Why does everyone think they should be angel financed?
Are we going to see angel financing change in 2013? This is a topic that I have written about before and I keep thinking about how financing in general is going to tighten up in 2013. What exactly does that mean for the first round of angels. Obviously time will tell but here is what is rambling around in my head.
In the past six months I have seen business plans from every industry and that includes consumer products, clothing manufacturing, technology, real estate projects, incubators, social apps in third world countries, legal help online, farm to table, etc. You get the point.
My question is why does everyone think they need to be angel financed? I am a big believer in building the product first, getting some traction and proving to the investor community that there is a business model there that will make the investors their money back and more. I have invested in many of those companies. It is certainly a risk no matter which way you cut it but at least there is some data that is appealing.
As an investor I really do think about the big picture. Does this product make sense? Does it fill a void in a marketplace? Do I see this as a company with potential to grow? There are so many companies that I see who have been funded that I am pretty damn sure are life style businesses not businesses that should be taking investors money unless of course it is friends/family or one strategic person.
What is going to happen in 2013? I hope the funding doesn't stop but I hope that angels become more focused (like the VC world will become). It is time for more people to do a little more boot strapping before they go out looking for cash.
I’m there with this thinking.Bootstrapping ain’t easy but it’s possible.What I like about it from an entrepreneurial perspective is that it is premised on focus, on discovering the one thing in every vision that connects with the market cause there is not time nor resources to do more.
exactly. it is the commitment not just the idea that someone put money behind.
Agree with you, but I can see why its hard to focus if you have to do other things besides your core startup to make money to live. People get funding since they want to spend all their time devoted to their company and if you don’t have personal savings it can be difficult.
Many companies in certain verticals never went out looking for cash. It is the times that everyone wants cash for their start-up. Yet most of these businesses will fail. Maybe there are not enough angels in different verticals.
It ain’t easy. It’s fashionable to be an entrepreneur but it’s just hard.Focus is everything.My favorite quote by Chuck Close, a personal hero, an artist who was paralyzed and then reinvented art for himself and changed the art world is:’Inspiration is for amateurs’It’s all hard. That’s why so few really do it and succeed, market conditions non withstanding.
Nice quote. It is so hard.
you should be handing out copies of atlas shrugged to these people
lol. that gave me a good chuckle
Is the average age/profile of people approaching you a meaningful data point?(I’m imagining young people with significant debt (student and even consumer) who don’t have the resources to bootstrap a business for any length of time…combined with the over-hyped media message to “be an entrepreneur.”)
the ages are all over the place just like the verticals.
It’s a really good question…I think it probably has a large variety of reasons, but more often than not, I think the simple answer is ‘because they can often get it’.In the past few years, more and more ‘ideas’ (that have no clear business; and no clear/proven winning team) have been getting angel funding…and so the general perception is that the bar is low for getting a little funding to give an idea a try…and I think that makes more and more people (who prob. have no business trying yet) try for it…
If you can do these projects without funding in the beginning you are just better off IMO.We all need advise, support and help. No one at an early stage needs someone impatient for results.
I mostly agree with you (getting as far as you can on your own is always the better approach in my book).The area I always personally struggle with is once something is built and starts to get a little positive attention it starts to need a whole lot more love/attention than just part time…but usually isn’t quite to a self-sustaining stage yet…for me that’s the *real* challenge — getting through the ‘needs full time but not profitable enough to be full time yet” period (which can be quick sometimes and other times can never end)…traditional bootstrapping challenge I guess (forces some decisions to be made towards ‘easy’ profit earlier than is prob. good for long term of some businesses but overall often makes for a stronger team/product).I often feel like ‘getting web scale or proper traction’ and ‘bootstrapping’ are two distinct paths that ultimately end in completely different places…if you’re interested in building a large scale web system bootstrapping the actual product doesn’t seem to work (at least I don’t know of any cases where they got to massive scale via bootstrapping the core business first)…perhaps the better question then is, why try to build ‘web scale’ at all? Why not just target bootstrapping towards lifestyle (and figure on a rare occasion one or two will explode out of that path into a web scale business)?
