I haven’t really done enough investment activity yet to feel that I warrant the title business angel but enough of my business partners and colleagues are and it is from my experiences working with these guys that has prompted me to put this post together. In my dealings with various investors, VC and institutional funds, I often review and discuss business plans and meet with founders to look at the proposition they are setting out. Below are some of the things I sometimes see that get the alarm bells going….
- Delusion: This is a hard one. When I am deluded, I often don’t know it and I rarely want to hear from others also that I am deluded. We want to push ahead with our business vision but if we are not careful we can do so at the expense of some sort of validation that shows others feel that what we want to create is genuinely wanted. Validation may come in the form of, customer expressions of interest, viability of being able to actually create the working model and the greatest validation of all… sales. Investment viability delusion can manifest itself when there is very little measurement or detail in the narrative of a business plan. Lofty ideals, a great deal of marketing spin, name dropping or avoidance of plotting detailed investor returns. For me these are all clues that a particular business still has work to do before they will gain serious investor attention. Here is a fantastic website (indeed resource) called Venture Hack which talks about building just enough (the Minimum Viable Product) to get validation, before you spend too much of yours or your investor’s cash.
- Lack of Realism: Bit similar to the previous point but I wanted to make another similar point. It is ok to admit the difficulties and weakness of your business proposition. I recently pointed out to a founder that he had built a whole chapter of his business plan around various 3rd party suppliers, dressing them up as though they were somehow in the company and on the payroll – trying to beef up his headcount. If you cannot describe your weaknesses, or you even avoid discussing them at all costs (because for sure they are there and investors will be expecting them), then investors may get the feeling that they will never get straight answers from you when they need them; they will perhaps feel that they will be treated to a constant stream of spin instead. Try to be open about your weaknesses (your SWOT analysis is often the place to do this) and say how you hope to address them, or at least try and demonstrate how a potential weakness might actually be a strength also. I distrust business plans which fail to talk about potential weaknesses without a degree of realism and humility.
- Product, product and more product. Some of the worst business plans are the ones that are majorly weighted towards describing the product or service in detail, with scant follow up detail on 1. how the business will go to market (It’s a scary thing to hear a founder with technical development skills and no startup experience, only a corporate background, say how they will ‘buy in’ the operational management team, as well as sales and marketing personell) and then 2. exit and provide returns for investors. ‘Product’ is safe territory for the founder and it is quite common for a founder to wax eloquently on their product but then go lite, talking broad sweeping strokes when it comes to sales and marketing. Their enthusiasm for describing the product they have invented or dreamed up is not matched with equal detail and enthusiasm for describing both the revenue streams or how the business will exit.
- Comfortable salaries: The exit should be at payday. The investor of your first round is not looking to supply a comfortable wage. Businesses that go lean and bootstrap (especially pre-revenue ones) warm the cockles of an investor’s heart. You have to show that you are in this for the long haul and not looking for just a comfy job with a nice salary. They want to know that you will eat locusts until exit day when from thereon in you can have caviar until your heart’s desire.
- No mention of IP protection. There’s others that could write so much more on this than me but one tip I have been told is a good idea is to maybe put IP in a separate company. This is a measure which can protect the IP in the event of a fail and therefore the assets of a company will be protected. Either way, make sure you have both a short term IP strategy that looks to procure revenues from IP opportunities and a long term strategy that positions and tempts any future investors or trade sale partners for IP acquisitions.
- Big picture vision but no detail. No ‘from here to there.’ Some entrepreneurs are lucky, their vision is really game changing and their pedigree would mean that investors might be willing to buy into their vision, even if they only have a broad outline of how to revenue it. For the rest of us we have to convince, cajole and persuade by means of endless due diligence rounds, questionings and presentations of various data, showing that we know how every bit of revenue will be made and from which revenue streams, why the monthly burn rate is so high and why we think we will get 1000 customers in month 4 and not just 500. It’s not about proving the accuracy of these facts because at the end of the day they will only be predictions. It is more about showing that you have tried to benchmark against other available information – perhaps a previous startup that has built a business in much the same way as you are planning to.
- Skin in the game – Are you investing also? Recently I spoke to a founder that wanted me to locate a sum from investors for a niche employment website. He had built a prototype and built a small following that had expressed membership interest in his website idea. He told me that he had no capital and could not put any money into the development process alongside an investor. My reply was that this might be a tall ask if he was putting ‘no skin in the game.’ I suggested that it might be possible if he could split the investment required into 2 tanches, the second being triggered on him hitting a sales target. The founder almost went pale when he realised that he would actually have to get close to the sales figures he had put in his business plan, otherwise his business would fold. It made me realise that the founder probably didn’t really feel the sales targets were achievable. Performance related investment – a common tool of the investor.
I hope this has been an interesting read and I’d be interested to hear any thoughts or experiences form anyone who has read this.
