Angel Investors Narrow Their Focus

Bill Warner Sunday, September 12, 2010

As you know, the entrepreneur’s “Valley of Death” is getting wider as the pressures on our economy move many private investors to lower risk venture investments. As they did early this decade, both VC’s and formal angel organizations are moving to more mature companies, widening the valley that is between where entrepreneurs are and where they need to be in order to find money to get their businesses launched.

The Valley Widens

In the late 90’s, entrepreneurs could get funding from venture capital organizations for start-ups. However, that produced a bubble of companies that were not very viable and most of them failed when the bubble burst in 2001 and 2002. In that same timeframe, formal angel organizations moved from providing start-up seed funding to start-up launch funding, focusing instead on companies that were nearly ready to go to market. The result of this was a large void of available funding for companies that were just getting started. I call it “grant land,” where the primary source of funding is public and private grants for feasibility assessment, research and development.

Well, it appears to be happening again. Venture capital firms are struggling for their very existence, as their model is changing to look more like investment bankers, loan operations, or small private equity funds, all driven by the near disappearance of the IPO. Driven by the uncertainty of the economy, private investors within formal angel organizations have become much more cautious as their managing partners move their investment preferences to companies that are approaching predictable profitability. These investors have been hurt badly by the economic downturn and many are moving to much lower risk investments. This further widens the Valley of Death, leaving entrepreneurs with an even greater period of time between their company’s inception and when they can even be considered by angel organizations.

The Reemergence of Seed Financing

To the rescue is coming the reemergence of the seed fund. Over the last couple of years, the NC Capital Highway project, sponsored by the NC Biotechnology Center and the NC Small Business Technology Development Center has been fostering the creation of seed funds throughout North Carolina, including one in the Research Triangle Park area called the Inception Micro Angel Fund (IMAF-RTP).

IMAF-RTP and the other IMAF funds are trying to narrow the Valley of Death by forming a new private equity fund that invests in startup companies at the seed level of maturity. This is at the point in time when they are still completing their proof of concept and formulating their marketing and sales plans; but are able to explain and verify a strong business model.

The Narrowing Focus

As with the original IMAF fund in Winston Salem, and the other IMAF funds that are emerging in Charlotte, Asheville, Greenville and Wilmington, IMAF-RTP is trying to narrow the focus on the kinds of companies it will invest in. These funds are much smaller than formal angel funds and will be the first investors in a company. They are looking for companies that will not need a lot of capital in order to become sustainable growth businesses. Finally, they will favor companies that have the possibility of exiting in less than five years.

Since these funds usually do not make subsequent investments in their portfolio companies, they are looking for the potential of substantial returns when they evaluate the companies in which they might invest.

Attracting New Investors

Many of the IMAF funds are still raising capital and are also looking for new investors.  Angel investors are finding this a way to continue their interest in angel investing at a much lower investment cost, even though at higher risk. For new investors, it is less expensive than formal angel groups while providing a broadly diversified investment portfolio.

---

Permalink

We Need More New Companies

Bill Warner Sunday, July 11, 2010

---

Permalink

The Alternative Board

Bill Warner Friday, April 23, 2010

I recently had the opportunity to sit in on a meeting of The Alternative Board (TAB) in Research Triangle Park. We have all been to all sorts of networking meeting and events as well as executive round-tables. All of them are "nice to meet you" and "want to get to know you" kind of encounters. But, TAB is different.

TAB is not a "soft drink"

TAB groups are invitation-only organizations of peer business owners who want to have a serious conversation about how to grow their businesses. Business owners and executives are led by an experienced facilitator who has extensive experience in executive coaching. During a half-day meeting every month, the group of peer business executives conducts well structured discussions about specific business issues that each of them have.

OK, that's the easy part. These discussions have a serious intent. The peers act as they would if they were the board of directors of the company who has an issue under discussion. The business owner is given time to explain their business issue and its significance to the company. The peers then ask questions for further clarification, without making judgments. Once the issue is clarified, the board then gives advice. Quite frankly, the business owner needs to fasten their seat belt, because this part of the agenda is characterized by highly focused straight talk without any sugar coating.

The business owners get some very valuable and unfiltered feedback that they will often not likely hear even in their own management and board meetings. The reason is that none of the peers are wrapped into the business owner's strategy or their company politics, giving them the opportunity of being brutally honest.

