Some Tried and True Bits of Wisdom

It hit me the other day how many times I have used the same funny (but true) phrases to describe situations that come up again and again in life and business.  They usually elicit a chuckle from people who have not heard them before.  Some of my favorites are:

"You can’t push on a rope" - I learned this one from my Engineering Mechanics professor in relation to solving certain EMech problems, but I find it applies really well to business, in that there are certain situations in which no matter how hard you push nothing will happen

"Like herding cats" - This is an old favorite that is appropriate in the situation where you have the unenviable task of leadind a group of poor followers

"Anal-cranial inversion" - We have all dealt with people like this - self explanatory 'medical' condition

"A business partnership is like being married except you don’t love the other person" - I learned early on from other people's mistakes (see below) that there is nothing more perilous than a business partnership and should be treated as such if you are seriously considering one

"Be careful; once you know everything God pulls the plug" - This is one of my own, illustrating that there is always something new to learn

"Some people live and learn, other people just live" - Heard this one from a 9 year old on my son's baseball team when he arrived at the game without his cleats for the umpteenth time.  Remarkably self-aware...

"Some people learn from others' mistakes, some learn from their own mistakes, and some just don’t learn" - a corollary to the above.  Always strive for the first, but the second is also acceptable

"X didn’t get rich by writing checks" - I think I heard this on the Simpsons referring to Bill Gates.  I think it is true in general and a good response to those who say "X is so rich, it should be nothing for him to write me a check"

I am sure I will think of more as relevant situations crop up.  Do you have any favorites to add to the list?

Communication With Your Investors – the Good, the Bad, and the Ugly

Being a novice but somewhat active angel investor for the past two years (I currently have 10 startups in my portfolio), one thing that has struck me is the wide variation in communication levels between myself, as an investor, and the management of the companies I have invested in.

A while back, I saw a great blog post by Ben Yoskovitz entitled ‘Weekly Investor Updates (How To Communicate with Investors & Mentors).  In it he describes a great system for companies to keep in contact on a weekly basis with investors and makes the point that investor communication is absolutely essential to the success of a startup.  Unfortunately I would say that only one out of my ten invested companies comes close to following this excellent guideline.  The other nine fall into the following general categories: 

1)      Fair – somewhat regular communication and occasional requests for assistance/advice from investors – (3 companies) 
2)      Poor – little or very sporadic communication, primarily public product announcements – (3 companies) 
3)      Horrendous – practically no communication with the unfortunate exception of urgent requests for additional ‘bridge’ funding (1 company) 
4)      Incomplete – recent investments that nonetheless look like they will fall into the ‘Fair’ category at best – (2 companies)

Look, I am not a major investor in any of these companies – I don’t ask for much, and proactively contact them only when I have heard nothing for months at a time.  However I consider regular communication with ALL stakeholders critical to a company’s success and an indication of both discipline and willingness to ask for help.  

Finally, I would note that in my case there does seem to be a direct correlation between the level of communication and performance.  I don’t yet know in this case which is the cause and which is the effect; do strong companies communicate more (and poorly performing companies less likely to give out ‘bad news’) or does communicating more contribute to a company’s success?  I would hope for the latter, and I intend in the future to make it clear to companies before I invest that regular communication be a priority. 

UPDATE - August 29, 2013

After reading Glen Hellman's blog post on what makes a happy angel investor I thought I would revisit the communication issue with respect to my portfolio.  Since I wrote this I have added to my holdings and had some 'acqui-hire' type exits.

I would say my scorecard now reads:

1)      Good - regular communication and regular sincere requests for assistance/advice from investors (1 company)
2)      Fair – somewhat regular communication and occasional requests for assistance/advice from investors – (4 companies) 
3)      Poor – little or very sporadic communication, primarily public product announcements – (7 companies) 
4)      Horrendous – practically no communication with the unfortunate exception of urgent requests for additional ‘bridge’ funding (0 company) 
5)      Incomplete – recent investments that nonetheless look like they will fall into the ‘Fair’ category at best – (1 companies)
  

When Should a Professional Service Provider Consider Exclusive Service Contracts

Moved to MIE Labs blog link

One Less Angel?

