Angel Investment Journal - Angel Investing and Entrepreneur Blog

For the third time in as many weeks, I have come across an entrepreneur with great software but is struggling to monetize it.

The problem is that a lot of software targeted at consumers is starting to become cheaper and cheaper to the point of where people have access to an amazing amount of great, free software.

These entrepreneurs, along with countless others, only consider 2 main monetization options…

1) Charge the users per month
2) Use a freemium business model

However, many entrepreneurs get so focused on trying to be the next facebook (or insert the name any other site that has a large number of users) they only focus on going after the consumers.

Doing so not only requires the entrepreneur to figure out how to acquire customers, but also determine how to monetize the users.

The good news is that there is an often overlooked option that addresses both of these issues. Entrepreneurs can license software to larger companies. Larger companies will then provide the software to their customers (either for free or for a cost). This does a few things:

1) Comes with its own distribution channel
2) Allows you to make a few big sales as opposed to thousands (tens of thousands or even hundreds of thousands) of smaller ones
3) Will likely require much less start up capital.

A recent deal involved an entrepreneur that licensed his software to a company for $100,000. He is now looking for angel investments to raise money so he can take try to sell the software to consumers. My recommendation…. try to sell more $100,000 deals. Then, if you would like, you can take that capital and develop your direct to consumer offering.

The WSJ had an article today about personal finance tools.
Taking our monetization method of licensing the software, one of these financial software providers could license their technology to a bank or financial services firm who could provide it for free to their customers.

The bank or firm would then be providing a great tool and adding serious value to their services. Also, many print publications are trying to figure out how to adjust to the online business model. Maybe a publication like Smart Money could license the technology and provide all subscribers with a really valuable tool for being a member.

This is by no means a new idea, it just happens to be one that gets overlooked far too often by developers seeking 9 figure valuations.

A buddy recently sent me this email from a colleague of his…

—
DO YOU HAVE THE NEXT GREAT MONEYMAKING IDEA? We are currently on the search for entrepreneurs, inventors, businesspersons, dreamers, promoters, creators, innovators, etc. If you feel you have a lucrative business idea but just can’t seem to secure the financial backing to get it off the ground then Shark Tank is just the show for you. Each episode features aspiring entrepreneurs pitching their business ideas to moguls in hopes of landing investment funds. Apply now for your chance to enter the “Shark Tank” and see if your idea survives.

All interested parties should email David Polanzak at xxxx with the following information:

Name:
Age:
Hometown:
Phone:
Photo:
—

I removed his email to ensure David does not receive spam. If you would like to be considered and have your information passed on to David, fill out the contact form on this site.

Quicksprout posts some great resources for Entrepreneurs in his posting titled Entrepreneurs Handbook.

Frank Peters has a great podcast on early exits with an interview of Basil Peters.

Basil talks about some reason why it may disadvantageous to receive large sums of VC money.

The WSJ did a brief A post on angel funding.

It includes 3 tips when looking for angel funding:

Gigaom has a post discussing Lookery’s recent round of funding that was raised entirely from Angel’s. Lookery’s CEO, Scott Rafer (former CEO of MyBlogLog), talked about 5 reasons why getting angel investing is better than VC money:

1) Focus. “Angels can concentrate on the individual strategy of your company, rather than the larger portfolio management strategy a VC must bear in mind.”

2) Deal Terms. Angels generally don’t demand as much in liquidation preferences and other deal terms.

3) Future Funding Rounds. You will generally have more control over future negotiations in getting additional funding.

4) Transactional Control. “You won’t have to seek permission from investors who aren’t on your board or worry about what a VC needs to have happen vis á vis managing his limited partners… Angels have no LPs, so their agendas tend to be far more transparent.”

5) Exit. “Angels aren’t compensated in ratios. Angels get 100 percent of the profit they generate with their investment in your company. A VC only gets a fraction of the ‘carry’ generated on your deal. This is one reason a VC might be motivated to urge you to sell bigger.”

Rob Conway, a well known “super angel”, follows up with 3 more reasons why Angel money is more attractive than VC money.

1) The due diligence process will be less rigorous since angels are acting in their own interest and not investing OPM (other people’s money).

2) Angels are generally more vertical specialists than compared to VC’s.

3) “Angels have one-degree of separation from people in their professional network — not two, or three, or four. But because angels tend to be operational types, the business relationships they bring to the table are personal, not transactional. ”

Finally, Allan Leinwand, follows up with a counterpoint on why Entrepreneurs should prefer VC money over angel money. He claims VC’s will be better able to stick with the startup over the long term, if things don’t work out quickly. However, Tom Perkins, of Kleiner Perkins Caufield & Byers, says they put companies in the “ICU” if they are not performing well. They either see if they can get out of it or they shut off everything right away.

The Seattle PI posts an article posing the question whether the market conditions will negatively affect angel investing.

Investors are likely to get more cautious as the market suffers since they are seeing their investments in the market decline. However, regardless of the economy, it is never a bad time to start a company. Markets are cyclical and it is unlikely you will achieve great success within a short time frame. There is a good chance that once things get going for your company, the markets will have shown some improvement. (I am not trying to predict the markets here, but throughout history after every down turn, there is at least some sort of up turn.)

Inc Magazine had an article a few months ago about this topic - Starting Up in a Down Economy. They mention several reasons for why a down market is a good time to start:

So market conditions should not deter entrepreneurs from making the decision to start a company. And even though some angel investors may be a but cautious, there are plenty of others that are always looking for good companies regardless of market conditions.

Trevor Blackwell has an interesting post on how some companies generate creative myths for how they started their companies in order to generate publicity.

Ebay and the pez dispenser myth comes to mind as an example.

This was a quote by Michael Phelps coach, Bob Bowman when talking about Phelps’ (and his fellow swimmer’s) training regime. Bowman not only trains Olympic swimmers but he also trains thoroughbred racehorses.

I liked that quote because it shows that the people at the top of their sport don’t get their by genetics or luck (although both of those would help). Those people, more likely than not, train much harder than the rest of the field.

I get to hear a lot of ideas from people wanting to start a company. The vast majority of the time, people want to start a “sexy” business. Whether that be the current hot online trend (at least half of the ideas I hear related to the web involve some sort of social networking) or even something more simple like starting a bar.

The problem with sexy businesses is that a lot of people are going after them because simply as a result of them being sexy or exciting. But those businesses are generally highly competitive as a result of the vast number of people going after them because of their appeal.

If you are trying to start an online business similar to what 1,000 other people are doing, you need to have a something remarkable or meet a demand no one else is meeting, which is more likely going to be a specific niche.

People also generally go after the sexy business ideas because that is what they hear about in the media. They hear about valuations and acquisitions of these companies that seem exciting. But I see many, many hundreds of million dollar deals with companies no one ever hears of and many times it is because the business is not exciting/sexy.

Look for that path less traveled.

My advice