Angel Investment Journal – Angel Investing and Entrepreneur Blog

5 Day Outlook

Posted in Entrepreneur Advice,Startups by angel on the July 27th, 2007

37Signals has a post today talking about the fact that they don’t do 5, 10, or 20 year plans. I tend to agree with this because most business I have been involved with that have achieved success actually achieved success in areas that we didn’t even know about when we started. The same is true for a many companies. Only when you get into an industry and find the demand for a specific niche do most companies achieve their greatest success.

Jason talks about the best business advice he has ever received:

“Focus on the things that won’t change.” Today and ten years from now people will still want simple things that work. Today and ten years from now people will still want fast software. Today and ten years from now people will still want fair prices. I don’t believe we’ll have a “I want complex, slow, and expensive products” revolution in 2017.

Management 2.0

Posted in General by angel on the July 20th, 2007

My buddy Rafe has a great post talking about “Management 2.0”. The post discusses concepts related to it and brings up the growing idea that management innovation, not technological innovation, may be the key driver of economic value.

His list includes some great ideas such as taking advantage of crowdsourcing and user-generated content and implementing emerging concepts such as a Results Oriented Work Environment, which Best Buy has helped make famous. He encourages people to add their own Management 2.0 concepts to the list.

The Equity Equation

Posted in Funding/Investing by angel on the July 20th, 2007

Paul Graham has an interesting post that discusses his idea on how you can determine how much equity should be given to an investor or employee. This is often a tough thing to determine for entrepreneurs, but Paul tries to simplify it. His Equity Equation can be easily explained:

If an investor wants to buy half your company, how much does that investment have to improve your average outcome for you to break even? Obviously it has to double: if you trade half your company for something that more than doubles the company’s average outcome, you’re net ahead. You have half as big a share of something worth more than twice as much.

The equation is: 1/(1 – n)

In the general case, if n is the fraction of the company you’re giving up, the deal is a good one if it makes the company worth more than 1/(1 – n).

Venture Hacks followed this up with his thoughts on the post.

He makes a few good points, but these two are great to keep in mind and explain why you can’t just use the Equity Equation to determine how much equity you should give an investor or employee.

You have to pay market rates regardless of the equity equation.

This is true. If it is absolutely necessary to get something such as an employee or money, you will have to pay market value for them, even if it is not in line with what you can justify with the equity equation. If you can’t justify it, you shouldn’t do it, but sometimes you don’t have a choice. The other option is that you may be able to get money or employees for something well below the cost of what you could justify with the equation.

Consider the opportunity cost of spending shares on employees and investors.

Just because you can get an investment at terms that will make it beneficial for you, doesn’t mean it is the best use of those limited resources. For example, you give up 30% of the company for something that will double your company. What if you could double your business by only giving up 20%? Just because an option is good for you, it doesn’t mean it is the best.

Entrepreneurs and Criminals

Posted in General by angel on the July 11th, 2007

Psychology Today had an article discussing Ten Politically Incorrect Truths About Human Nature. It poses some interesting ideas and brings up an an idea that could show a possible relation between entrepreneurs and criminals.

Criminologists have known about the “age-crime curve.” In every society at all historical times, the tendency to commit crimes and other risk-taking behavior rapidly increases in early adolescence, peaks in late adolescence and early adulthood, rapidly decreases throughout the 20s and 30s, and levels off in middle age…The relationship between age and productivity among male jazz musicians, male painters, male writers, and male scientists—which might be called the “age-genius curve”—is essentially the same as the age-crime curve. Their productivity—the expressions of their genius—quickly peaks in early adulthood, and then equally quickly declines throughout adulthood.

The likely reason that criminals, scientists, and some of the most successful entrepreneurs make their biggest mark in their younger years is a result of their risk tolerance. It may also be related to their naivety in doing things which more experienced (older) individuals would not. This doesn’t mean that age is the restricting factor, but the willingness of the individual to take these risks that can lead to great achievements.