Should you take VC money or Angel money?

作者：Dan

I meet with a lot of entrepreneurs, and invariably this question always comes up in one form or another.  I think I have a pretty good perspective on this because I’ve been on all three sides of this question: 1) a professional VC, 2) an angel investor and 3) an entrepreneur facing this question for my own business.

There are both pre-investment issues and post-investment issues to this question.   Post-investment is a lot more nuanced and maybe I’ll tackle it in the future, but not right now.  The pre-investment issue can be summed up very simply:

Raising angel money is like trying to find a date on Hot Or Not.  Raising venture money is like trying to find a life partner on eHarmony.

If you’re "hot" (like this picture of Miss America 2008), you’ll very quickly get lots of dates / investors. 

You may not ultimately like the dates you get, because they only like you because you’re "hot", and if you stop being hot they move on pretty fast.  And always remember that different people find different looks "hot", like this picture of a New Guinea tribal woman doesn’t appeal to me but I’m sure it does to New Guinea tribal men.

If your business is something that people well-schooled in the industry and market you are going after would find really exciting, AND you have the time and patience to spend a lot of time getting to know each other (because it will take a while),  then you may be better off going after professional VCs who know your market and are looking for long-term relationships (i.e. submit your profile on eHarmony).  For example, Tina Fey’s humor, intelligence, style and looks aren’t for everyone, but they sure do work for me (which I’ve fully disclosed to my wife!)

Food for thought when picking an investment route….a fun way to think about a serious topic!

NOTE: I fully disclose that I’m plagiarizing this concept from someone else, but I can’t remember where I heard it so I can’t give appropriate credit, so Thanks to whoever said it first.

【好书推荐】

对于VC投资来讲，最好的回报是不是发生在黑天鹅身上呢？

对于创业者来讲，最适合的商业模式也许并不是你一直坚信的那个方向。

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精彩摘录

ü 对待历史问题，人类思维会犯三个毛病：假想的理解、反省的偏差、高估事实性信息的价值。（第6页）

ü 历史和社会不会爬行，只会跳跃。它们从一个断层跃上另一个断层，中间只有很少的摇摆。（第8页）

ü 错误地把对过去的一次天真观察当成某种确定的东西或者代表未来的东西，是我们无法把握黑天鹅现象的唯一原因。（第34页）

ü 正面的黑天鹅事件需要时间来显现它们的影响，而负面的黑天鹅事件发生得非常迅速——毁灭比缔造要容易和迅速得多。（第36页）

ü 有时大量信息会变得毫无意义，而少量信息却具有非凡的意义。（第44页）

ü 现代世界是极端斯坦，被不经常发生及非常不经常发生的事件左右。它会在无数白天鹅之后抛出一只黑天鹅。（第47页）

ü 你需要对正面黑天鹅现象发生的概率有些视而不见，才能获得创业的成功。（第70页）

ü 我们冒险通常不是出于自信，而是出于无知和对不确定性的无视。（第91页）

ü 一旦形成一个观点，我们就很难改变，所以那些推迟形成观点的人更有利。（第115页）

ü 如果你用线性方式解释过去，你只能朝一个趋势继续。但未来对过去的偏离有无数种可能。（第153页）

ü 有些真理只有孩子能看到，成年人和非哲学家被现实生活的琐碎所囿，不得不操心“严肃的事情”，于是为了一些看上去更重要的问题抛弃了洞察力。

ü 我永远不可能知道未知，因为从定义上讲，它是未知的。但是，我总是可以猜测它会怎样影响我，并且我应该基于这一点做出自己的决策。（第171页）

ü 我们很容易忘记我们活着本身就是极大的运气，一个可能性微小的事件，一个极大的偶然。（第243页）

Angel Investor Best Practices

对于所有希望做天使投资和打算找天使投资的人来讲，必看之

I came across this 200-page document today which is a very detailed manual of best practices complete with a glossary written by and for angel investors.  It’s not only great reading for those who are new to angel investing, but it’s must read for any entrepreneur looking to raise angel money.  Why?  Well it’s always helpful to put yourself in other’s shoes to see what they’re trying to achieve and when it comes to angels, there’s no better way to get into their shoes than to read this.

Angel Investor Best Practices

Read this document on Scribd: Angel Investor Best Practices

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天使投资系列文章

The really interesting story these days about tech exits is not the small number of really big acquisitions, it’s the big number of smaller acquisitions. For the typical entrepreneur and angel investor, these smaller transactions are an excellent way to make several million dollar capital gains and should be part of every company’s exit strategy.

