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.

Standing up to an Internet Bully - why we support Private Equity Events

For several years now the iBreakfast group has run low-cost Angel pitching events of its own where the winner gets a free seat at one of Mike Segal's Private Equity Forums. So on that basis I can speak to this issue. 

Mike Segal's Private Equity Forum events are always sold out and are packed with real investors and entrepreneurs - often from outside of New York.

In most cases, these players are worlds away from Calacanis and Digital Media. They never get the attention of the Fred Wilsons, the Esther Dysons, the DFJs and so on. They tend to come from energy, engineering, biotech, transportation, waste management – all the stuff that doesn’t make it to the blogoshpere. They are also usually older and let’s face it - you don’t see too many gray hairs in the digital Start-Up world. When they do, the seniors rarely get funded. 

At Segal’s events these participants are, for the most part what I call pedigree start-ups – people with 10 or more years of experience in serious business and technology fields. Their plans are not too sexy or too wildly conceptual and they will never be the next Facebook or Twitter. But they often have real customers on tap and genuine backgrounds in the field with deep relationships and so on. They tend to come from areas in the hinterland that are not flooded with investors – so presenting in New York means something to them. 

Should they pay what they pay? That’s their calculation. Does Mike have a right to charge them? Ask them? They know the cost and resources they need to reach out to investors – and there really are investors here – and so they make that decision.

The bottom line is they will never get an invite to Fred’s office, they won’t get a “free” invite to Techcrunch or any other hackerthon or techie start-up fest. And guess what, this is not a socialist country - people have a right to charge and you have a right not to show up.

So why the libel?

Has anyone stopped to ask what Jason gets out of this crusade of his? Free publicity for his ridiculous people-powered search engine, Mahalo that now answers your every lame question. Jason is the same idiot who dropped over $200,000 on a late night TV poker game and then claimed it was really publicity for Mahalo because he wore a logo shirt. Some publicity! See Calacanis Poker Face.

Last year, after he got into a fight with his partners at TechCrunch, he went after Mark Zuckerberg and Facebook. While the site has its flaws it is nowhere as evil as Calacanis made it out to be. But he was after his usual cheap publicity. I don’t recall any Egyptians saying “Thank you Mahalo.” Even the so-called “founder” of the revolution, a Google executive, said “Thank You Facebook.”

I have met Mark’s dad, Dr. Edward Zuckerberg so I know what it is like from his perspective to be slandered by the likes of Calacanis who has never found a cheap shot not worth taking. It is not only an unpleasant thing but almost impossible to respond to because he hogs the conversation. I even saw him hold up a gun of some sort when talking to a Keiretsu exec. Hardly a fair fight.

I am all for choice. If you can get a free ride as a Start-Up, for heaven’s sake take it. But most entrepreneurs heed some help and one way or another they are going to have to pay for it.

What I can’t abide is a bully. Calacanis made his mark as a champion of NY’s Silicon Alley in its salad days (remember that?). He picked battles when no one else would and paraded about with his trademark bulldogs – which made him look like a good guy to some people. That was 10 years ago. Flame throwing is OK when you’re in your 20s. Being a Tae Kwando black belt when everyone else is a geek is intoxicating all right. But this act is getting old – a touch of the Mubarak. In reality, Jason is rapidly becoming a slander machine that mistakes dirt-dishing for publicity and thinks it makes Mahalo and his various conferences look good. 

If he can make money doing what he does good luck to him. But here’s an amazing reality: the Private Equity Forums have never been fuller – precisely because they fulfill a need that others don’t offer. Apparently, Calacanis is just singing to his choir hoping they’ll pay for more of his web-thumping. Watch out, if he thinks there’s a publicity angle, he could come after you!

What’s the Secret Sauce in an Out Sourced World?

Are you a linchpin or a munchkin? We have an answer…..and its management.

David Rose’s keynote at NY Entrepreneur's Week put the question of what is valuable in a "virtual business world?" Once upon a time, Ford Motor was a vertically integrated company with 100,000 employees in the Rouge River plant making everything it needed down to the actual paper in their car manuals. Same with Fleischmann’s yeast in Peekskill, NY. Nowadays, only a fool would operate that way when you can outsource everything, minimize your overhead and start a business on a dime.