Accountability and trust is at the heart of it all

What makes this work is that the members of the TAB group have built a high level of trust with each other and as a result command a high level of accountability. After the business owners get feedback on their issues, the business owners are required to summarize what they heard and say what they are going to do next.

This is where the accountability appears. The business owner has committed a course of action and will have to report results to the TAB group at the next meeting. Of course, all of these discussions are kept confidential.

But, there's homework

---

Permalink

Business Mentoring for Entrepreneurs

Bill Warner Wednesday, February 17, 2010

Approximately 26,000 new companies are formed each year in North Carolina. In that same year, over 23,000 companies fail due to poor management and operational mistakes. The statistics are worse in rural and minority populations. This means that good ideas go to waste along with the grant and investor funds that helped get these companies started. As a result, the potential growth of revenue and new jobs is lost also.

 

If we had assistance for entrepreneurs who are struggling to create successful businesses, the failures should decline considerably. Entrepreneurs should be seeking out business mentors that can help them through the early years of their business.

 

EntreDot™ Connects the Dots for Entrepreneurs

 

For the majority of the companies that fail, the missing ingredient that could have ensured their success is basic business-operations “know-how.” This is the void that EntreDot™ fills. At no cost to them, EntreDot™ provides business mentoring to entrepreneurs and helps them make the right decisions as they start and operate new companies.

 

Read More>>

---

Permalink

Managing in an Uncertain Economy

Bill Warner Monday, February 01, 2010

There is no one single thing that will protect your business in this economy. You need an array of actions to maximize your chances of getting through this downturn and pull you through what might be in store for us, whether it’s further depression or looming inflation.

Cash remains king

Have you tried to get a business loan lately? Pretty tough isn’t it? Better take a look at your line of credit and see if you can get a higher limit and a better interest rate over a longer period of time while you can.

Take a really hard and pessimistic look at your cash position. How long will it last in the grimmest of sales forecasts? Establish refreshed limits on your cash reserves and then create the cost and expense budget that would achieve it.

Have you looked at your accounts receivables and their aging? Do it now. If needed, establish new goals for collections and execute them with discipline.

Of course, manage expense

Take a more insightful approach to managing expense. It’s not just a budget cutting exercise, although you may find unnecessary things to eliminate. More importantly, it’s a matter of getting more for your dollar.

This is about working smarter, being more focused and increasing productivity. Consider things like:

• Taking stock of your knowledge of your market and determine if there are better ways to reach your customer
• Looking for ways to reach additional customers within your current market, with essentially the same marketing dollars
• Creating teams of people that look at process improvements in marketing, sales, development, manufacturing and customer support, looking for ways to be more productive. Constantly ask why we do things they way we do them. Give them a reward when they find substantial improvements
• Analyzing your lines of business, bringing focus on those that are performing poorly. Find out why and fix them or eliminate them entirely

Communicate

Often overlooked, communications is even more important in tough times. When employees are left in the dark about the business situation, they will surely make things up based on any observation they make or rumor they hear. As they make up the situation for themselves, they will take care of communications for you by simply telling others what they believe to be true. Pretty soon, your business picture is painted with a brush you never held.

It’s time to over-communicate. Use whatever means of communication you have to your employees:

• Frequent all hands meetings
• Management meetings with stress on getting information to employees
• Newsletters to all employees
• Make a point of walking around every day, talking to everyone you meet

Most employees can deal with any news you give them, as long as it is the truth and you are realistic. When employees know the truth and the ramifications of it, they will work hard to achieve the company’s goals.

Get the best from the best

Take the time to realign everybody’s roles and responsibilities with the company’s goals. Everybody needs to understand what they have to do and why they are doing it. This will turn out to be a giant productivity improvement by getting everybody on the same page, and being able to clearly see how everybody’s job fits into the strategic plan for the company. It will help eliminate unnecessary work that is not important to achieving their goals.

It’s also time to put more discipline into managing the performance of people. This means setting realistic expectations, working with employees to meet them, and rigorously assessing their performance. This will bring the best forward as they rise to the challenge and will weed out those that are not been performing.

Just as in most start-up companies, you need all “A” players, because everyone has to be an outstanding performer to get you through the tough times.