I’m not anti funding certainly!Market proof is not the same as traction either usually.And I think that sometimes you don’t have a model, you have a belief and the model develops over time. Hard to ask for dollars pre model. But often the largest companies start without any idea of what the $$$ formula will be.
For several reasons perhaps: Almost every text and every professor teaching Intro to business to MBA classes (along with publishers I may add) illustrate Angel as one of the primary examples of getting funding from an equity perspective for start up models. Along of course with their own funds and family…however it is the difference between VC and Angel definitions from a learning objective approach and there for power-pointed, highly lighted and tested on that sticks out in B School curriculum’s.Also perhaps media mags-print and online-(Inc, Entrepreneur, etc) constantly show case great successes and their Angel funding origins…it may be this has led to the misperception that Angels are waiting to fund the next greatest thing at all times, and we know that there are just a plethora of those who believe, for what ever reason they and their ideas are truly the next greatest thing…even when they are not. And in deference to others who are not very fortunate from a socio-economic perspective it just may be there is absolutely no where to go for funds…that said however, it leaves the question of how someone who cannot figure out how to launch and raise assets will be able to manage a start-up anyway.
It is legacy thinking. At one point in time, it was really expensive to create a tech company. The upfront costs were just too high for most and the risk profile too great for banks to support. This stuff was too cutting edge and innovative. Things like the Internet were totally greenfield and it was not all that certain the market was there. Thus the need for venture capital and angel investors.Fast forward, we are in an age when the Internet is ho hum. The business models and markets not so mysterious or opaque. The costs to build and scale an Internet based business is significantly less. Yet, many still operate like its 1999.I agree with you. Many startups simply do not need funding or are too early to even consider gathering a round. I see a whole class of these tech startups occupying this middle tier where they are profitable and growing, but not necessarily investment worthy. We need to explain to folks that this is a perfectly acceptable outcome, and that investors may not be the best route for these types of businesses (though could be of interest from a crowdfunding perspective).
Possibly a statistical function of the specific cohort approaching you for Investment consideration. Meaning the people who are bootstrapping, aren’t approaching you with their hand out.
The perception is that it is easy to get angel funding partly because the stories about people who do have gone so mainstream.But – co-incidentally(?) – there is a post over on Fred’s blog talking about how hard it is to get funding in the middle. Quote: “There are a ton of options out there for early stage funding. And if you get to the stage where you need a growth round from a big fund, there areplenty of options for that too. But if you are looking for a Series B round to help you grow from early revenue status to true growth status, you are going to find that challenging…To put it another way, there are plenty of us who fund hopes and dreams. And plenty of us willing to fund true success. At the stage where you are past hopes and dreams, where you have customers, revenue, and a real business, but have not yet reached “true success”, there just aren’t many investors to choose from.”And so, we don’t hear as many of the stories of people who have bootstrapped their way up to a working business model, gotten a fair amount of revenue, brand awareness and initial success, and then gotten funded.The other thing I can vouch for – as an entrepreneur who ran a non-funded business for 8 years and now is running a VC-backed business — it is ALL hard. (Which doesn’t mean it’s not absolutely wonderful also). And you do need focus. But before you get into the thick of running the business, before you are in the 24/7 whirlwind that consumes you – that complete passion and confidence and energy you have is everything. And these days, it’s easier than ever to do the upfront planning – it’s easier than ever to connect with really good teams of people, to find the comps, do the statistical modeling, do the research on vendors and manufacturing and systems implementations than ever before. You do your research, and at the stage before you actually do start the business – it all looks easy. You have an amazing idea, and you can connect the dots for the investors as to how it will grow tenfold because you can see it so clearly. And the investors can see it too.Once you are so immersed in it – well, it’s not quite that easy. You can still see how to connect the dots, but some of the dots have now become moving targets. And it’s also a little harder to extricate yourself from the day-to-day, stop the momentum you have, and go out and hit the pavements and do the rounds of VC meetings necessary to keep it going. Not that a good CEO shouldn’t be able to carve out the time to do so, but finding that time may not be as easy as it once was.Love commenter Awaldstein’s quote by Chuck Close “Inspiration is for amateurs”. I think that’s why.
