Angel Investors and Entrepreneurs - Living a Bad Dream
Bill Warner Monday, October 06, 2008
Watching the economic news unfold over the last week was like living a bad dream. Like most dreams, it was a slow moving series of events that brought us closer and closer to economic disaster as the flow of credit became more and more constipated.
Financial institutions are failing, including our own Wachovia Bank, coming off the failures of Lehmann Brothers, Fannie Mae, Freddie Mac and others. The administration put guns to our heads telling taxpayers that they had to pay $700B or else the world as we know it would end. Congress denied all accountability and served up some more pork to fix the problem, moving us closer to the abyss of socialism. McCain gave a head fake of leadership, while Obama again ducked and weaved his way to looking like the almighty savior with a few good speeches.
So, there in that bad dream stand angel investors, whose portfolios of investments are being crushed by the resulting market downturn. But, the dream is not over. We still have not gotten a complete awakening of what is going on and what else is going to drop on our heads. What does this mean for angel investors and the entrepreneurs that need them?
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Angel Investing Brought To Earth
Bill Warner Sunday, October 05, 2008
A standing room only crowd participated in a recent Angel Connection Event where angel investors, entrepreneurs and other business professionals gathered to learn what angel investing is all about as well as to meet new business associates.
Co-sponsored by WRAL Local Tech Wire and the Triangle Accredited Capital Forum, this is the first Angel Connection event.
“We are thrilled with the interest shown in last night’s event and the exciting information provided about the world of angel investing,” said Rick Smith, General Manager and Editor of WRAL Local Tech Wire.
“This event more than exceeded our expectations. We all got the opportunity to get some valuable information about angel investing that we don’t normally see,” said Bill Warner, Chairman of the Triangle Accredited Capital Forum.
Featured speaker
This inaugural event featured Catherine Mott, CEO and founder of BlueTree Capital Group and BlueTree Allied Angels of Pittsburg, PA, and board member of the Angel Capital Association.
Catherine delivered a comprehensive perspective of the angel investing industry, highlighting some very important trends:
- Of the 500,000 start-up companies in the US each year, 40% will be financed by friends and family, 10% by angel organizations and less than 1% by venture capital firms.
- Formal angel investor organizations are rapidly growing from nearly 100 in 1999 to over 250 today, 165 of them are members of the Angel Capital Association, representing over 6,800 angels, an average of over 40 angels per organization.
- However, it is estimated that there are between 200,000 to 500,000 active angels throughout the US who have invested over $26B in 2007, growing from $15B in 2002.
- Angel organizations bring much more power and understanding to the investing process via their pooled deal flow, business experience, industry knowledge, due diligence and investment strength.
- The average amount invested per round by each investor group has increased 10% to $266K in 2007, the vast majority of which is going into seed or early stage companies.
- Medical devices and software lead the way as the most popular industry for angels, followed closely by business products and services, industrial/energy, IT services and biotechnology.
- Angel organizations are quite territorial, wanting to invest locally or regionally. However, with the growth of syndication between angel organizations, their reach is widening.
Profile of an angel
Catherine gave a quantitative profile of what a typical angel is. So when you are searching for angels, here is what they look like:
- Nine years of investing experience
- Investing in 10 companies
- Has had 2 exits
- 14.5 years of experience as an entrepreneur
- Has founded 2.7 ventures
- 57 years old
- 10% percent of wealth in angel investing
- Has a master’s degree
“Survey says”
Catherine shared the results of a recent survey by the Kauffman Foundation that sheds some light on how angel investing is performing:
- Overall, angels are achieving a 2.6X return on their investment over a 3.5 year period for an IRR of 27%.
- Over 50% of angel investments have less than a 1X return on investment, with 35% being dead losses.
- 34% of their investments have a 1 to 5X return, while the remainder is greater than 5X.
- Spending considerable time in due diligence directly correlates to investment success. Low due diligence time has led to a 1.1X return in 3.4 years, while high due diligence time has led to a 5.9X return in 4.1 years.
