6 Key Thoughts Along The Fundraising Journey (No3)

It’s Not All About Your Business Idea

(Image Courtesy of 123rf.com)“Good Ideas & Good Investment Propositions Are Two-a-Penny”

Yes, it really is true and yet many founders give the impression that they alone are holding the big ticket to success. The statistics show that the odds are heavily stacked against every milestone of business success that you are likely to encounter. From staying in business more than 3 years to procuring angel investment, the odds are not in your favour. Even if you do get investment, there are a million and one reasons why a business won’t achieve success and the statistics prove it. Angel investors are speculating their personal money, so don’t be naive and assume that just by the virtue of having a business idea or a business plan that you should automatically have the right to talk to investors. Business ideas that have not developed into an investment proposition are rarely worth the time and effort. My belief is that founders often feel that if they can just hook the investor with the opportunity then all other considerations will take care of themselves. Most investors that I know are too cautious with their money to hand it over on an untried opportunity alone. Most investors are not looking for good ideas (per se) but for ideas that have begun to prove themselves by gaining some form of business traction. The potential of the opportunity does not override all other considerations.

Investors are looking for people that have gone beyond just identifying a business opportunity, to actually demonstrating and validating it in the marketplace. Such ‘wise heads’ will often benchmark against real-world data that shows how much money they could return for an investor. If “ideas are worthless” (as Colin Willis of the business accelerator Ignite100 explains in the article link below) then what is worthy to an investor? My answer would be founders and entrepreneurs who know how to ‘configure an investment proposition’ and who have validated it as far as is humanly possible. There is always an abundance of investment opportunity out there for investors but an investment proposition is different, it’s an idea or an opportunity wrapped up in as much tangible market place proofs as possible. This proof is often referred to as traction or validation but more about this in article No4 – coming soon.

A few good articles loosely on the same theme…

http://www.growthbusiness.co.uk/comment-and-analysis/2129233/its-not-the-product-its-the-execution-stupid.thtml

http://www.forbes.com/sites/alextaub/2012/03/01/what-it-takes-to-raise-seed-stage-funding-in-2012/

www.timjoslyn.com/post/2400692301/funding-is-not-a-right

www.nebusiness.co.uk/business-news/science-and-technology/2011/07/01/why-your-idea-is-worthless-51140-28976859

http://blog.elegantbanners.com/2010/12/entrepreneurs-ideas-are-worthless-execution-is-gold

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About Aristos Peters
I work rest and play in the digital space, with particular interest in digital startup companies and their need for seed, angel and VC investment. As a NED, I have worked with several start-ups, taking them through funding rounds and also work on investment acceleration and business growth helping companies to become investment ready. Currently about to launch the startup fundraising app D RISK IT (www.drisk.it).

5 Responses to 6 Key Thoughts Along The Fundraising Journey (No3)

  1. This theme about “good ideas being two-a-penny” I hear again and again. No, they aren’t. Good ideas are rare, or (a) there would never be any start-ups (because all the established businesses would already have had all the ideas) and (b) I’d hear more good ideas (from established businesses and start-ups, or from politicians, journalists and charities).

    And angel/seed investment is all about taking risk with an idea, a proposition. Sure if the idea is non-obvious to the investor they’d like some reassurance it’s got real potential, but a business with traction can go to the bank, they have no reason to give away equity.

    Whenever I hear this sort of thing expressed around the UK investment scene I match it up with “why has the UK not created the Amazon, the Google, the eBay, the Facebook”. It’s because too few UK angel investors are ready to risk their money on a good idea.

    Is there a solution?

  2. Aristos Peters says:

    Hi Chris – thanks for your comment. Incidentally, I see your involved with crowdfunding. I have just set up an arrangement to utilise one of the main UK crowdfunding sites on some of my smaller deals. There’s a different aspect of focus in the crowdfunding arena and perhaps that influences your thoughts and comment. All interesting and valid. I work more at the angel & early stage VC level.

    I think there’s a reason why you probably keep hearing it again and again. People like myself see countless entrepreneurs on a monthly basis, very few of them have what would generally be perceived as poor ideas. The problem is not so much on the business idea being brought to the table but more with the entrepreneur’s ability to execute an investment proposition and this was really the main thread I was looking to draw out. Many entrepreneurs come asking for money with clearly a great looking idea and a business plan and think that’s it – deal done!