Great information here. Thanks for this
Simple answer IMHO. Not everyone is in the situation or has the required resources (even though they might be modest) to bootstrap. It’s unfortunate for them in that case due to the very high cost of that equity but it’s reality for many.
.I could write you a book on this subject but I won’t.The modern notion of “angels” is the democratization of what had been heretofore a less well known and less publicized financing mechanism — the Country Club funding mechanism.Angels are, by and large, folks who have money but don’t belong to country clubs.I raised a lot of money at country clubs from country club members wherein the word “angel” never crossed anyone’s lips. I was a member of those clubs and therefore could navigate more easily.As I like to say — this generation did NOT invent sex.BTW, apparently sex was invented in the Stenian Period as evidenced by the fossilized remains of “eukaryotes” approximately 1 to 1.2 billions years ago. This in a comment on my blog “www.themusingsofthebigredca…”Go figure..
People don’t think about the consequences of raising money. The naive view is an angel is simply backing you and your vision, allowing you to follow it without personal risk. Bootstrapping can be really hard, as you’ve got one pool of money for both your business and your other interests, yours, and a lot of people aren’t up for that. Whether they should be starting a company if that’s their genetics, I don’t know.
I agree with you Joanne. I am amazed by the number of pre-beta startups focused on a sliver of a service or market (I have coined the phrase “build a product, not a feature”) that are getting funded.As we are building our business, we constantly challenge ourselves to make sure we are building a product. We also defined a very specific path for revenue before we starting building our product in a market segment where most of our competitors do not know how they will generate revenue. We did what Lisa mentioned. We did a lot of upfront focus and planning. It is not easy but, if you do the work, once you get the ball rolling, connecting the dots starts to fall in place. If they don’t then you should be reevaluating your concept.One thing I have seen is there are now a large number of amateur angel groups in the market place. When people hear about what we are building, they all want to have us come in and talk to them. These are non-tech focused people with no relevance to our product. I think this is happening a lot now and these groups are funding the companies Joanne mentioned. In later stage funding, the sources of capital are only coming from a more disciplined institutional investor or experienced tech executives/entrepreneurs and therefore it is much harder to raise capital.
Just for a different perspective, I think there are some business models where it makes sense to invest up front. The ease (and low cost) of building an app or website has perhaps made it seem like bootstrapping to a “minimum viable product is always the best way to go, but I’m not sure that’s always the case. Luxury branded products are one area where a minimum product probably isn’t really viable. The customer is not like a tech early adopter who is likely to forgive your bugs, but rather someone who expects a comprehensive and smooth product offering.Hybrid online/offline models are another area where I think real innovation can take real (and early) investment. In our case, we discovered that existing supply chains and manufacturing systems were the impediment to offering the high quality, customized products customers wanted. The only way to deliver this was to invest in a vertically integrated manufacturing system.One last point is that sometimes tech innovation does have real cost. Advanced visual rendering often requires a lot of technical photography to be done during development (and trust me when I say that ain’t cheap!).We were fortunate to be able to “bootstrap” this early investment because of prior successes (maybe I should start calling myself an “auto-angel” ha!), but I would hate to see other entrepreneurs miss out on the opportunity to innovate (and for angels to miss out on some potentially cool and profitable disruptive investments) because of a firm view that no start-up deserves investment before it can show solid traction.