Great, but then who holds value here? The Entrepreneur, of course – you can’t outsource Entrepreneurs, said Rose. You could feel the room swelling at the thought of being the economy’s new linchpin (as defined say, by guru Seth Godin). But then they heard that only about 1% of start-ups ever get funded and, in the virtual, cloud-y, outsourced age, they don’t get that much by way of valuations, thereby making them feel more like economic munchkins. 

Despite that, the investors all say the bet is not on the idea, it is really on you, the entrepreneur and your ability to execute. You are the real talent.

Its been my experience that anytime someone calls you a genius - or linchpin, for that matter - they are definitely not paying you, or they are paying you more compliments than cash. You may be a genius Mr. or Ms. Entrepreneur but not a rich one and not with a lot of equity to hold on to.

Still, the entrepreneurs hang on to every word hoping to hear where that check is coming from. And for how much! That is obviously the purpose of Entrepreneurs Week. But should it be, when in age of 8.4 million unemployed where the cheapest resource may be talent and not Angel VC dollars?

In the outsourced world, why do you even need all this investor money when you can get most of the development on your own dime with a credit card or two and some friends and family money? One answer is that many Start-Ups think of Investors as a kind of jackpot winning. The other is that they think investment translates into sales.

It does neither.

Even Rose complains that only 1 in 10 of his investments pan out.

The thing that matters, the secret behind the sauce and the thing no-one was talking about is the management. The entrepreneur may be like Dave Brubeck, but Dave (and I have seen him play) needs at least 3 really professional musicians to make his sound come alive. That’s management. He may be CEO of his jazz band but those players are not lackeys, they are key ingredients to his extraordinary success.

Yet management, better management never came up in the conversation. It was missed in a few other panels except fleetingly in the bootstrapping one which Scott Shuster managed so well…….

This may not be oversight so much as a belief that real start-ups can’t afford good management. How wrong are they! The country is full of great executive talent thrown out of the marketplace at the peak of their experience. They are available and yet no one even hinted at the possibility! Fortunately, as savvy souls in our own right, we at the iBreakfast can help!

So here’s a modest proposal, check out Job Generation, our new program that lets Entrepreneurs interview really savvy execs to find out how they would run their company for them. Get free advice and a wealth of powerful contacts. You may hire them, a VC might pay you to hire them or they may come on board with their own money. One of these execs we know raised $900,000 for a Social Media start-up by going to his former Wall Street colleagues. Try doing that at an Angel group!

Most importantly, it is management – a superior team of high-functioning execs that sell things which, in the old days, is how people used to make money. They can also raise your valuation dramatically, not just in dollar figures but in the termsheets themselves. Inexperienced start-ups get one kind of termsheet (lousy) savvy execs get the better one.

The real opportunity is like no other – thousands of savvy execs are waiting around to meet you. For now, and for now only. When the economy picks up you can pretty much forget about them, they won’t be taking your call. If they do, you won’t be able to afford them. Today they are like your server, a part of the cloud…..

So do yourself a favor, get those savvy execs on your side and then talk to the VCs. Not the other way around. The execs can make you the genius you really are because they benefit by increasing your value, the investors only care about improving their odds and downplaying your value. Sorry, but it's true.

So while everyone was hyping the cloud and open source and the low cost wisdom of the crowd, they forgot to tell you about the real talent that's available: the once-in-a-lifetime firesale of Harvard, Wharton, Columbia, Fordham, Kellog and you-name-it, MBA’s who like to share with you, a minute or two of their time. 

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Additional notes:  One audience member actually complained, in a long-winded way, that investors never give him enough time to hear his story.........

Job Generation - Report from 1st Live Event

Job Generation went live last week and it resulted in this amazing report on NY!

Thanks to all of you who followed this new event, Job Generation. There will be more and in many cities because the need is so all-encompassing: 8.4 million jobs lost, 2.1 million gone forever.
 
Our experience with the first live event is that executives realize the need to reinvent themselves. This is an ideal forum to make a case for their expertise in public where they can display how they think on their feet.
 
Start-Ups are less certain. As we discovered, many Start-Ups are leery about reaching out to veteran execs. Part of being a Start-Up is doing your own thing - until you need to raise money or just grow the business. That's where the savvy set kicks in.
 