I’ve written before on why this is a great time to plan an early exit. The tech M&A market is hot. Big companies know they are better at acquiring than developing new ideas in house. And big companies have lots of cash.

The financial media, and most bloggers, write about the really big startup exits like Club Penguin, YouTube, Skype and MySpace.  Those are certainly exciting exits and great startup stories.

But for the other 99.99% of entrepreneurs and investors, the really exciting news is the large number of tech startups being bought for under $30 million. Many of these exit transactions are so small they aren’t even press released. In my own portfolios, where I have been generating some solid early exits, recent transactions have been in the $15 to 30 million range.

Several smart VC bloggers have also been writing about this trend over the past few years. I tried to find some quantitative data to illustrate what’s going on in early tech acquisitions, but I wasn’t successful. (I found one database that looked promising but didn’t feel like parting with several thousand bucks to back up this post. I also figured that many of the smaller transactions wouldn’t be included anyway.)

The best reference I found was an article by Om Malik titled “The New Road to Riches” which was in Business 2.0 a couple of years ago.  He reports that the Mergerstat database, which includes about 5,000 tech acquisitions per year, showed an average selling price of $12 million.

I spent some time on Google searching for recent acquisitions of tech companies and quickly pasted this list together. Most of these are pretty big successes that millions of us use every day.  They are also great startups that all sold for $30 million or less.

• Google bought Adscape for $23 million (now Adsense)
• Google bought Blogger for $20 million (rumored)
• Google bought Picasa for $ 5million
• Yahoo bought Oddpost for $20 million (rumored)
• Ask Jeeves bought LiveJournal for $25 million
• Yahoo bought Flickr for $30 million (rumored)
• AOL bought Weblogs Inc for $25 million (rumored)
• Yahoo bought del.icio.us for $30 – 35 million (rumored)
• Google bought Writely for $10 million
• Google bought MeasureMap for less than $5 million
• Yahoo bought WebJay for around $1 million (rumored)
• Yahoo bought Jumpcut for $15 million (rumored)

Why is this happening now?

One of my friends in a Fortune 500 company explained it to me this way (paraphrased): We know we aren’t good at new ideas or startups. We basically suck at building business from zero to $20 million in value. But we think of ourselves as really good at growing values from $20 million to $200 million or more. It’s a different skill set than starting things. If we see an acquisition priced at $100 million, then our view is that it’s already out of our sweet spot for adding value. But at $20 million, it’s really easy for me to get it approved.

How should this affect the exit strategies for entrepreneurs and angel investors?

It seems pretty clear that the optimum strategy for tech startups today is to design the company, and its corporate DNA, so everyone is aligned around the idea of an exit transaction in the under $30 million range. The good news is that these exits can often be completed in just a few years from startup. They also have a much higher probability of success than swinging for the fences and hoping for a big NASDAQ IPO.

This exit strategy is nicely summarized in “The New Homerun” by Tom Stein in Mergers & Acquisitions magazine, May 2008. He said: “Startups must be content with hitting singles or doubles, that is, a buyout of $50 million.”

As an angel investor that works well for me. What do you think?

A Few Thoughts, Pre‐Pitch…

Where possible, research the investor or firm you are meeting with. Tailor the presentation to their affinities. Why might there be good synergies? What past investmentshave the made they complement your work? Do they blog? Are there specific things they are looking for in potential investments or entrepreneurs? Call someone at one of his or her portfolio companies (it will trickle back to them and make you look good).

• Let the CEO lead all talks but have someone highly technical there for reinforcements and specific tech‐y questions.
• If at all possible, wait until you have a demonstrable product (i.e. a working alpha) before starting the pitch process. Many VC’s now will just want a team background and to then see the product. They may not even ask for the deck.
• Make sure you pack any projector converters you will need. Ask an assistant ahead of time to confirm whether you will have wireless access, only if you need it.

Four Steps to a Great Pitch:

1. Tell them what you are going to tell them: Show them where you are going to take them, on the title slide.
2. Tell them how you are going to tell them: Have an agenda slide and stick to it.
3. Tell them: make sure the body of your presentation always reinforces your opening point.
4. Tell them what you told them: wrap up, recap and go for the close

Obvious, but make sure you can justify/defend your underlying assumptions in the financials. Need an example of how to create financial projections? Guy Kawaski links to an excellent example. You can even download the template! Guy Kawasaki on the 10‐20‐30 Rule

Possible Format for Power Point (Using Key Note may be better):

