Are You Fundable? Part 1

Section 1 - Summary 

The Entrepreneur’s Guide to Winning Over Investors

by Alan Brody

After 12+ years of evaluating pitches and helping entrepreneurs raise money, we have put together a book of rules on what it takes to get funding. What Investors look for and how to make your plan fundable. By looking through the prism of Angel Investor wisdom. It tells you how to:

• evaluate an idea

• find the right investor

• build sales

• attract sponsors

• pivot, reconstruct or know when to fold

At the heart of the book is this idea: you understand Start-Ups by seeing them through the eyes of investors. If you know how they handicap you, then you not only know how to get ahead but which race you should be in.

Not all Start-Ups are the same. You already knew that, but do you know what sets them apart in the minds of investors? When you do, you can increase your chances of success dramatically.

Why Ask “Am I Fundable?”

The key reason to ask is that it forces you to think about your enterprise from the outside in. When you do that, you get out of your own spin zone and into the mindset of real customers and investors.

Here is what you will discover:

1.     There is a hierarchy of Start-Ups - you need to understand where you belong on that line-up.

2.     Customers and Investors may be  connected to each other but often have very different points of view – what makes a customer want to buy your product or service can be different from why an investor would want to write you a check.

3.     All businesses have to adjust their much loved ideas to the reality of the marketplace.                                                                                                                                                                                             

4.     When you know what you have and how it is really perceived, you can calibrate your message for each audience: investors, customers and potential partners. You can also realistically determine how to spend your – pursuing customers or investors in just the right measure, instead of wasting time doing both incorrectly.

THE MAP OF ENTREPRENEUR LAND….MINES

The Start-Up Hierarchy: What Kind of Entrepreneur Are You?

The heart of Are You Fundable? is the idea of a hierarchy of Start-Ups and then a matching taxonomy of investors. Investors handicap you according to your status. If you pitch an idea that is inconsistent with your status you will probably lose credibility. Without credibility, you don’t get funded or even attract business.

The Hierarchy of Entrepreneurs

What is a Serial Entrepreneur?

A serial entrepreneur is someone who has started one or more businesses. These Kings of the Start-Up realm can sit by the phone and investors will offer them money just in case they come up with an idea.

What is a Semi-Serial Entrepreneur?

At the next rung are serial entrepreneurs with a mixed record.

The Pedigreed Start-up

At the next level down in the hierarchy are what we like to call the Pedigreed Start-ups. I can say anecdotally, that these people seem to get the lion’s share of the Start-Up money. Almost anyone with 10 years in an industry could make a case if only they found the marketable idea within their domain of expertise and understood the “rules.”

Pedigreed Start-ups are people who have:

• 5 or more years of domain experience in a field (10 years seems to be the sweet spot)

• have identified a key market with a critically needed product in their field

• have the developer team in place with the product ready or at least a working demo

• have the customers who want or need to buy it

Not-So Pedigreed

Here are some of the traps this kind of entrepreneur can fall into. Investors look out for this and if you are not careful, you can disqualify yourself:

• Salaryman/woman: never been an entrepreneur before

• No skin in the game – as in not having your own money at risk, is negatively viewed. 

• Tied to a paycheck: the risk with this type of entrepreneur is that they could be more interested in finding a paycheck than in taking on the struggle of launching a business. • Mixed age team. Having an older manager and a very young developer raises generational issues.

• Acting like an exec. Don’t be aloof, you’re supposed to hustle or it will seem like you never left the previous company.

• You were fired. Tricky and best left to the later conversation but if you were fired for being an entrepreneur, as long as you were one in the past is not a bad story.

• The worst sin: coming up with an idea that has nothing to do with your previous line of business.

Moonshots, Up-and-Comers and Career-Enders

At the bottom level are the youngest and the oldest. These are the folks who come to our really early stage Start-Up events called Startupalooza. They are the heart and soul of the TV show “Shark Tank” and they are the biggest winners when they get it but overall, the most consistent group of losers. They either reach the moon or fizzle out trying.

1. The greatest Start-Ups are usually founded by people under 27 Google, Microsoft, Facebook, Apple, Netscape and so on.

2. Only the young can invent the defining ideas of their generation which is by definition, an untapped market.

2. They can afford to take the greatest risks since they have the least to lose. The right person is also adaptable, able to struggle, accept loss and still recover.

3. They appeal to the vicarious reinvention psychology of Angel Investors.

4. Young people who have these qualities – even if the idea is wrong or the investor doesn’t invest in their deal – are a kind of currency that Angels like to “trade” with each other.

5. They have nowhere to go but up.

Let’s Give them Something to Tweet About

The way investors find out about great Start-Ups is that people talk.

The Up-and-Comer

Most Start-Ups have a good idea that is essentially a twist on other ideas in play.

The Older Player

If you are over 50, you can pretty much forget about getting Angel money. Angel Investors will probably deny this but I am sure they will also want you to believe they are not a day over 50 either.