- Having angels with relevant industry experience also correlates to investment success, indicated by 1.3X returns in 3.6 years with no industry experience and 3.7X returns in 4.0 years with considerable industry experience.
- Angel participation as advisors and board members as well as ongoing operational and financial monitoring helps increase the chances of success. Those that were involved 1 to 2 times per year achieved 1.3X returns in 3.6 years, while those involved 1 to 2 times per month achieved 3.7X returns in 4.0 years.
- Interestingly enough, those investments that did not require a follow-on investment from the same angel organization got better returns than those that did; 3.6X returns versus 1.4X returns respectively.
Future trends
Catherine predicted that the world of angels is going to have more important changes in the future:
- There will be a rapid increase in university-connected angel groups
- Green/clean-tech company investments are emerging rapidly
- Women angel groups will be forming
- Co-investment regionally, US-wide and cross-border will increase
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CEO Coach - Building An Ethical Culture
Bill Warner Tuesday, September 23, 2008
A distinction that is sometimes misunderstood is the difference between compliance issues and ethical issues. Compliance programs deal with external issues that have internal implications on a company (i.e. compliance with the SEC, IRS, Sarbanes-Oxley, and the law). Ethics programs deal with internal issues that have external implications (i.e. company values and codes of personal and business conduct). A frequently unrecognized challenge for CEOs and business owners is to fully understand how they are the symbol and the source of the culture of their organizations.
CEOs Set the Example
Close scrutiny of a CEO’s personal conduct occurs every day by employees, customers and business partners. Ethical behavior by the company’s leadership will establish respectful business relationships and solidify employee loyalty. Unethical behavior will undermine the integrity of the company. If there is a difference between what a leader says and what a leader does, everyone will see it, and employees and business partners will emulate the bad behavior.
Whether it is simply through ethical behavior or by instituting a full blown ethics program, the company’s leadership must fully stand behind their actions. Establishing an ethical culture is a process, not an end, requiring the company’s leaders to demonstrate the highest standards of integrity and accountability.
Types of leaders
- Ethical leaders are committed to acting ethically and insist upon that from their organization and from their business partners. Not only are they demonstrably accountable for their actions, they are perceived that way as well. They foster a culture that emulates their own dedication to ethical behavior.
- Ethically neutral leaders are inherently committed to ethical behavior, but no one knows it. They are perceived as leaders who have done nothing ethically wrong, but their decision making process has no context of values or code of conduct.
- Unethical leaders believe that ethics is not relevant to the business world. They make pragmatic decisions, without concern for their ethical implications, which sometimes don’t stand up as ethical behavior under external scrutiny.
Foundation for ethical behavior
Executives must establish the ethical foundation for their companies, which will serve as the cultural underpinnings that guide their leadership. Ethical behavior is founded in:
- A set of values that spell out the way employees will relate to each other and the company will relate to its customers and business partners.
- A framework of principles for personal and business conduct that is unambiguous and integral to everyone’s behavior; so that unethical behavior is not an option.
- Selling ethics to others so that ethical behavior is fostered by exemplary conduct by the company’s leadership, where decisions and actions send a clear message of what is tolerated and what is not.
- Standing for what is right in everyday actions by rewarding positive ethical behavior and counseling others when a breach in ethical behavior occurs.
There’s no way around it. Ethical behavior cannot be delegated and unethical behavior cannot be tolerated. Leaders have to be conscious of what is right and what is wrong, and set the example for others by asserting their integrity and honesty. As their reputation grows, so will the respect and dedication of others.
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Networking Event: Angel Investing
Bill Warner Wednesday, September 03, 2008
We have a very interesting angel investing networking event coming up on Thursday, September 25th at 4:30, at the Hilton RDU at Research Triangle Park located at 4810 Old Page Road. The event is a chance to meet some angel investors, entrepreneurs and local professional services firms. If you are considering becoming an angel investor, you need angel investment and need to know what to do, or you are just interested in this aspect of financing start-up companies, come join us for this interesting networking event. Click here to register.
