November 29, 2007

What Drives You

As entrepreneurs we are often asked why we are doing things by family, friends, and associates.  Many of them question our sanity.  For me, independence and knowing that what I am working on will directly affect my company gives me all the motivation I need.  However, everyone is different, and everyone has their own reasons for what they do.  As entrepreneurs, what drives you in your business, and what inspirations are behind your work?  Is it money, respect, family?  Who or what has inspired you while you have been working in your various endeavours?

I think asking ourselves these questions occasionally is helpful in making sure we are doing things for the right reasons.  An entrepreneur can quickly become obsessed with making money and forget the real reasons he started the company in the first place.  There are exceptions, but usually the most successful entrepreneurs stay grounded and focused on their goals they originally had for their ideas.  How have you kept your vision and company focused on your vision as you have grown?

November 19, 2007

Is your business a lifestyle business?

I had an early Monday morning meeting today with a member of the FundingUniverse advisory board that stirred up a few thoughts regarding the the type of entrepreneurs that we are attracting as customers.  As I have mentioned several times, FundingUniverse was initially founded with the goal to connect entrepreneurs to angel investors.  While we haven’t lost site of that goal, we have expanded our services to help entrepreneurs connect to other funding sources (including credit cards, lenders, banks, VCs, venture debt, and more).

One of the main reasons that we have done this is because we want to help more entrepreneurs get the funding that they need to grow their business and become successful.  There is a lot of research out there about the entrepreneur/angel market that suggest that only a very small percentage of entrepreneurs are successful raising angel money.  Here are some stats that I have picked up that I find very interesting:

  • There are nearly 5.6 million new startups each year in the U.S.
  • At any given time, nearly 1/3 of those businesses will be trying to raise money (~1,856,000)
  • Here’s the key stat:  it’s believed that  only 50,000 receive angel money (approx. 2.7%)

If those statistics are accurate (or even close to accurate), that means that only 3 out of every 100 entrepreneurs will successfully raise angel money.  Can you believe that?  So… now you can see why we have expanded our network of investors to include lenders, banks, VCs, etc!  ;)

Now… getting back to the title of this entry.  If your business is a lifestyle business (won’t scale to be a very large business — think $30-$100M in revenue annually — with the opportunity for an exit), then you automatically take yourself out of the running to be 1 of the 3 that gets angel funding.

Is that a bad thing?  Not necessarily… it can be a fantastic lifestyle (and you do have other options).  I’m just trying to accurately set expectations.  If you are a lifestyle business, we have options for you too.  They include:

  1. Bootstrapping
  2. Friends & Family
  3. Credit Cards
  4. Line of Credit
  5. Equipment Leasing
  6. Hard Money Loan
  7. Commercial Loan
  8. SBA Loan
  9. Venture Debt

Be honest with yourself and be smart about who you approach for financing.  Good luck!

November 16, 2007

Survey says? Involved Investors are Best

The Kauffman Foundation just released a study reporting that angel investors are making 27% on their investments over 3.5 years.

A few more interesting stats form the study:

  • 52% of all investments returned less money than invested
  • 39% of all portfolios returned less than the original investment amount
  • 7% of investments returned 10x the original investment, accounting for 75% of the returns reported in the study
  • Investors with experience in the industries they invest in typically received returns nearly twice as high as those with no experience
  • When investors did less than 20 hours of due diligence on a deal, they lost money 65% of the time
  • Investors who did 40+ hours of diligence prior to investment returned an average of 7.1 times their money (I learned today that the Tech Coast Angels do an average of 500 hours of due diligence before making an investment.)
  • Investors who provided mentoring and guidance to their portfolio companies one or two times per month received better returns on their investments

What does this mean to entrepreneurs?

You want to increase your investor’s return on investment as much as she does, so make sure she is spending time with you once or twice a month. If you don’t have an investor yet, look for those with a track record of spending time with their portfolio companies.

Look for investors who have experience in your field. It’s tempting to go for the easy money from the doctor or dentist who will just give you the cash and back off. Don’t fall for that trap. An investor with domain expertise will increase your return on investment as well as theirs.

Today I spent the afternoon learning at the feet of Luis Villalobos, the Obi Wan Kenobi of angel investing. He has invested in more than 60 companies, started the largest angel group in the U.S., started the Angel Capital Association, etc. Now he’s raising a fund to co-invest with angel groups throughout the U.S.

Throughout his presentation he stressed the importance of investor involvement in startups. He said that he has never invested in a company that was fully ready for investment the first time it pitched investors. Even during the due diligence phase, TCA members are working with entrepreneurs to shape their business model into an angel-ready one.

So if you’re looking for an investor, make sure he’s ready to get his hands dirty. If you’re an unengaged investor with an average portfolio, don’t just stand there — get involved.