At the latest UoA Centre for Entrepreneurial Learning Forum Bill Payne, the BNZ University of Auckland Business School Entrepreneur in Residence and prominent US angel investor, spoke on the topic of ‘Fundable Companies – An Angel Investor’s Perspective’. Below are some of my notes from his talk. ($ in US)
- Capital food chain for entrepreneurs
Friends, Family and fools account for $75 billion in US
- Capital life cycle
Angels in the space of late POC to mid start up. Don’t typically compete with VCs
- Funding gap
VC use to invest down to 1.5million but has now increased to bigger chunks. With Angels rarely making >$1mill investments this has created a funding gap between 1.5million and 4million.
Most angels/ VCs will not sign. The trick is to write non confidential business plans. Hide the ‘secrete sauce’. Investors don’t need to know the detail early on. Just need enough to ‘set the hook’.
Generally invest 25k-250k per deal per investor. Average 30K.
2-10% of their net worth is regarded as ‘mad money’. They can either go to Vegas with it or invest it in a start up company. They would like it back but don’t mind if it doesn’t come.
They need to make 20-30 investments in order to get 1-3 home runs as 50 % fail. 1/10 provide all of ROI.
VCs invest to make money. Angels have a reason other than ROI to invest.
- Business Plans
There are four forms:
- 2 Minute Pitch ( verbal ).
- 20 Minute Powerpoint presentation ( verbal ).
- 2-4 page Executive Summary ( written ).
- 20-50 page full Business Plan ( written ). Only give if they ask for it after giving them the above.
Referred to Guy Kawasaki’s 10:20:30 rule – 10 slides, 20 minutes, larger than 30 font size.
Make sure you write your own plan. Don’t get consultants to write it.
- Evaluating Deals
What does Bill look for? Two main ones:
Management team <30%. Need to have fundable management teams. CEO has experience, serial, has vertical expertise, coachable,leader.
Scalability / size of the opportunity <25%. Need to be 30 million company in 5 years. VCs look for >100 million. High gross margin, ready customers and competitive advantage.
- Doing the deal
Takes 2-4 months. 1 in 72 that start the process actually receive investment.
- 5 mistakes entrepreneurs make
- Don’t take dumb money
- Don’t elaborate product/ tech when pitching
- Don’t overestimate market – ‘ the addressable market’
- Don’t use ball park revenues as a % of market. Use a bottom up approach.
- Don’t press the first mover advantage. The third or fourth company in the market is typically the successful one. They take advantage of their predecessors. 1st company miss sales targets, 2nd company cant scale quick enough.
If total investment needed in a company is more than 10million then angels are unlikely to make any money (get diluted out). Therefore there is no place for angels in pharma and certain biotech and clean tech.
Ownership levels that angels like – depends on how much money is needed to grow and how many milestones made to date. e.g Need 500k in early start-up~ 30%, later on 20%. If need 750K+ early on then more likely to go for 30-40%. Definitely not owning the company. Don’t like big investments early as want to keep entrepreneur with >50% shareholding to keep them motivated.
Lifecycles of investments. Those that go belly up normally do so within 3 years. Successes take 6-8 years to mature. The best ones are up to 15 years.
What’s holding up company growth? The typical ‘lack of capital’ is bullshit. It is mainly due to the management team failing to execute.
One area that he didn’t touch on in terms of the capital food chain was strategic investors/ partnerships. A method a couple of the Spark high tech alumni companies have utilised very well.
Graeme @ graemefielder.com