Comments on: A great question with some surprising answers http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/ The Startup Blog Network Thu, 11 Mar 2010 08:21:32 +0000 http://wordpress.org/?v=2.7 hourly 1 By: EnablingAngels http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/#comment-166 EnablingAngels Thu, 10 Aug 2006 06:50:39 +0000 http://ColoradoStartups.com/?p=74#comment-166 <strong>Chad and Brad say this is a Good Article...</strong> Chad Blodgett emailed this story to me and Brad Feld blogged about it.  I'm guessing it's worth reading.David Cohen writes a thoughtful article about how angel investors make decisions to invest.  The underlying theme is that many angels re... Chad and Brad say this is a Good Article…

Chad Blodgett emailed this story to me and Brad Feld blogged about it.  I’m guessing it’s worth reading.David Cohen writes a thoughtful article about how angel investors make decisions to invest.  The underlying theme is that many angels re…

]]> By: Andrew Luter http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/#comment-165 Andrew Luter Wed, 09 Aug 2006 21:37:48 +0000 http://ColoradoStartups.com/?p=74#comment-165 So well put I didn't have much to add. So well put I didn’t have much to add.

]]> By: David Cohen http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/#comment-164 David Cohen Wed, 09 Aug 2006 16:52:44 +0000 http://ColoradoStartups.com/?p=74#comment-164 Angela, I don't know much about franchises, but this doesn't sound right to me. I would think the franchiser would offer full financial details and provide any supporting documents to you in advance of your investment in them. In any case, I'm not expert on franchising, so take that for what it's worth. Angela, I don’t know much about franchises, but this doesn’t sound right to me. I would think the franchiser would offer full financial details and provide any supporting documents to you in advance of your investment in them. In any case, I’m not expert on franchising, so take that for what it’s worth.

]]> By: Angela Fisher http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/#comment-163 Angela Fisher Wed, 09 Aug 2006 16:21:18 +0000 http://ColoradoStartups.com/?p=74#comment-163 Question about franchises. I have found a real gem in a niche market that I am POSITIVE will really do well in my area (there is zero competition and it would be a much needed resource). I have 0 dollars capital (planning on offering to take a large salary cut to compensate), but tons of experience. However, the real sticking point that I am struggling with is that the franchise will not release their data (full business plan, market analysis, and more) until I sign. The best I can get from them is that I am "on the right track". I can't submit a business plan and am hesitant about putting data out there that may be inaccurate if there numbers are different. How can you provide good, rock hard information to an angel in this case - that they can depend on? Question about franchises. I have found a real gem in a niche market that I am POSITIVE will really do well in my area (there is zero competition and it would be a much needed resource). I have 0 dollars capital (planning on offering to take a large salary cut to compensate), but tons of experience. However, the real sticking point that I am struggling with is that the franchise will not release their data (full business plan, market analysis, and more) until I sign. The best I can get from them is that I am “on the right track”. I can’t submit a business plan and am hesitant about putting data out there that may be inaccurate if there numbers are different.

How can you provide good, rock hard information to an angel in this case - that they can depend on?

]]> By: 52 Reviews http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/#comment-162 52 Reviews Wed, 09 Aug 2006 03:17:18 +0000 http://ColoradoStartups.com/?p=74#comment-162 <strong>How angel investors evaluate an opportunity...</strong> Earlier this week there was Paul Graham’s 14 tips on how to present to VC’s, now David Cohen, from ColoradoStartups.com, writes a compelling and informative article on how angel investors evaluate oppurtinities. From the article: Like anyt... How angel investors evaluate an opportunity…

Earlier this week there was Paul Graham’s 14 tips on how to present to VC’s, now David Cohen, from ColoradoStartups.com, writes a compelling and informative article on how angel investors evaluate oppurtinities. From the article:
Like anyt…