1. Cover Slide: Logo, name of presenter, date. Spice it up with a quote from a well known authority justifying the need for someone like you, or you specifically
2. Intro Slide: List key team members. Have you raised some money already? Verbally describe the story of how you all came to be; the company story. Prove you come from the community you aim to serve. Two attributes most VCs look for in a founding team ‐ deep tech skills and capable sales skills, so stress these.
3. DEMO: Show the investor something visual (prototype/wireframes) so they can see what the hell it is your working on
4. What Do You Want? Amount Seeking, etc. Be realistic and know EXACTLY what you are going to do with the funds once they hit the bank account
5. Team: Give each team member a slide with small picture. Skip these slides during the pitch if it seems like overkill
6. Problem/Opportunity: What problem are you solving? Why is it important? A personal anecdote is always good. How big is the market opportunity you are pursuing and how fast is it growing? Do you have a credible claim on being one of the top two or three players in the market?
7. What is the Revenue Model? How do you make money? What is your revenue model? What is required to become profitable?
8. Solution: How does your product or service fix the issue(s) from above?
9. Technology:
10. Marketing:
11. Sales:
12. Competition:
13. Milestones:
14. Contact Page:

After you have your PowerPoint, draft up a one‐page executive summary. This is all you will need. Check out Venture Hacks for Advice on what to send to an investor. Don’t bother asking them to sign an NDA. You also may want to create a high concept pitch.

To Help Drive Content & Refine the Message

What Union Square Ventures looks for:

1. A technology enabled service business
2. Potential to change the structure of markets
3. Information technology leverage
4. Data asset (Defensibility)– At Union Square Ventures, we look for companies that have a data asset. We think that the most valuable data assets are created when users interact with services on the web.
5. A Strong Management Team

What Union Square DOES NOT invest in

What Charles River Ventures Looks for:

1. The team, its authenticity and empathy for the user experience. Do the founders speak the language of their customers? Do they empathize with their customers’ pain? Do they feel passion for their users?
2. Unfair advantage. This is the elusive secret sauce that sets you apart from all of your competition. What about your business and your approach can’t be done by anybody else? Unfair advantage can manifest itself as proprietary and differentiated technology, a superior business model, an incredible team iterating on past success solving similar customer pain, or a network of relationships that drives down customer acquisition costs.
3. Attractive market. Let’s imagine that I’m the most cynical financier possible and the one and only thing that matters to me is delivering economic returns to my investors. I’d be looking for businesses that served the entire world population and whose customers were completely price insensitive.

What First Round Capital Looks For

Be prepared for questions. Review Guy Kawaski’s, 9 Questions to Ask a Startup:

1. How many outstanding shares of stock are there?
2. What is the monthly burn rate?
3. How much cash is in the bank?
4. When will the company achieve positive cash flow?

Thanks to Sam Huleatt from LeveragingIdeas.com for permission to reprint his ‘Pitch Monster’, good stuff!

New Data on Angel Investor and Angel Fund Returns

Every year, angel investors and venture capital funds invest about the same amount of capital — around $25 billion in the US and $3 billion in Canada.

When it comes to returns, there is a great deal of information available on venture capital funds, but almost no information on angel returns.

Fortunately, the first large scale study on angel investor returns was published this week by the Ewing Marion Kauffman Foundation and the Angel Capital Education Foundation.

The study was authored by Robert Wiltbank of Willamette University and Warren Boeker of the University of Washington.

This was the largest study of angel investment returns ever conducted, analyzing results from 86 organized angel investor groups throughout the United States, involving 539 individual angel group investors who have experienced more than 1,130 exits in which investment-receiving companies were acquired, went public, or were closed.

Average Angel Investor Returns

The study’s results showed that, on average, exits generated 2.6 times the invested capital in 3.5 years from investment to exit.

The angel investors achieved an average 27% internal rate of return on their investments.

Angel Fund Returns Website

While even less data is available on Angel Funds, the very new www.Angel-Funds.com wwebsite has been launched as a medium for angel fund managers to present their fund returns. The website shows returns for funds that are in the same range as those reported by the study on angel investment returns.

When comparing the fund returns to angel investor returns, it is important to remember that fund returns are reduced by tax, expenses, and the equity participation, or carry, of the fund managers.

Comparable and Confirmed Returns

These angel investment and angel fund returns compare favorably to those of other private-equity investments, including early-stage venture capital, which is probably the highest performing equity asset class of all. Some data on early stage venture fund returns is available here.

The results cited in the angel investor study and on www.Angel-Funds.com confirm what angel investors have known intuitively for a long time - if you invest early, and make non-monetary contributions by mentoring or serving as a director, the returns from early stage investing can be very rewarding.

Download the Angel Investment Returns Study

The Kauffman Foundation study on angel investment returns can be downloaded here.