Angel Investment Journal - Angel Investing and Entrepreneur Blog

Robert Robinson, founder of the Hawaii Angels, gave a session on negotiating at the recent ACA Summit.

The following are some brief notes from his session:

-Angels need to negotiate in the following areas-
Expectations
Process
Term sheet
Communications
Portfolio Governance
Follow on Financing
Exit

-Your negotiating strength is proportional to the value of your alternatives AND inversely proportional to the value of their alternatives.

-“Principles unite and numbers divide.” Don’t talk numbers in the early stages. Talk about the vision for the company over the next year and beyond or related topics. Once you start talking valuation you are in adversarial position from then going forward.

-Many times entrepreneurs get too concerned about getting too diluted. However, dilution is not the worst thing that can happen to entrepreneur. The most proximate cause of company death is running out of cash.

I just returned from the Angel Capital Association Summit in San Diego. It was a great event and would highly recommend it to all angel investors. David Berkus who is widely known for his contributions to the Angel community as well as for his method of valuating companies – the “Berkus Method” gave a presentation on boards that was excellent.

Some quick notes from his talk:

-Every board needs an audit committee and compensation committee. Other committees could also be beneficial, but it is on a case by case basis.

-A general guideline of board compensation is 1 percent that is vested over 2-4 years.

-The boards of small companies should focus the spending where there is a demand pull. Don’t go in direction of using ‘cost push’ to determine spending. This is where the CEO says where he thinks costs should go. Instead, find where demand is pulling on company and go in that direction. Try to “expand the runway” in the direction of this “demand pull”.

You may want to check out his book “Extending the Runway” which discusses Boards (all of his proceeds go to the Boys Scouts of America). I spoke with Frank Peters after the session. He said he and Dave may do a show expanding on this presentation which will get into some war stories about being on boards.

Recently I have come across a few different instances of people talking about when not to start a business (E-Myth Revisited and Scott Shane talking about his book while
on The Frank Peters Show). It is a topic that does not get much coverage, probably because most entrepreneurial-types like to read things to motivate and inspire them, not things that dissuade them from going after their dreams.

It is an important concept because starting a new venture is going to require a significant amount of time and possibly a significant amount of capital. So it is vital to make sure the resources you are dedicating to it are going to be on something worthwhile.

My freshman year in college, I wanted to start a sno-cone stand. I grew up in St. Louis which has an abundance of sno-cone stands all over the place doing consistent business. In my college town, just two hours from St. Louis, there was not a single one. I was pretty confident I could start a stand and make money from it. Twelve years later, I am pretty sure it would have made money, but it would have been a foolish use of resources. Instead, my brother convinced me to go after another business we had just started in the ticket industry. That company eventually grew to a $22 million company before it was acquired. If I had started a sno-cone stand, maybe I could have expanded and had a few locations. Maybe I could have franchised it or found an exciting niche in the industry that could have been big, but the chances of it being as big as the ticket industry were very slim. And there is no way I could have gone after both businesses to the extent that was required for success.

This isn’t meant to get you to think too much about your idea before going after it. Thinking too much is a major reason people never start a business. They do too much thinking and not enough action. The point is that you should be sure to think big. If your idea has big potential then take action (DIFN) and try to validate your idea as cheaply and quickly as possible.

A while ago I pointed out some interesting entrepreneur and investor podcasts, but I only recently started listening to The Frank Peters Show. If you are an angel investor, I would highly recommend subscribing to the podcast. It is put together very well, it is informative, and he has some excellent guests on the show.

I was at InvestMidwest this week and saw some really exciting companies. I was impressed by the presentations and it seems many of the presenters were either coached on what their presentation should include or they just intelligent entrepreneurs that knew what needed to be done.

Most presentations I see include one aspect that is so common it has started to frustrate me. It happens when the presenter gets to the part of the presentation about projections. They start talking about revenue projections and they present the figures, but say that they believe this projections to be “conservative”.

I don’t know why it frustrates me, but apparently I am not the only one that feels this way. Fortunately, I only heard one entrepreneur (out of 12) claim their projections were conservative. And, upon hearing this, I saw another investor look at his buddy and smile.

Why shouldn’t you use the word “conservative” when talking about your projections?

First, when coming up with projections, especially if you are a start-up, it is extremely hard to predict what you could actually do. But you should do whatever you can to support your projections. So don’t try to say you just need to get 1% of a gigantic market in order to experience huge success. Talk about what aspect of that market you expect to penetrate. But since it is so hard to predict, you probably don’t know what is conservative and what isn’t.

Second, why would an entrepreneur that is trying to “sell” the concept of his business and raise money quote conservative numbers? It is unlikely you would, so don’t try to make the projections look bigger than what you actually believe.

Finally, even if your numbers are conservative, don’t use the word “conservative”. Don’t qualify your projections at all or maybe use a different word like “realistic” if you actually believe those projections are within reach.

While watching Citizen Kane last night, one particular quote in the movie made me think:

It’s no trick to make a lot of money… if all you want to do is make a lot of money.

Things are not as simple as that short phrase, but it does have a lot of truth behind it. If you have one goal and one concern in your life - to make a lot of money - it is very likely you will be able to do it.

The concept requires that you are willing to sacrifice all other aspects of your life (being the type of person that doesn’t care about any other aspect of your life will work just as well as having to make sacrifices). But most people want to make money to have freedom, to be able to do fun things, to not have to worry about money, etc. Money alone means nothing. You strive to make money as a result of the benefits of having money. But it is also true that you could have money and not have those things. This is why you need to stay focused on what you are ultimately seeking. Having a lot of money without a loving family or friends is probably not your ideal goal. Having a lot of money without having any fun along the way sounds like a pretty crappy lifestyle.