In return for getting great advice and chance to acquire talent, the Start-Ups get to tell their story to the business community which increases their chances of raising capital and building their businesses. The sooner we get the message out the quicker we generate opportunity.
 
Investors, were also an interesting case study. The objective of JG is to find the exec and start -Up combination that offers the best increase in value. Of the executives they picked for working together, the VCs tended to go with the most thoughtful and analytical while being averse to the more outgoing and sales-y. Are the VCs right? Or do they just prefer the studious type on a personal level, perhaps viewing them as more "coachable".  
 
Come to the next Job Generation and you be the judge.
 
Thanks to the feedback, we've figured out how to tweak this model so it will really crackle with creative tension - we'll be doing several more events as iEvenings, at Business Schools and in other cities.

Response to Jason Calacanis' Attack on Mike Segal & Private Equity Forumss

I know Mike Segal of Private Equity Forums and we even promote his events. So let me stick up for him in this way: his events bring out-of-town investors and entrepreneurs to New York. That is his strong suit and has been doing that well for years, filling up room after room with investors and entrepreneurs. He deals with what I call pedigreed starts-ups: people who have serious experience in their fields, have put a good amount of money into it and can afford to pay to be in this league. Dotcoms are a small part of his world - most of his Entrepreneurs have biotech, heavy engineering, energy, packaged goods or financial services businesses.

These obey very different rules from the digital world that Jason and his cohort inhabit – so before we get into some version of class war let’s understand that we are dealing with other classes of new enterprise.

As the organizer of the iBreakfast I should state that we run very modestly-priced start-up events and we give our winning entrepreneurs tickets to Mike Segal’s events so they can see what his world looks like. Some of it is familiar but a lot of it is very different – his investors usually look for revenue, tangible assets, assumable debt and a host of things dotcoms start-ups are oblivious to.

I can’t argue with Jason or anyone that access to investors ought to be Free. Why not? If Fred Wilson or Steve Jurvetson wants to see you – go ahead. They might even throw in a VitaminWater or buy you lunch. But unless you’re a serial entrepreneur and were recommended to them, the chances are the don’t want to see you. So events like Mike Segal’s and to some extent, the iBreakfast have emerged put you right in front of investors and get you into the general recommendation system. By organizing it into a marketplace they are entitled to charge what the market will bear. In that respect Mike is no different from a trade show producer or the Wall Street broker that takes his commission and the spread.

If you think he is charging too much – don’t pay. The iBreakfast offers a low-cost pitching event that grooms, educates and gives start-ups access to investors for a nominal $125. We don’t market it like crazy but then we also don’t pack dozens and dozens of investors into one place. So take your pick. As for the groups that do it more or less free, go to them – but they are probably oversubscribed and they’ll make you wait.

So, should one approach drive out the other or should all of these coexist?

If Jason can attract Investors and Entrepreneurs from all over the region – or the country to an event, do it on a regular basis and give it away for Free, I say more power to him. I might have a plan or two I’d like to trot out myself.

But keep in mind a few things. Free often drives out the good. Without a financial incentive there is a good chance the forum will run out of steam. Even if the forum continues, they still have to add some kind of value that makes it worthwhile for the investors to show up and for the best pitches to rise to the top. If they can do that, Free may win. Even so, many companies would still rather pay for all kinds of reasons like speed to the investor market or controlling their destiny.

A big question is why would Jason do it for Free. I buy his “sticking up for the hood” motive up to a point, but the real deal is publicity for his Mahalo “people powered” pedicab of a search engine, he needs to attract contributors, fire up his base them up and make them feel important.

As for the profit motive, well excuse me, Jason had no trouble charging over $1,000 for his Silicon Alley conferences when he could – thereby keeping good information and contacts away from the needy. Tech Crunch 50 is not Free. So why should these organizers behave differently? If Mike Segal can save his Entrepreneurs from traveling all over the country just to see investors and get the word out at once, then there is a value in it. Something like a road show in one place. Plus, many investors take this kind of effort seriously and see this as separating these Entrepreneurs from the pack – those which just can’t afford the effort and therefore may not be as viable.