]]> By: David Cohen http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/#comment-160 David Cohen Tue, 08 Aug 2006 19:18:15 +0000 http://ColoradoStartups.com/?p=74#comment-160 Thanks for the additional thoughts <a href="http://www.newyorkangels.com/members/david_rose.html" rel="nofollow">David</a>  (Rose, #6). I completely agree - I think each of these things often happen during the "getting to know you" phase. If the opportunity is not significant enough or the team can't execute it in the opinion of the investor, you're probably toast right there. I also think David's point out valuation is a great one - If you hear $10M right up front for a company with no customer validation, no product on the market, etc, then you know you're dealing with unrealistic entrepreneurs right away. Thanks David! Thanks for the additional thoughts David  (Rose, #6). I completely agree - I think each of these things often happen during the “getting to know you” phase. If the opportunity is not significant enough or the team can’t execute it in the opinion of the investor, you’re probably toast right there. I also think David’s point out valuation is a great one - If you hear $10M right up front for a company with no customer validation, no product on the market, etc, then you know you’re dealing with unrealistic entrepreneurs right away. Thanks David!

]]> By: David Cohen http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/#comment-159 David Cohen Tue, 08 Aug 2006 19:11:20 +0000 http://ColoradoStartups.com/?p=74#comment-159 I like Dave Jilk's categorization of "people investors" and "market investors" (comment #4) Certainly, if you've got an investor who comes (successfully) from the same space that you're now playing in, they're going to be more knowledgable and will often end up the lead investor for a round. They are certainly going to "smart money" as Dave points out - providing more than just capital. There are many investors who use the market as an initial filter (I bet that I missed many more litmus tests - this is one for sure). For example, an investor may only be interested in SaaS/ASP type software models and will filter out everything else right away. Great point. I like Dave Jilk’s categorization of “people investors” and “market investors” (comment #4) Certainly, if you’ve got an investor who comes (successfully) from the same space that you’re now playing in, they’re going to be more knowledgable and will often end up the lead investor for a round. They are certainly going to “smart money” as Dave points out - providing more than just capital.

There are many investors who use the market as an initial filter (I bet that I missed many more litmus tests - this is one for sure). For example, an investor may only be interested in SaaS/ASP type software models and will filter out everything else right away. Great point.

]]> By: David Cohen http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/#comment-158 David Cohen Tue, 08 Aug 2006 19:07:11 +0000 http://ColoradoStartups.com/?p=74#comment-158 Kedar, you asked about angel groups. Angel groups are really just made up of individual investors in most cases, unless they are operating some sort of pledge fund. These individuals still have to make up their own minds about each deal. You'll almost always notice a natural flock mentality. Once a few investors get really serious about a deal, there are almost always others from the group that jump in to that deal. This is because the angel group is one big social network. Really, in most cases, angel groups just serve as dealflow for investors. At that point, you're still dealing with individuals. Kedar, you asked about angel groups. Angel groups are really just made up of individual investors in most cases, unless they are operating some sort of pledge fund. These individuals still have to make up their own minds about each deal. You’ll almost always notice a natural flock mentality. Once a few investors get really serious about a deal, there are almost always others from the group that jump in to that deal. This is because the angel group is one big social network.

Really, in most cases, angel groups just serve as dealflow for investors. At that point, you’re still dealing with individuals.

]]> By: David S. Rose http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/#comment-157 David S. Rose Tue, 08 Aug 2006 15:42:54 +0000 http://ColoradoStartups.com/?p=74#comment-157 That's an excellent explanation by someone who clearly knows the players [grin]. You're 100% on target about the gut feel/trustworthyness/bet on the entrepreneur factors. In addition to the points you've mentioned, however, I think there are three other things that figure into the analysis: (1) Market size/scalability. While these are really two separate things, they both speak to the question of how big the company has a chance of realistically getting. If the worldwide market for whatever you're selling is only a few million bucks, it's unlikely that you'll be able to grow the company large enough to provide the investor's necessary return. Similarly, even if the market is large, if the business is not scalable (say, you're a local dry cleaner, or a personally-producing consultant), it also won't be an attractive investment. (2) Type of Business. Regardless of whether the plan makes sense or the dollars work out, most angels have relatively (or even very) specific preferences as to businesses in which they want to invest. Some are only high tech, some are only non-tech. Some like consumer products, others prefer ASPs. Some thrive on potentially giant, risky, exciting, long-shots; others will only look at boring, been-there-done-that, traditional (lower return but safer) businesses. In general, it's an impossible task to get someone to invest outside his or her comfort zone. (3) Valuation. While you covered this concisely and pretty accurately (although the subject actually is a LOT more complicated), the requested valuation is often the very first 'reality check' that an angel will look at. If you come to me with virtually ANY startup deal where you're looking to raise money at over a few [low] million dollars (let alone $10 million, or even $20 million, which I've seen), it immediately tells me that you're not familiar with the market, and thus probably not ready to run a real business with my money. But the bottom line is that David is right on target: I'd much rather invest in a smart, savvy, experienced, energetic, passionate, COMPLETELY TRUSTWORTHY entrepreneur with a mediocre plan, than I would with a perfect plan but a second rate entrepreneur. That’s an excellent explanation by someone who clearly knows the players [grin]. You’re 100% on target about the gut feel/trustworthyness/bet on the entrepreneur factors. In addition to the points you’ve mentioned, however, I think there are three other things that figure into the analysis:

