attendee information.

The portfolio company update was very upbeat since all the BAN companies are currently tracking well.  We even had a prior portfolio zombie that sprung back to life in a big way on Friday and that means we are back to batting 1000.

All in all, I couldn't be any prouder of the group and it's leaders for sticking it out through a tough economy and the results seems to be REALLY paying off.

Congrats to everyone and if you haven't made it to a meeting yet, check out the schedule (www.birminghamangels.com) and come visit!

Communication and Planning in a High Growth Company

Ralph Waldo Emerson once said, "Speech is power: speech is to persuade, to convert, to compel. It is to bring another out of his bad sense into your good sense."

For quite some time I have suggested a plan (see below) of communication to clients and BAN participants.  It's not anything ground breaking, but it is a programmatic way for a company to facilitate orderly communication.  Nonetheless, it is amazing how few of them really follow it (or any other) systematic plan of communication and I think it ends up hurting them...potentially a lot.

Effective internal communication among stakeholders (Management, Employees, Board, Shareholders, JV partners, etc.) is critical to coordinating efforts and maximizing the opportunities for success, but it doesn't just apply to startups...most companies would do well to try and systematize some regular forms of communication.

Suggested Plan:

1.  Quarterly (maybe monthly early on) board/advisors meeting
-- Progress
-- Plan
-- Challenges

2.  Weekly recap email of progress and "to do" items

3. Monthly Financial Statements *(email updated statements even if no revenue)
-- Income Statement  (aka P&L)
-- Balance Sheet

4. Annual letter (recap and vision)

If you are looking to make a change for the better in your business, give it a try or work out your own plan and let us know how it goes.  I bet you will be surprised at the energy and progress it will create.

Niche, Dominate and Repeat

I was having a conversation with Jonathan Sides, Daxko VP of Finance, the other day about startups in Birmingham and he told me a bit about their story.  He summarized their business strategy as "niche, dominate and repeat."

I have seen a lot of strategic theories and there are plenty of books that talk about niching, but I had not heard that phrase used as a complete strategy before...I loved it.

"Niche, dominate and repeat" encapsulates a lot of good strategic thinking because "niching" forces a company to define exactly what they want to be and who they want to serve while "dominating" reinforces that niching process and encapsulates most of the strategic tools such as:

• product/service differentiation
• value proposition planning
• creating a minimum functional unit
• customer experience focus
• adoption planning
• etc.

"Repeat" is also a critically powerful tool because it implies both continued process improvement and new market growth.  

A lot of business planning and strategy is cumbersome and somewhat clunky to use, with graphs and graduate level books to understand and it can be difficult for many entrepreneurs to actualize the theory.  On the other hand "niche, dominate and repeat" is just four words and it doesn't take a rocket scientist to figure out what it means.  With that kind of simple strategy, everyone on the team ought to easily be on the same page and what a powerful place to start.  I don't think it is a surprise that the guys at Daxko are getting it done.

If you are in an existing business or starting a new one..."niche, dominate and repeat" is not a bad place to start.

Just Do It....

Nike has made the phrase "Just Do It" famous.  They started with the sports arena and now it is a part of the American English lexicon.  It applies to business as well.

I have seen many smart people and good businesses suffer because of a desire for perfection...the perfect label, the perfect timing, the perfect product, the perfect customer, etc. etc.

Unfortunately, waiting for perfection usually is a permanent wait.  Even Apple's Steve Jobs (a notorious perfectionist) has to eventually declare the product "good enough" and start selling, but for most startups even a Jobsian style wait may be too long and wastes two of the primary advantages of a startup...speed and flexibility.

For most startups, the best strategy is to plan quickly, execute to the best of your ability then iterate.  By following a speed to market strategy startups can take advantage of their relative size and use it against the bigger, slower competition.  It also has the advantage of minimizing the time spent in the negative cash flow "valley of death" and that can significantly increase any businesses chances of success.

So don't sit around waiting....Just Do It.

The company financing life cycle...

I ran across this diagram of the financing cycle of startup companies on eandua.com and thought it was an elegant expression of where true seed stage capital fits in the overall scheme of our economy and the critical role it plays despite it's relatively small dollar amounts.

I also think this points out a somewhat obvious, but often overlooked, concept...things can really start to take off once a company gets to Break-Even and is cash flow positive.  


That is why I believe the goal of most seed stage investments should be to get companies to a positive cash flow.  When a company gets sustainable positive cash flow all kinds of good things are possible because the home runs have a chance to happen, but solid returns can be achieved over time even without them.