Look to the future

In a way, this is all getting you repositioned for the good times. You business will come out of the downturn being stronger, more focused, more productive and with excellent people. Take the time also to look at new business areas you might attack when you are ready to spend some of your cash reserve.

Do the market research that will lead you to new opportunities. You are looking for the next great deal in which to invest your hard earned cash. You may find an acquisition or new partner that you never expected. Your new found strength may be just what they need at a price that is very attractive to you.

---

Permalink

Successful VC’s “Stay Fresh”

Bill Warner Thursday, January 28, 2010

I just read an amazingly refreshing perspective by Greg Gretsch in PE HUB. It’s all about what it takes to be a successful VC. It is counter-intuitive, but makes a lot of sense.

A Fresh View of a Successful VC

With only ten years as a venture capitalist, with some very successful investments and lucrative exits, Gretsch is worried about becoming stale and out of date. Heck, most VC’s with his record of success would be riding high, living the good life, and pontificating to the venture community about his formula for success.

But no! Gretsch doesn’t think that the longer you’re a VC, the more skilled you become in picking winners. Instead, he theorizes that if you’re a VC for more than 10 years, you’re likely to grow worse at your job over time. And, he has some data that point out that this may very well be true. Even with spotty verification, Gretsch takes this seriously. Here’s why:

• The older a VC becomes, the further out of touch with new technologies they become
• As they move up the professional pyramid, their network actually shrinks because they are working with fewer and fewer people
• They are not meeting the new people that are really bringing innovation to the market; as a result they miss trend setting ideas
• They are stuck in looking at existing market sectors for new opportunities, missing new and significant market changes
• Family demands increase as they get married and have children

How Do VC’s “Freshen Up?”

Gretsch’s simple advice is to “remain humble, keep your attitude in check, and stay hungry.” The hard part is to remember how that all feels. Here’s his formual, which might apply to many of us in lots of different lines of work:

• Increase the number of relevant technologies with which you are familiar
• Follow the leading industry analysts to learn what they are thinking
• Build relationships with the next-generation of successful investors and technologists
• Reach out to the younger entrepreneur and learn from their fresh ideas
• Always be better at what you do

I think Gretsch really believes this and will remain on top in the VC community for another decade.

---

Permalink

VC Investment Outstrips Fund Raising

Bill Warner Wednesday, January 27, 2010

In 2009, the venture capital industry experienced the biggest gap between investment and fund raising in the last six year. In a recent Wall Street Journal Venture Capital Dispatch blog, it was reported that investment was down nearly $10 billion, from $30 billion to $20 billion, while fund raising declined $17 billion, from $30 billion to $13 billion. This $6 billion plus difference is the amount more invested than was raised by VC’s.

Bad news for companies

The implication is that although venture firms still have a lot of money, it is still going to be increasingly hard to get funding because they are running low on available funds and it is still very difficult for them to raise further funds from their limited partners. Their limited partners are still suffering from the economic downturn and have not opened this investment class for funding.

Corporate and other private equity investment is also suffering, further reducing the number of options for equity financing.

Is IPO the answer?

Another source of funds could be successful IPO’s, which could breathe more money into the VC firms. We have recently read about an emergence of IPO filings, including Motricity, a former RTP darling. However, many analysts are quite skeptical that 2010 will bring much hope in this arena either.

What companies need to do

2010 is not going to be much different than 2009; perhaps worse, with respect to your chances of getting new VC investment. It is still a game of the “best of the best” getting due consideration. It means that you need to have a very compelling business, with meaningful and growing customer traction, having the potential for large and rapid growth, to a level that will provide a handsome return.

Due diligence will be treacherous, filled with disappointment for many, but there is still gold in “them there hills.” You will have to mine it with a focused laser.

---

Permalink

You Sell To More People Than You Think

Bill Warner Tuesday, January 26, 2010

“Let’s get some good sales people. We need those hungry ones that know a lot of customers. That’s all we have to do. Right?” These are famous beginning and last words. You are selling your product to almost everyone you meet as your business matures. And, everybody in the company sells in one form or another; it’s not just the sales team’s role. You certainly have to identify and sell to potential customers. But, there are many other interested parties that you have to sell to as your company evolves. The sales process begins on day one and lasts for the life of your company.

