As a mentor I run into many young (and not-so-young)
entrepreneurs who have apparently been conditioned by what Glen Hellman refers
to as the Startup
Industrial Complex to take the following steps in building their startup:
- Get an idea
- Network and tell everyone you meet about your great idea
- Take the gobs of money that angels throw at you
- Pay yourself a big salary get a cool office and buy lots of swag
- Oh are there more steps?
Generally I find that most entrepreneurs I meet do a pretty
decent job at steps 1 and 2 on their own.
When time for step 3 rolls around (from what I can tell somewhere
between setting up an LLC and well before developing an MVP or any significant
traction) the idea comes that they must now pitch angels and collect the cash. Since I don’t hide the fact that I am a
fairly active angel investor and member of Baltimore Angels, many times these
entrepreneurs come to me for advice on funding.
Often they show me their ‘pitch’ which is so far off I can’t even figure
out where to start in terms of advice. It
can be a really poor pitch but more importantly the company is just not
remotely close to being fundable, and most likely they never will be. That is not necessarily a bad thing. The vast majority of new companies are just not
realistic candidates for outside venture investment.
It is a fact that not all new small companies are ‘Startups’. As @FAKEGRIMLOCK
commented on a recent Glen Hellman blog
post “IF IDEA NOT INCLUDE "CAN SCALE TO HUGE MONEY WITH SMALL
COST" IT JUST A BUSINESS. NOT STARTUP.” They are small businesses that can
and should grow organically, funded through reinvestment of profits generated
by steadily growing revenues. This is
the vast majority of small business and accounts for most of the job growth in
the US. Some of the startups I work with
have sincerely and genuinely tried to follow the more ‘old fashioned’ approach
of concentrating on building a small business and have asked me for (and taken
my) advice. But there always seems to be
a feeling that maybe they should follow the ‘easy’ approach and just go and get
angel funding. I am often asked how they
should go about this (and less often IF they should). Some points I like to make to everyone I talk
to about angel funding are:
1.
The majority of angel funded startups fail.
2.
If you can build and grow your company without angel
investment, do so. You will be much
happier in the long run.
3.
Don’t bother asking an angel for funds to develop
your MVP. I personally consider figuring
out how to do that without angel or VC funding to be the first test that you
encounter as an entrepreneur and the minimum entry fee for consideration of
investment.
4.
The more and better quality traction you have
before approaching investors, the better.
5.
Don’t approach an angel/VC unless your business
is scalable and you have a business model in which the money you seek will
accelerate growth dramatically.
6.
Don’t pitch any investor without reviewing some
of the many excellent examples of winning demo day pitches posted on the web. As Paul Singh says, “Be the least shittiest
pitch of all the shitty pitches”. And
remember, you are not just competing for investment dollars with the guy next
door but companies all over the world.
There is no excuse for not doing your homework.
7.
Understand the economics of venture investing
and how investors (must) think about this type of investment. Paul Graham has some great posts on that
topic here and here
I really want to be positive and supportive when working
with young companies. But I am really
feeling now that the best way to help those seeking my opinions on angel funding
is to be as honest as possible to the point of bluntness (crankyness?). Most successful small businesses in the world
are bootstrapped and seeking outside investment should not even be on the
table. Instead of following the
‘standard’ process, I think that a renewed focus on building the business and
doing the required homework will better prepare companies for taking their best
shot at long term success.