(1) Market size/scalability. While these are really two separate things, they both speak to the question of how big the company has a chance of realistically getting. If the worldwide market for whatever you’re selling is only a few million bucks, it’s unlikely that you’ll be able to grow the company large enough to provide the investor’s necessary return. Similarly, even if the market is large, if the business is not scalable (say, you’re a local dry cleaner, or a personally-producing consultant), it also won’t be an attractive investment.

(2) Type of Business. Regardless of whether the plan makes sense or the dollars work out, most angels have relatively (or even very) specific preferences as to businesses in which they want to invest. Some are only high tech, some are only non-tech. Some like consumer products, others prefer ASPs. Some thrive on potentially giant, risky, exciting, long-shots; others will only look at boring, been-there-done-that, traditional (lower return but safer) businesses. In general, it’s an impossible task to get someone to invest outside his or her comfort zone.

(3) Valuation. While you covered this concisely and pretty accurately (although the subject actually is a LOT more complicated), the requested valuation is often the very first ‘reality check’ that an angel will look at. If you come to me with virtually ANY startup deal where you’re looking to raise money at over a few [low] million dollars (let alone $10 million, or even $20 million, which I’ve seen), it immediately tells me that you’re not familiar with the market, and thus probably not ready to run a real business with my money.

But the bottom line is that David is right on target: I’d much rather invest in a smart, savvy, experienced, energetic, passionate, COMPLETELY TRUSTWORTHY entrepreneur with a mediocre plan, than I would with a perfect plan but a second rate entrepreneur.

]]> By: Kedar http://www.coloradostartups.com/2006/08/07/a-great-question-with-some-surprising-answers/#comment-156 Kedar Tue, 08 Aug 2006 14:47:36 +0000 http://ColoradoStartups.com/?p=74#comment-156 I have come across some angel investors. My experience is some what different than you said about their investment decisions. Here it’s a group of angel investors so that might change the things. They wanted to me show some revenue or what you could call as proof of concept, so show me customers who will pay for this. Basically the offering was a service, consumed by corporations and it is very difficult to prove that (get beta customers). Another advice I got from these guys is that if you can't pass through us, (means they are not funding the deal) then you will never manage the angel funding any where else. I was told that various angel communities will first ask this question, why did angel co. so and so did not fund you since u are from that area. Then they will contact that angel group verify the reasons and reject just because that group did not fund it. As u said before importance of networking is there, but is it really that hard once your area angels decide not to fund you. You mentioned about individual angel, what about angel groups. I have come across some angel investors. My experience is some what different than you said about their investment decisions. Here it’s a group of angel investors so that might change the things. They wanted to me show some revenue or what you could call as proof of concept, so show me customers who will pay for this. Basically the offering was a service, consumed by corporations and it is very difficult to prove that (get beta customers). Another advice I got from these guys is that if you can’t pass through us, (means they are not funding the deal) then you will never manage the angel funding any where else. I was told that various angel communities will first ask this question, why did angel co. so and so did not fund you since u are from that area. Then they will contact that angel group verify the reasons and reject just because that group did not fund it. As u said before importance of networking is there, but is it really that hard once your area angels decide not to fund you. You mentioned about individual angel, what about angel groups.

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