Brandon Mullins

Do as Investors Do, Not as They Say

Do as investors do, not as they say.

As those who know me and my business philosophies can attest, I am a big proponent of niche strategies for start-up companies. This goes hand-in-hand with the need for start-ups to have singular focus in the beginning (and one can argue, perhaps throughout the company life); one market, one solution, one vision. While many investors will shy away from being pitched a niche business and niche solution, this is a very short-sighted strategy. Example below.

I’m an avid fan of Reid Hoffman (Founder of LinkedIn, Angel Investor of Facebook, Ning, Flickr, Last.FM, and many others). To hear him speak on the topic of the consumer internet market and its trends is a great learning experience. He’s got great vision, and incredible grasp on what is required to start, operate, and grow a successful consumer internet solution. However, from an angel investor angle, he too falls prey to the old “do as I do, not as I say” investor philosophy.

About a six months ago, on TechCrunch, Reid wrote this article on “My Rule of Three for Investing.” Read the post in full for more clarity, but as a summary, here were the three rules:

1. How will you reach a massive audience?
2. What is your unique value proposition?
3. Will your business be capital efficient?

While all three sound quite obvious and sound in theory, this framework is hardly ever adhered to in the real world. Using Facebook as a quick example…

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Angel Investing 101

This past Thursday night I had the opportunity to attend a very informative lecture on Angel Investing, put on by David Rose, at the newly located 92nd Street Y on Hudson Street in lower Manhattan. David Rose has his hands in many various ventures, all streaming through the hub of Rose Tech Ventures. He serves as Chairman of the Board at New York Angels, the leading investment consortium in the New York region. He is CEO & Founder at Angelsoft, a software tool that allows Angel investors to collaborate and discuss together potential investment opportunities for improved deal flow efficiency (now powering 200+ Angel groups throughout the United States).

Okay, enough plugging of David.

While the lecture served mainly as a refresher course for me (I’ve been reading about the process of Angel Investing since I was about 5), it was definitely worth the one hour of my life it consumed. And the free alcohol didn’t hurt, either.

I recommend the book Angel Investing if this Angel investment shinanogins interests you.

Here are some interesting notes:

1. 600,000 new small businesses are formed every year in the United States

2. Where does funding come from?

• 350k get funding from themselves (58.3%)
• 200k get funding from friends & family (33.3%)
• 50k get funding from Angel investors (8.3%)
• 1200 get funding from VC firms (0.2%)

3. Typical Angel investor profile:

• 57 years of age
• Masters Degree
• 15 year entrepreneur
• 2.7 ventures funded
• 9 years of active investing
• 10 angel investments
• 2 exits or closures
• 10% of their wealth resides in Angel investments

4. The Startup Funding Food Chain

• You —> up to $25k (possible bootstrap)
• F&F —> $25k to $100k (pre-seed)
• Angels —> $100k to $250k (seed / start-up)
• Angel groups —> $250k to $2M
• VC funds —> $2M +

5. Angel group stats (per year):

• 7.3 investments per group
• 4.5 new investments
• $1.9M total invested
• $265,926 per round (average)
• $386,963 per company
• $33, 236 invested per angel investor / per deal
• view 30 to 40 business plans per month

6. What do Angels look for? (1% of companies looking for funding get it)

• Great entrepreneur (“betting the jockey, not the horse”)
  • integrity, passion, experience & skills, domain expertise, committment, leadership, vision, “change the world” attitude, realistic, coachable & able to listen
• Scalable business models
• an unfair advantage
• external validation
• low investment requirements ($750 to $1.5M)
• reasonable valuation ($750 to $3M pre-money)

7. Secret Economics of Angels (example scenario)

• $1M spread out over 10 deals
• Investor wants a 3.8x total return on those 10 deals (25% annual return)
• typical 5 to 7 year hold on the deals (until successful exit)
• 5 deals = 0x return
• 2 deals = 1x return
• 2 deals = 3x return
  • lost money on 9 out of the 10 deals in total
• the last 1 deal must return a 30x ROI to make up for the other lossed deals for a combined 3.8x return for investor
• always shoot for making Angels a 30x ROI on your dea

If you’re still awake after reading the above, or even if you just scrolled down to this portion of the post, I again recommend picking up the book “Angel Investing” (no I am not getting paid for this endorsement) for much more detailed info on the topic.