The Going Enterprise that Seeks Growth

For a company already showing profits, to bring on investors is usually a double edge sword. Their actual profits tend to put a cap on their valuations.

Scalability

This is more challenging than it seems. Do you have a formula that with nothing more than the addition of capital, will generate more sales?

Transformative Element  Not just projections,

--> something that the changes the business paradigm.

What Impresses Investors

How to Improve the Way Investors Rank You

Get a Lead Investor or Champion or Make Friends with Serial Entrepreneurs

If you don’t have a lead investor or at least an investor who introduces you to other investors, or a serial entrepreneur, the next best thing is a fellow entrepreneur.

Thumb on the Scale and other Anti-competitive Ideas

They want to know if you have a thumb on the scale – a special advantage that others don’t have and can’t see.

 

Patents

A defensible patent is prized by investors, but any patent along with business momentum carries value because it has the possible effect of warding off competition.

Barrier to Entry

If you don’t have a patent then you want to convince investors that you have some type of barrier like special equipment or rarefied knowledge that competitors either can’t get.

First Mover Advantage

This is essentially what Amazon had as the first online bookseller. The reality is not so much that the first in a market as much as the first credible player in the market wins.

What Investors Don’t Want

Lifestyle Business – the Big No No

What they cannot abide, what the live in fear of is the lifestyle business. Be careful of phrases that suggest this: like having a steady business, being a consultant or living off sales.

What Investors Fear

 

Settling (A Tribute of Sorts, to Steve Jobs)

Even the idea of selling out too soon – or settling will upset an investor.

The Zombie Business

Never quite taking off but never quite dying either. You always need more money because you’re always just about to break .

Failed Execution/Failed Idea

Fix it and then pitch….

The Tells – How you Know You Need Help!

a.      “If we just had 5% of Google’s (or Apple/Facebook/put_big company_name here) market we would be worth a billion Sure!

b.     We need the money for sales and marketing. When you ask for money in order to sell you’ve just told them you don't have the confidence to sell yourself.

c.     We have no competition

Hosni Mubarak used to say the same thing about his Egyptian regime and for 40 years he was right. Then along came Facebook. There is always competition.

d.     Our competition is Microsoft, eBay and Google - but they don’t get it.

Nor do the investors.

What kinds of deals investors are looking for?  
 

What Investors DO Want

The rule of thumb for fast-rising business in a massive, emerging market is a defensible business in a sector that is likely to double every year for 5 years in at least a billion dollar market. They also need to know that it is scalable through capital. 

Are You Fundable? eBook or Print eBook $10.00 USD Print $20.00 USD Part 2 discusses fundable ideas like anticipation, natural progression, aggregation, undercutting. How ideas are measured and rated. How to pitch them, how to value and how to move to the next level.

The VC Outlook - Report from June 24 Event

Charlie Federman, Crossbar Capital • Jeanne Sullivan, Co-Chair, StarVest • Owen Davis, NYC Seed • Ben Boissevain, Agile Equity • F. Morgan Rodd, Milestone Ventures

We usually do a VC Outlook iBreakfast once or perhaps twice a year – and they are good. But somehow the June 24th event was special in an extraordinary way.

Maybe it’s the strange times we are in. People really needed to understand where we are headed and so Investors, by telling us where they are placing their bets – are also giving us a view into the future.

It is also a tricky time because, on the one hand, there appears to be a rising tide of private equity. On the other hand, we see a lot of entrepreneurs but for all their enthusiasm, also lack a vision about the future. Most of all, entrepreneurs may not be thinking of what the Venture marketplace wants – only what they want to do.

We understand that deals have become cheaper and investors can cherry-pick them in a way they may not have been able to do in the past. But what are they looking for?

So this iBreakfast was a wake-up call to “game” the Venture marketplace – getting your plan in line with what the market wants instead of wondering what’s wrong with the market…...

According this iBreakfast - here is the lay of the land:

Most of the exits are closed – the IPO market is all but dead, few investors speak of building a great profitable company in the old enterprise-building sense of the word. M&A is the main exit. Fortunately, many companies have strong balance sheets and after having laid off staff, they are finding that buying start-ups is the cheapest form of R&D. Great. Perhaps even better, foreign companies too, are eyeing the US market and they will often pay a premium if they feel they can get market entry.

So what are investors looking for? According to Jeanne Sullivan, the companies they look for include tech-enabled service businesses, platforms and any high perceived value service that once required custom tailoring, that can be delivered in a mass format is in demand.

Charlie Federman of Crossbar, a noted early stage investor looks for the first new idea in a marketplace. First to market is big deal and if properly executed, usually carries over in the long term. He especially likes ones that "export deflation" - i.e. offer a really low-cost alternative to a current business under price pressure. More importly, he looks for entrepreneurs who can adapt, since most start-ups find their real opportunity later. The business they end up is never quite what they started with. Somewhere, they’re going to have to take a left turn. Will they be ready to respond to that…..?

Owen Davis has analyzed various investment deals and has laid out a kind of roadmap that would be an invaluable guide for an entrepreneur to determine which sector has the highest probability of raising capital in the New York area. Hint: social media and communities highest pitch topic – least invested in.