2012 might also be called the year that angels (and some VCs) lost their discipline. Over valuing companies with a lot of cash chasing too few deals. I saw some crazy stuff and I stayed away. I made some (what I think) are good investments in 2012 so we will see. Rougher for angels to focus depending on the vertical, because it eliminates opportunity. Helps to have a diverse group to bounce things off of
You have an interesting portfolio. It spans from what I would consider relatively lower risk lower reward opportunities like Rick’s Picks (love them) to the high risk high reward go big or go home type opportunities.You say there is data that is appealing. Is it from one or the other?Because from my very, very limited experience to yours there are two markets going on.The first is that you have relatively low risk/low reward opportunities that are trying to raise money from people they don’t know without a current tangible offering. Its one thing if you know and love Rick’s Picks and think: this could really grow from where it is, but its another if its a plan without any validation trying to raise money from people you don’t know, that was never a market, but is now.The other is the very high risk if it takes off we are going to need to raise a ton of funding or it just flames out opportunity, where if you don’t have deep pockets for follow on and really hold to your pro-rata rights you aren’t going to get the return deserved for your risk. You also need to have a portfolio, and right now seeing how many of these are getting funded and the relative valuations the odds of future funding are much lower, and the requirement for a really big exit is higher..I agree nobody likes to hear bootstrap it, but there is something to be said for doing whatever it takes to get it off the ground. Its not the sexy choice, no you aren’t going to get a cool office, or get to play hipster, but you actually have more opportunities, and it makes you hustle.I have written before there are very few angels that span multiple decades and that’s because about every decade there is a serious wash-out. I watched the first in PC software/hardware in the early 1990’s, the internet one in the 2000, and fear we’ll have another here sometime soon, but of course you can’t predict timing.I think a huge part of it is right now people aren’t getting any return on their money and the stock market seems like a rigged game.
I met with an investor today who said most entrepreneur need to be thinking “How can I make revenue in the next 30 days” not “How do I raise the next round.”
I think 2013 is about showing that you can actually prove a revenue model. 30 day is a little insane but yes revenue.
The investor stated that entrepreneurs are reading too much TechCrunch and other blogs trying to build The Next X. Instead they should be focused on building something off their current skillset.For me I need to be building off leadership, project management, blogging/writing, social media and logistics.A business I could to do that could be bringing in revenue in 30 days? consulting crowdfunded projects who don’t know to move stuff from point A to point B.What do I need? A simple website, an email address, a descriptive name, a working phone and know how of 3PL, Amazon Fullfillment, Shipwire etc.
Yes, this makes sense for some startups and some business models but may not for others. The constant insistence that revenue needs to be proven to be funded fails to take into account the nuance of the type of startup and what the stage that they are in.For example, HealthyOut hard-launched 6 weeks ago and hit the top 10 of iTunes Food & Drink this week without any PR/marketing. That means we’re among OpenTable, Seamless Web and UrbanSpoon. Just got turned down from an angel group that insisted we have revenue traction. As the CEO, do I think chasing revenue makes sense at this stage? Not necessarily. I think the company would be better served by accelerating user acquisition and engagement. But given the trends in investing, we’ll start diverting resources from user acquisition/engagement to revenue (and by diverting resources, I mean asking my one developer to stop working on the next killer feature to implementing online ordering). Apparently reviews where users are publishing “I will pay for any upgrade you have” and the fact the online ordering market is proven and exploding market isn’t enough tangible proof for investors.As for why startups look to angels? For a mobile consumer play, we hear VCs don’t look at you until you get to a million downloads. Sure, a startup could bootstrap until then, but it’s hard…not just from a personal financial standpoint and watching your team convince their families to “not worry”, it’s hard b/c you *KNOW* you could get bigger, go faster and in our case, impact more people’s lives/health/nutrition if you had more resources. Sure, a lot of not so great startups get funded with the availability of capital at the angel stage, but some game-changing ones do too. We’re hoping to be in the second camp.
Wendy Mark republished an older post called Should Startups Focus On Profitability or Not December 27, 2011 which I believe aligned with your thoughts
To me that there are two main issues. First it seems from reading the news that the goal is to get funded. But really, the goal is to build a sustainable successful business because angle or vc capital is just a short term solution. Second, that you need to build a fully functional minimum viable products to test the idea.In the beginning there is unlimited amount of risk and limited amount of resources. The job of the entrepreneur is to identify risk and figure out how to eliminate it by doing cheap tests and then move forward. This is hard and is probably why so many companies fail and why so many entrepreneurs feel they need capital to really test their idea.
I’m bootstrapping but have been told to look for money at least 6 months before you need it. This means right now we have minimal traction. It’s tempting to not talk to anyone until we have tons of traction, but I’ve also heard angels/VCs say they want to see your progress over time. I guess this is why we’re starting to talk to angels without a lot of traction yet.