Selling in the market research phase

Even before you have a product, you have to sell your ideas to contacts you make while doing your market research. This phase is not just filled with reading and finding numbers that support your business strategy. You will have to sell your idea to industry analysts, market consultants, companies providing similar products and potential customers in your chosen markets. Seeking out the opinions of analysts and consultants makes a lot of sense. They know your markets in detail. You present your product or service idea, supported by your business rationale, looking for further insight that they can provide. In a way, you are selling by trying out what you think the value proposition is and how you will take it to market. Understanding that you may not have it quite right, they will provide you feedback that helps you to further refine your business plan.

Contacting companies that are within your market segment is also smart. If they are a potential competitor, you may have to get information from a third party, but you are essentially trying to figure out how your product fits into the market. You are prepared to sell your ideas, but also have questions like:

• Are you complementary?
• Will you need their help?
• Do you add value to their products?
• Are they a competitor?
• How will we fit?
• Why are they succeeding or failing?

Of course, the best piece of research is to approach a potential customer and get their feedback. You sell your product or service, but really want to know:

• Do they really have the need you think they have?
• Will your product solve their problem?
• Do they see the value of your product or service?
• How do they become aware of and buy products?
• Are they in a position to buy?

Getting funded

Once you have a well formed business plan, your next sales call will be on an investor or potential strategic partner from whom you need money to get your business started. This is a critical sales call which has to be successful. In this case you are selling a lot more than your product or service. You are selling the value of your company, and trying to create a long lasting partnership that will give the funds to launch your company and your vision. The business plan story has to:

• Be complete
• Represent a compelling business idea
• Be attractive in a large market of needy buyers
• Reflect a rich financial model
• Have a truly competitive and differentiated product
• Be managed by a superior management team
• Provide strong financial performance

This sales call is made by the top executives of the company, who have to be very well prepared to explain all aspects of the business and create excitement with the potential partner.

Selling to your channel partners

If you are going to use indirect channels, you will need to have a sophisticated process to sell to the channel partners through which your product will reach the ultimate buyer. The value proposition has to be specifically tailored for this audience to show them how they are going to make money in a relationship with your company. The partnerships could be with wholesalers, distributors, integrators, value added resellers and dealers. All of these partnerships have to established, and in addition to your product or service, will require you to sell some combination of:

• Training
• Product information
• Sales support
• Problem support
• Warranty management
• Inventory
• Discounts that make them profitable

Your sales efforts are to close a channel partner agreement that will result in financial success for them and an increase in revenue for your company.

What about alliance partners? If your product requires that you have to go to market jointly with another company, you have to make sales calls to them too. For example, if your product is integrated with another company’s product, then you may have to have an agreement where you are jointly marketing and selling. You may be integrating some other company’s product into your solution, so an agreement is needed for you to market and sell their product along with yours. The value proposition here has to bring a share of the overall revenue to the partner to recover the expense that they incurred plus a reasonable profit.

Sell to the influencers

When your product is ready to be taken to market, it is important to make sure all of those that influence your customer are aware of it. Industry consultants, partners and early customers need to know of your plans to launch your product. During the time when the product is first being introduced, you want potential customers to be able to call their outside consultant and get advice on your product. You also want your customers to be able to contact your early customers as a reference for your product. So, you need to make sales calls on all these influencers and make sure they have the most important facts and messages about your product or service. You will look very smart if a potential customer contacts one of them and learns the truth about your product. That is, the truth that you taught them.

Oh, the media too

Who would ever give up on some free visibility? Another important influencer is the media. They represent trade magazines, local newspapers, business press, television specials and radio news programs. When you launch your product, they too will need to know about your product or service. You want your customers to read the right messages, and from the media source that makes them aware of new products and services. The media will want to get quotes from consultants, analysts, customers and partners. They make the story come to life with the reality that it’s not just your company talking about the new product or service. Always make the media aware of positive news and use them as a way to get effective marketing information to customers.

So, selling is a process that involves much more than sending the hungry sales people after potential customers. Selling involves approaching the whole set of stakeholders in your market segments. You need to make sure that your company properly fits and that your customers know all the right things about your product or service.

---

Permalink

Outlook for 2010

Bill Warner Sunday, January 03, 2010

Boy, I want to be optimistic, but I have too many doubts. It’s not just me either. The subject of a lot of holiday party talk has been about the economy. Much of that is centered on the subject of job growth and the state of the US dollar.