There is nothing wrong with being motivated to make a lot of money. Just be sure to know what you ultimately seek. Be willing to make smart choices about what you are willing to sacrifice, because success will likely require a lot of them. I was fortunate in college to have made smart choices in what I sacrificed. I never played video games in while some guys would spend hours a day playing them. I also made sacrifices in the amount of time and energy I put into school, which turned out to be a wise decision. Instead, my brother and I ended up building a solid company while going to school. I didn’t sacrifice going out and having fun and now I wouldn’t sacrifice spending time with my family.

Be sure you know why you strive for whatever it is you seek and make sure the sacrifices you are giving up are worth it.

Paul Graham argues that Dignity and Professionalism are not only overrated, but they are actually deadly. Kathy from Creating Passionate Users summarizes a speech given by Paul Graham discussing this concept.

When you evolve out of start-up mode and start worrying about being professional and dignified, you only lose capabilities. You don’t add anything… you only take away. Dignity is deadly.

Fortunately, within our companies, we have been able to avoid a focus on being dignified and being perceived as professional. We have very modest offices, we don’t require ties or even business casual. Hats, sandals, and graphic tees are commonplace in the offices and no one was to worry about being especially cordial to one another (although respecting fellow employees is demanded). Passion is what is important. Being passionate about making sure every customer is taken care of and happy is valued. Making sure employees are happy and comfortable in their work environment is also important.

If am employee does something considered unprofessional such as telling a client about how they went out and got drunk this past weekend, it is not a cause to worry. But if they ever did anything that was not in the best interest of the client, that would result in a deserved ass-chewing or worse.

Passion creates action. Professionalism leads to timid people. Passion makes people do what they know is right. Professionalism makes people do what they think will be perceived as being right, regardless of whether or not it actually is.

Will Price put together an investment checklist that he goes threw when considering an investment in a company. A great checklist for angel’s and VC’s.

This week Venture Voice has a great interview with Tom Perkins of Kleiner Perkins.

Most investors generally talk about how they prefer to invest in people over the ideas. Some claim that there are plenty of ideas out there and it is unlikely you will come across a totally unique idea. Execution is generally considered the hard part. And that is why I was surprised to hear Tom say he invests in ideas, not people. He supports his claim because, first of all, people with good ideas are generally good people. He says he is also able to build a good team to help support the company. It is hard to argue with a person with so much success in investing in companies.

He goes on to talk about building a team. He says you don’t need a good team right away. A main reason is because if you are seeking to build the best team that you can, it is unlikely the best people won’t come on right away when company is in its highest risk state. So you need to prove the company has potential and when there is less risk and a proven potential, it is easier to get successful and experienced people to lead the team.

That point does support the idea that the team is very important, but it seems Tom and his team have enough experience building companies that they can provide the assistance necessary to get the company to the point of being able to prove the potential.

The host of Venture Voice, Greg, asked Tom about their “ICU” for failing companies. Tom said they put failing companies in an ICU where the companies will either fail and they shit everything off completely or they make it out. The idea of “killing” the company completely even if there is some potential left is interesting. It reminds me of one of the central ideas behind Seth Godin’s “The Dip”. You don’t want to dedicate resources to things without a great deal of potential. You have limited resources and need to make sure you are focusing them on things with the most potential.

Hopefully you get a chance to check this podcast, I highly recommend Venture Voice and only wish it was done on a more frequent basis.

Many entrepreneurs spend way too much time planning before they actually take action. Many also spend too much time trying to raise funds too early in the process. It is generally advisable to take some action as soon as you can. This allows you to get feedback regarding whether your idea has potential. You will be able to determine if you are on the right track or if you need to take another path including making some revisions to your idea.

Testing your idea can easily be done through Pay Per Click advertising. You can create an ad campaign in less than 10 minutes. An entire blog could be dedicated to what you can do to optimize your PPC ads so I won’t get into that here (but here are a few good resources). The main things you need to do are make sure you target the right keywords, have a decent ad, and put up a landing page that will help you track interest.

You don’t need to put up an entire site, you just need a teaser on the page and then measure how many people respond to the teaser. When I say “respond”, I simply mean you need a way to judge how interested people actually are in what you are offering. Actually getting traffic is good, but if what you are offering is not what they want, then you can’t accurately judge the need for your business.

For example, we were thinking of selling and ebook on online reputation management. Before we spent the time to actually write the book, create a site, and everything else involved, we ran some PPC ads and got traffic for people looking for related keywords. On the landing page, we had a few tests going at different price points. We listed what would be included in the book and then listed a price. For some people we said “Click here to buy this ebook for $79″, other tests showed lower prices. When people clicked on the link, it took them to a page saying the book was not yet available and they could fill out a form if they wanted to be notified when it was released. We did not collect any information from people unless they said they wanted to be contacted when the book was released because we did not think it would be right, but more importantly, we were not interested in collecting info on them. We simply wanted to how many people would click the link so we could determine if an ebook on reputation management had much potential. In the end, we found out that it did not have as much potential as we thought so we never did anything with it.

Another time we considered pursuing a new type of lead (for our lead generation company). We created a PPC campaign, put info on the landing page and did something similar. In this instance we found out there was enough interest in this type of lead and we would likely be able to convert the visitors at a high enough rate where it would be worthwhile to pursue.

The idea of testing your business model via PPC ads is mostly related to online businesses, but most businesses now need to have some online aspect to them so it is likely applicable to you.