That’s why these events take place at fancy ballrooms and not at a taco stand – it makes people take these presentations seriously. Maybe the investor should be paying for the lunch but the market dictates otherwise. Trust me, the doctor who just prescribed Jason his self-righteousness pills didn’t pay for his own lunch either if he didn’t want to. The drug company was happy to pick up that tab. More importantly, if an Entrepreneur is flying in from Minneapolis, Free starts to look very iffy while a paid event says “this is happening” and his time and travel costs will not be wasted on a flake out. Likewise, investors realize their time is unlikely to be wasted by people who are not really committed to their new enterprise.

Having said all that, I actually welcome Free because it forces the paid guys to do a better job or else. Plus it gives the posers a chance to discover their real selves before they do something silly like empty their trust funds.

As to which approach is really better – let’s say they are different and serve different purposes that may ultimately harmonize. A free event favors just-out-of-college start-ups with those big moonshot ideas like the next Twitter, iPhone Killer App or Search Engine (know of any?) Few succeed but the ones that do, make it really big. They change the world.

Paid events favor the seasoned player – the pedigreed start-up that has 10 years of experience in a field, often a mundane one where they see the real opportunity in their space, know the players, the customers and so on. There is less pizzazz and few ground-shaking ideas. The payoff is more earthly but to the investor, is also a safer bet.

The true serial (and successful) entrepreneur which includes Jason, only has to pick up the phone. The sensible entrepreneur has to know which category they belong in before they choose their path but they all have their place.

My prediction – a year from now, all these forums will exists in one way or another. All will do a better job and all will charge about the same – even the Free.

Report from July - New VC Vistas iBreakfast

"Who Moved My VC?"

Steven Arnold, Arnold IT
Allan Young, PCMexchange
Slava Rubin, IndieGoGo

Open Season for Open Source
Entrepreneurs looking for new funding got an eye-opener to the future at the July iBreakfast. Top of the list - according to Steve Arnold, is that open-source is becoming a mandate for all government-related RFPs. If you are going after of City, State or Federal money - these are the magic words.

Crowdfunding
For Entrepreneurs looking beyond the tight VC market - where many, many deals are chasing very selective investors offering low valuations - PCMexchange holds hope for the future. Here Entrepreneurs can raise money directly from pools of investors online. While this technique has been tried (Wit Capital to Prosper) sooner or later the SEC has moved in to shut them down.

But now we are seeing a new way of dealing with this.

PCM Exchange uses a new combination of techniques - it is founded by a broker-dealer and only accredited investors get access to the site. But it is it open to all entrepreneurs. The advantages for investors are that they can vet the entrepreneurs as a group - saving them from multiple due diligences. For the investors, the site will offer a kind of stock exchange thereby offering liquidity for their holdings.

IndieGoGo offers a crowfunding source for film and digital content. The trick here is that the pubic does not buy equity on the film only the equivalent of sponsorship or bragging rights.

Additional report by Guilherme Cunha

Film Funding iEvening Report

Picture by Seitu Oronde

Michael Salort, Symbiotic Pictures
Martin Feinberg, Winner Media
Slava Rubin, IndieGoGo

As the first in a new series of events that cover the funding of content - this iEvening got off to a rousing start. 3 investors spoke to a packed house about the opportunities and difficulties of raising money for a film project.

The key today is audience and distribution - and most of it is digital. The old days of having a screenplay and a prayer and more or less over. There are exceptions but most indie filmmakers have to contend with using the Internet to build a pre-audience, and distribution and marketing methodology.

Symbiotic Pictures, a new veteran-driven enterprise is actively looking for close-to-completion projects that they can place and leverage into a compelling deal. Marty Feinberg, talked about his movie investments with Penny Marshall and Martin Scorsese and the film projects he is looking at today. Slava Rubin showed how his site, IndieGoGo can help moviemakers raise money from fans and build an audience at the same time - a critical ingredient in getting studio attention. And money.

A variety of projects were pitched making a powerful impression on the investors. The star of the evening was Frederic King of Fountainhead Films, two of whose projects - Manuela, about Simon Bolivar's mistress (hints of Evita) and B.I.K.E a film about counterculture cyclists - got the judges' attention. We will soon be posting these pitches online through an arrangement with IndieGoGo.

Additional report by Guilherme Cunha