I have heard that the best way to get into blogging is to wait until something disturbs you and then write about it.  Well today I am disturbed about something I have seen recently in the world of angel investing that may end it for me.

I started angel investing almost two years ago by joining a local angel investor group.  My goal was to make money, of course, but I realized that first I had to learn more about the current state of the startup world, both locally and worldwide.  I knew that I could take two paths; one would be to sit back, be cautious, learn as much as I could and then selectively and carefully invest in some ‘sure things’.  Of course if we could tell which ones were the ‘sure things’ then it would be a piece of cake!  I took another, more aggressive approach, which was to pay my dues (literally) and learn by doing.  I have certainly learned a lot, and continue to learn.  The main thing I have learned is something my friend Jason told me, which was “Until you have an exit, angel investing is essentially a charitable contribution”.

At the same time, whether you believe we are in a bubble or not, it seems to me that startup entrepreneurs have now been conditioned that Step 2 in having a successful startup (Step 1 being think up a snappy name that ends in ‘ly’) is to raise a lot of money from angel investors.  Many of these entrepreneurs do not understand or care about the equation from the angel’s side, that even ‘sure thing’ investments are quite likely to fail.  Angel investing necessitates a high risk tolerance but insanity should not be a requirement.  In any event, I strongly feel that angel investors and startup entrepreneurs can and should coexist in a fair and mutually beneficial relationship.

This brings me to what has been bothering me.  I recently found out about a new startup, FundersClub (https://fundersclub.com/) that in preparation for the expected crowdfunding gold rush is enabling angel investors to invest in select deals at a much lower investment size (ex. $1-2.5K vs. typically 10-20x that amount).  My understanding is that they aggregate up to 95 or so smaller investments into one combined LLC investment.  If the minimum total is not met, the overall investment doesn’t close, a la Kickstarter.  

Initially I thought this was a good idea, and it may very well be a great idea (for startups) in the end.  It will enable non-accredited investors to crowdfund (at this time it is limited to accredited investors), and facilitate all investors to diversify their holdings more easily than they could at higher minimum investments.  The thing the is bothering me is that I noticed that the first 5 deals on the site all have the same terms, which in my opinion are terrible from the investor’s point of view.

In short, they all are raising on an uncapped, undiscounted convertible note.  I have seen arguments from both sides for and against convertible notes, and I personally feel they can be a good and fair way to structure seed stage investments.  The problem from my perspective is that in this case, the convertible notes are uncapped and undiscounted.  The entrepreneurs (and by extension the site) are offering investors to be allowed to invest in a note which will convert at the time and price of the next priced round, whenever that may be.  As an investor, aside from the fact that an uncapped note puts me at odds with the entrepreneur in terms of valuing the next round, the problem is that now I am risking my hard earned money much earlier than the investors in the next priced round (which may be more than a year off) with no corresponding reward.  I have thought about this a lot over the past few days and have come to the conclusion that this makes no sense.   

I can only view this new approach as one sign that angel investing may have ‘jumped the shark’.  Another possibility is that the upcoming crowdfunding boom is expected to bring a lot more suckers to the table, pushing traditional accredited angel investors aside.  I have been told that the terms on the site are the same as those being offered to and accepted by (presumably larger) investors not using the site, which is actually more troubling to me.  I have invested in a few convertible notes over the past year and have not seen any terms like this (yet?), although I have been assured that these terms are considered by some to be ‘standard’.  All I know is if this is indeed the direction of early stage angel investing, there will be one less angel around in the future.  What do you think?

The Value of Outsourcing in the case of Analog IC Design and Development

Moved to MIE Labs blog link