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Angel Investors
Bill Warner Tuesday, September 02, 2008
Entrepreneurs often talk about needing angel investor money to launch their companies. When asked about their financing plan, they are heard to say, “I am going to raise $500K from angels.” When asked what their strategy for approaching angels is and who they are going to approach, they often go silent and have a blank look on their faces. To many entrepreneurs, angel investors are a general term for a form of start-up investment, but they don’t clearly know who angel investors are.
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Financial Modeling
Bill Warner Thursday, July 17, 2008
“Financial models are a black art and don’t really reflect what is going to happen anyway,” says a typical entrepreneur! Well, true and not true. It’s not a black art, and your business is probably going to act differently than you expected. Nevertheless, you can’t run a business without a game plan. When an executive and founder put a business plan together, one of the exhibits is a financial model of the business. This is your financial road map. It is important to show an estimate of how the business is going to perform over the first three to five years. It is shown as balance sheet, cash flow and income and expense statements. These are created from estimates of costs, expenses and revenue that all feed the calculations in the financial statements.
But, where does the executive get the data? There are lots of ways to go about this, but here is an approach that works pretty well, and in this order:
- From your market plan, do an estimate of revenue. Don’t just use a market share percentage and think you are done. Take into account the:
- Lead generation productivity expected
- The length of the sales cycle
- Price assumptions
- Revenue recognition assumptions
- Collection assumptions
- Availability of trained sales people
- Productivity of the supply chain
Calculate the number of customers per month and multiply by your price assumptions. Then calculate the revenue based upon your collection assumptions. Since so much of the cost and expense item are determined by revenue assumptions, this is the first step in creating a financial model. No, you won’t actually attain revenue exactly as you planned. The important aspect of this exercise is that you make reasonable assumptions to convince yourself that the revenue plan can be achieved.
- Based on the revenue estimate, the number of products and services sold is known. The costs of goods sold can then be determined. This is a matter of reflecting all the costs of manufacturing the product. For hardware, it’s the manufacturing cost. For software, it’s the cost of creating the software distribution package. For services businesses, it’s the costs of performing the service. Maintenance is also a cost item. These numbers will be subtracted from revenue in the income and expense statement to determine the gross profit.
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CEO Coach - Improving Communications
Bill Warner Monday, July 14, 2008
Getting your ideas across, helping your employees, and achieving your ambitions all come with effective communication. Even though you may already be a good communicator, everyone can improve on their current abilities and approaches to communications.
Network With Other Executives
One way to improve your communications skills is to take advantage of local business organizations. Many business communities have organizations like the Council for Entrepreneurial Development (CED) which is housed here in Research Triangle Park, North Carolina. The CED is a place where entrepreneurs can gather to share ideas and gain training on business related topics. Take advantage of CEO gatherings, industry networking events, business seminars and communications coaching opportunities.
Get Out and Meet People
Other ways to improve company communications include implementing an aggressive program of Managing By Walking Around (MBWA). CEOs can’t communicate if they are stuck in their offices. Get out and walk the halls and visit the cubes of ALL your employees. Ask questions about how the employees are doing, what they are doing and how they are going it. Be interested or at least act interested in your employees and the teams they work within.
Regular Employee Communications
Share information about the company freely. If the CEO does not share the information, the employees will make up their own information. This is the dreaded rumor mill. Share information in person in company meetings on a monthly or quarterly basis. Implement a company newsletter/newspaper/e-letter and encourage every department and team contribute.
Be Consistent
Be consistent in your communications. Many CEOs complain that they have set the company vision and shared it with the employees, but “everyone is going in different directions?” What they don’t realize is that each time they share the vision they state it slightly differently and the employees hear a different vision.