    An angel investor friend/colleague of mine spent most of 2010 looking for a business to put around £300k into. I went around various angel networks, followed up various leads passed to him but felt that even though he saw some potentially good ideas and good products, he ultimately passed on everything he saw because the founders hadn’t convinced him they could execute. In the end he put £30k each into two businesses, rolled his sleeves up and showed the companies how to grow organically and by bootstrapping. My colleague liked the idea but didn’t feel the founders convinced him that they could execute the whole investment proposition.

    Your last comment is a really good one, i.e. why has the UK never raised a Google or Amazon? I have no answer but could a simplistic response be because we have often pioneered in invention, whereas the US has pioneered in commerce and surrounded their entrepreneurs and commerce with a risk-embrasing venturing eco-system?

    I’m just about to embark upon my next article (#4 in the series). On validation and traction. I hope it again stirs your thoughts.

  3. I’m not exactly involved in crowdfunding, I just accidentally ended up co-chair of the newly formed European Crowdfunding Association 🙂 . I’m more involved in online protection for younger children (http://twoten.is) although we haven’t launched yet.

    It seems then there’s a different issue; not so much not enough ideas as not enough angels willing to put their money where their mouth is; if someone is an experienced investor, looking at a good idea/product with a half-decent business plan, and having some concerns about the execution capability, why aren’t more of them jumping in and saying “hey, nice idea; I think it could become a profitable business, but I think you’ll need some help on the execution. So I’m in, but on the condition I have some hands-on involvement”. Of course that would need the experienced investor to really be an experienced entrepreneur; although if they are not, how on earth are they making such judgements?

  4. A well asked question is half the answer and this post nails a very important topic that needs further exploration.

    Chris on your distinction between crowdfunding and more angels putting their money where their mouth is:
    Euboulia is the word the ancient Greeks used. It means something like good judgement in the absence of knowledge. Knowledge isn’t everything and often there isn’t time for us to gather lots of information and even if there is sometimes too much information can lead to paralysis (see thin slicing in social psychology). Often life demands that we have to use our intuition.

    I don’t think it is entirely a different issue therefore. I think Aristos was hitting on a deeper point. Often the crowd is wiser than the expert. There are some projects that are going to lend themselves better to crowd funding than going the angel & VC route because businesses like Kickstarter have opened up a range of options that afford smaller units of investment. This in turns opens up the economy to many more people and allows for communities funding as a composite customer.

    Now from the other side:

    A good entrepreneur will only ask for money when she needs it. A great entrepreneur knows how to build relationships with investors and facilitators over time because that’s how they build the groundwork of trust. We build trust every time we converse. This in turn produces an environment more likely to render positive opportunities; less luck more sagacity equals the best serendipitous encounters. Those who spend time building this strong foundation and who are open to finding these unexpected results are the ones who find the best opportunities.

    Now let’s go back visit that well trodden path of ideas versus execution. This is a complex issue that won’t be resolved here, but I’ll give it my best shot.

    I take as my assumption that ideas come from nature, nobody really owns an idea. Our expression of the ideas we see is our unique perspective on them, it’s a reduction of the idea itself. In a sense we’re all looking at the same sky, each of us from a different angle, some of us paying more attention than others. Recognising one good idea is pretty meaningless, but seeing a wealth of ideas and being able to keep them coming in many different contexts, in response to different needs is the real skill in being a so called ‘ideator’. Ideas don’t turn up on demand they come to you on the train or while you’re out on a stroll. That’s the nature of ideas, you have to be willing to receive them not good at producing them.

    I have an Evernote folder with thousands of ideas that I have been writing down over the years. I think because I started writing them down my mind just kept seeing more and more.

    So why doesn’t the UK have a Google or a Facebook?

    Too many people are looking to make a fast buck around here. You have to keep one eye on the short term and the other on the big 10 year vision. Anyone can play the game of ‘wait and see’, anyone can play it safe and wait for an idea to gain market traction, but what about opportunity cost? Surely the real talent in investing is about seeing the big picture, recognising the importance of narrative. The past is not always the best indicator of the future, sometimes it just comes down to exercising that good judgement and having the courage to work with an entrepreneur not just because of what she is doing but why she is doing it. Then, as Chris you rightly point out, working with that entrepreneur, complementing their skill sets to make it in to a reality. Fixing the problem should be the focus above all else. If the world believes in the vision the money will come.

    I had a whole section on ‘money is time’ but I don’t have enough time to say it! I will put all this together in to a blog post. But we should definitely keep this conversation alive. It’s too important to ignore.

    Aristos check out, if you haven’t already, Mark Suster’s thoughts on investing in dots not lines.

  5. Quick correction, Mark Suster’s article was on investing in lines not dots and not the other way around. 🙂

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