(Note to Entrepreneurs: check back with us for the best bets.)

Morgan Rodd noted that Milestone Ventures was increasingly interested in tech-enabled medical services.

Based on the surge of investor/entrepreneurial interest we will be producing a new series of Start-Up bootcamps, business and deal structure sessions and more investor meetings.

View Presentations
Ben Boissevain - Agile Equity

The 27 Year Old Rule - Where Big Ideas Come From

There is a lot more than a grain of truth to Steve Levey’s assertion in Newsweek that the biggest ideas come from people under 27. Psychologists have long noted that most professionals and artists and not few revolutionaries develop their big ideas in their 20s (think Einstein,Marx and Picasso) or began incubating them in those days (think Freud & Darwin). On top of that many investors like Fred Wilson of Union Square Ventures have mulled over it, realizing they're not that thrilled about dealing with entrepreneurs under 30.

In the past 10 years, the iBreakfast has hosted thousands of new business idea presentations and we have developed our own classification system for handicapping the investiblity of entrepreneurs by age group.

(Note that true serial entrepreneurs, especially ones that succeeded early are in a class of their own to be discussed separately.)

THE YOUNG ONES: START-UPS 27 and UNDER
Moonshots: Big on concept but usually lacking in key details. Young entrepreneurs, unencumbered by mortgages and howling bambinos are free and hungry enough to go for broke. Too often though, bean counters get in their way. Their young egos are unpredictable and investors, seeking bargains, tend to offer low valuations or onerous term sheets. The young ‘uns tend to be strong-headed and yet.....they start Google, Paypal, YouTube, Federal Express, Yahoo, Virgin Records, Microsoft, Apple…..

The bubble years may have opened up the purses of many a stingy investor but that has changed and investors have largely reverted to type. That is why, in the long run, New York tends to lose the best ideas Silicon Valley because they are either more nurturing over there or because, a hot head who rejects a tough termsheet in NY turns to jelly when an even tougher one comes from an industry rock star in the Valley.

THE MIDDLE YEARS 27-50
These are the most investible. Fewer home runs but a lot of triples and of course, base hits. But there is an almost mathematical certainty that an industry pro with 10 years experience in a growth industry and a plan based on an actual market need or a genuine domain innovation, a briefcase full of warm leads and a bit of skin in the game is going to get funded. These are consistently the most investible entrepreneurs in the game – entrepreneurship’s true middle to upper-middle class. If you, as an entrepreneur fit this profile…..the check’s in the mail.

These are the kinds of people who start Salesforce.com, eBay, eTrade and other businesses with actual substance (but also Craiglist and Wikipedia, whose business models mystifies most investors). While a lot of middling, unknown companies come out of this field - your base hits that never quite progress - these people do really well when their idea coincides with a dramatic growth in their sector. They tend to know what they are doing and are less likely to drop the ball.

THE GRAYBEARDS 50-75
Like an old wine, when it comes to the geezer group, the bottle is usually in better shape than the content. The tannins may have softened but so has their oomph and they may not be ready for a 24/7 lifestyle with madcap deadlines. On the other hand, if they have had entrepreneurial experience or bring a good team with them they could do it.

They are best if they are an evolved version of the Middle Players but with more experience, a better team, more potent connections and a better understanding of the need they’re filling.

The Dubious but Always Interesting Graybeards Are:

1. The Immortality Seeker. Like a graying Indiana Jones they are on a quest to make meaning of their careers. Usually, it’s the Temple of Doom and, like the Pharoah’s attendants who built it, you, the investor will probably get buried with him.

2. May-December Team
You tend to see these at big money events for the same reason that you see old lotharios with young babes. The old manager finds a smart kid and backs him with resources, contacts and of course, adult supervision. But generally, the geezer’s ego gets in the way. The kid bridles or just gets diaper rash and shops his even bigger idea at a business hangout on line or at the iBreakfast (sure, why not?). Unless there’s a special dynamic, like these two really worked together in a previous life or the kid married the geezer’s daughter and has 7 years to work off his debt, watch out!

3. The Geezer just has to Do it.
While this looks like a quest for immortality the main difference is the motivation is tied to a genuinely good idea, the entrepreneur is prepared to do what it takes and the business flows from his past experience. Plus he may have a really experienced team (hopefully, with just enough tannins to keep the wine flowing) and extra skin in the game. This could be a thumbs up! Just don’t expect a home run, but ya never know! Plus, you won't have worry about them being lost to nightclubbing.

SOME THOUGHTS ABOUT SERIAL ENTREPRENEURS
If yo are lucky enough to have an idea take off while you’re still at college (think Bo Peabody of Tripod, Dean Kamen of Segway or Kevin O’Connell of DoubleClick), you truly are the landed gentry of the community. However, things can go wrong. Even Spielberg produced 1941, Edison’s talking dolls (the ones with little phonographs in their bellies) were all returned and so on. Generally though, as long as they stop reading their PR, they rule!