At the heart of it all

Job growth now is stagnant at best. Unemployment is actually increasing when you discount the growth in short term government jobs that produce no economic growth and count the people who are no longer on the unemployment ledger. There are a lot of moving parts that are needed to put velocity back into the small business engine.

• Banks have to start loaning money again; companies need working capital
• Government has to reduce regulation on small businesses; too much is spent on responding to new regulations and it stifles businesses
• Removing the capital gains tax will fuel investment in small businesses; bringing more private equity to entrepreneurs
• Lowering the income tax on businesses will accelerate investment in company growth; increasing profitability
• State and local government resources are needed to support entrepreneurship; creating a community in support of entrepreneurship
• Reduction of the individual income tax will put more money back into people’s pockets; firing up affordable spending

Until we get legislators in place that understand what we need, entrepreneurs will be fighting an uphill battle again in 2010.

The unknown about our dollar

I am no expert on monetary policy, but what I do see still frightens me.

• The debt is higher than ever in our history
• The growth our debt has never been higher in our history
• Other nations are visibly looking to move off of the dollar
• We are getting a lot of pushback on purchasing any further government securities

If we were to have a balance sheet for the United States Company, it would show that we are bankrupt and have negative cash flow. These are all signs that lead me to continue to worry about a coming inflation, especially if we really put the TARP money into circulation.

So what do entrepreneurs do?

The growth of our economy will come from the small business arena getting back on track. For 2010, entrepreneurs are going to have to continue to fight through the lack of effective legislative and administration support. Staying with the basics of survival is first and foremost:

• Execute well thought out marketing and sales plans; the fewest mistakes as possible
• Keep nearly a year’s worth of cash burn in place as a buffer on further economic decline
• Hire only what will be needed in the long term; outsource the rest of your personnel needs
• Invest in cost cutting measures that pay back in a few months
• Continue to establish and nurture a lasting credit line

The pros will tell you that this is the time to look for great investments at low prices. That is still true, but I suggest that you don’t go too far out on that limb with so much uncertainty and volatility in the economy.

---

Permalink

Find the Right Investor

Bill Warner Tuesday, August 11, 2009

So you have completed your business plan, determined how much money you need, practiced your presentation, and are now ready to approach angel investors to raise the capital needed to launch your business. But, you don’t know any. You have heard about the angel organizations in the area. You have read about the venture capital firms as well. Where do you start looking? Here are some tips to finding angel investors:

• First decide what you want from an investor with respect to industry experience, management experience and scope of influence. Your first investors are going to be your business partners and are people who can help you get your company started with their contacts and advice. When you have a good understanding of the kind of help you need from your investors, you will be able to easily qualify them. Not every investor you meet is one that you need on your team. Don’t make the mistake of engaging an investor who is going to ultimately be a bad partner. It could kill your company.

• Right now you probably know more investors than you think you do. Establish a list of people that you know that you think could be an investor in your company. They should be accredited investors if at all possible. Think through all your business associates, friendships and family members, identifying those that could be investors, or those who might be able to introduce you to investors. This approach is often described as a “friends and family” round of investors. The reason it make sense is that you are dealing with people who know you and trust you, and therefore are more likely to agree to become an investor in your company. Of course, the downside of this approach is that you your friends and family may lose their money if your business is not successful.

• The sophisticated angels are territorial and many of them roam in packs. Go to the Angel Capital Association website to find the names and contact information for the angel investor organizations in your area. Many also roam alone or in small private groups. They are hard to find. You need to make a habit of doing a lot of business networking. The more business people that you meet at networking events the better are your chances of finding angel investors. Let people know you are raising angel money to maximize your chances of getting a referral to them.

There is no silver bullet approach to this. Finding angel investors takes a lot of hard work and months to accomplish. You will need to attend a lot of events, meet a lot of people, shake a lot of hands and give your elevator pitch hundreds of times to find just a handful of people that are willing to invest in your company.

---

Permalink

Contact Paladin for a Free Consultation

Subscribe to Our Blog

Subscribe to Our Newsletter

• Angel Investment
• Financing a Company
• Business Operations
• Managing Business Financials
• Business Strategy and Planning
• Business Coaching & Leadership Skills
• Marketing Plans & Strategies
• Sales Tips & Strategies
• International Business
• Raleigh Happenings
• Starting a Business