Be brief and only communicate the minimum required to get the message across. To elaborate and elaborate slightly differently each time just breeds confusion and lack of focus.
Focus on Improvement
The most effective way of improving communications is to assess your situation, identify and improve on your areas of weakness, and capitalize on your strengths. Where do you start? Ask your employees.
Make communications a daily drum beat. Communications effectiveness starts in the CEOs office, continues with MBWA, and ends in the CEOs office. You can even get a coach, who can impartially discuss your communications needs and strategies.
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CEO Coach - What’s Your Value Proposition
Bill Warner Monday, June 30, 2008
I attended a very enlightening meeting last week of an organization called Men of Significance. It is led, along with others, by Fate Thompson, the CEO of iAdvantage Software in Cary, NC.
They bring to life another aspect of business vision and value proposition. When thinking about these two subjects, most of us think of the obvious observations about market size, customer value, revenue growth, profitability, marketing messages and sales traction. But, we don’t often think about our own fulfillment. That is, what of your own needs have been fulfilled by your business vision and value proposition. Often, the need is really not money or fame. Searching deeply into your own purpose in life, you perhaps will find a more fundemental and significant need that drives you. Entrepreneurs and business executives start businesses for many reasons. When you discuss with them why they are taking this risk, you will often find a deeply seeded and thoughtful reason that really represents their view of their purpose in life. Men of Significance is all about helping business people find that deeper need and to guide them to their significance in life.
This organization adds another dimension to the way we should think about our role in a business endeavor. I invite you to go to their website at www.men-of-significance.org and learn about their organization and the many resources they have available.
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Sales Fundementals
Bill Warner Thursday, June 26, 2008
You are selling your product from the time you put together your first market study and every day thereafter. Actually, everybody in the company sells in one form or another; it’s not just the sales team’s role. You have to sell to your employees, stakeholders, investors, channel partners, alliance partners and customers. Let’s focus on selling the company’s products and services.
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CEO Coach - Effective Communications
Bill Warner Wednesday, June 25, 2008
Over 80 percent of our waking life is spent either sending or receiving information. The ability to communicate effectively at work and in our personal lives is perhaps the most critical skill for everyone, especially the CEO. Poor communication leads to poor performance, yet it is common in the workplace. Luckily, communication skills can be improved and the more effective the communication, the better the overall performance and therefore the greater the level of business success.
Some CEOs don’t realize that communication is a two-way process. In addition to getting your own message across, it is also important to listen to and understand what others have to say, a technique known as “active listening.”
But an even more important communication skill that is often overlooked by CEOs was expressed best by Peter Drucker, “The most important thing in communications is to hear what isn’t being said.” Effective communication allows CEOs to use all the other skills they have to their fullest. The ability to motivate, delegate, organize, solve problems, and obtain information all rely on the ability to communicate effectively with others.
Effective Communications Brings Business Results
Evidence suggests that bad communication is probably the cause of most of the problems people encounter at work. It starts with an unclear company vision, gets worse because of ambiguous personal objectives, and is exacerbated by a company culture that evolves rather than being set by the clear communications of the chief executive. Jack Welch, the past CEO of GE said it best, “Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”
Effective communication can transform how well people work. Imagine an organization in which everyone is kept informed, knows exactly what to do, and has all the information necessary to do their job. The effective CEO fosters teamwork, empowers key employees with responsibility and authority, and communicates key information to the organization. These CEOs not only use effective communication, but they also gain employee buy-in to the vision and objectives, build employee confidence in the company and create respect for the management team.
Setting a culture of sharing knowledge is critical to business success. If, rather than keeping quiet, people shared their knowledge with others, and problems were solved using everyone’s knowledge, skill development of less experienced people would dramatically increase. It would also allow more delegation and facilitate problem solving. The CEO who operates this way creates cohesive teams and builds uniqueness of purpose
Think of the effect it would have on the performance of your organization if culture drove everyone to feel motivated and empowered.
