Angel investor: Want my money? Here's my checklist | Hacker News Reader

Angel investor: Want my money? Here's my checklist

alleyinsider.com

68 pointspakafka45 comments

The problem with this list, in my mind, is that it's a checklist of descriptions of a successful company.

If the signs are this obvious then the valuation would already be high enough to be unattractive to an angel.

I've done some (roughly 8 deals) angel investing myself, and prefer to look for something market-shaped; matching buyers to sellers, or similar; a team I would seriously consider working for; and a working prototype for me to look at.

The first is because that's the kind of thing I like to think about and because I think those tend to be scaleable businesses, the second is because as an angel I want to actually spend time for them, and the third because I think most powerpoint presentations are crap.

There are some additional parameters around investing (like how much the valuation is) but I'd much rather help an entrepreneur who is going to shoot for the moon.

It's similar to Sequoia's "Elements of Sustainable Companies", but well, not as focused:

http://www.sequoiacap.com/ideas/

(Currently down, Google cache below)

http://tinyurl.com/4byylj

I really like the Sequoia list -- perhaps because it's like a point you can look at and aim for when trying to sort out business ideas.

I'm just saying what works for me. But I'm also looking to have fun, etc. I'm reasonably sure I don't want to be a VC...

I meant the "problematic" list -- not yours. What you said jives with what I've heard from other angel investors -- that it's more of a gut feeling / labor of love than a calculated investment.

Ever thought of moving back to starting up again?

Yeah. I'm much happier working on products. I'm not going to be a full-time investor -- I'm not suited for it. I mostly started out doing some angel investing to see if it was for me.

I think the main problem here is that I see problems and I immediately want to solve them. The goal for an investor is not to find and solve good problems but to bet on good teams. As Josh Kopelman says, it's about the chef, not the ingredients.

So mostly you end up saying "no" a whole lot. If you give an explanation as to why you don't like it, many entrepreneurs will simply change the details and then expect money, so you can't even generally give a reason. I think I spoke to north of 90 companies to consider even the eight deals I have done. Between that and incoherent summaries, MBAs with just a powerpoint deck, etc, I just get too tired.

I disagree. The first list is. The latter list:

# Initially sells to the enterprise for branding, credibility, awareness and early revenues

# Can get to revenues within 6 months, tops

# Is sold on the basis of ROI, e.g., helps generate revenues or reduce headcount/costs

# Integrates easily with existing platforms and/or programs

# Either leverages existing open source programs or can itself become partially or fully open source

# Has multiple revenue streams, e.g., software, maintenance, services, etc.

That's all describing a particular kind of business. It actually seems like it's describing a reasonable sepcific area: tech/service hybrid focusing on large-ish b2b clients.

It's not bad for an angel to focus on one subclass of business models that he feels capable of understanding and judging.

A business that has an inherent call option, that could boost its base-line exit value by at least 10x

I will go ahead and expose my novice status and ask: what is an inherent call option?

It's just a financial vernacular. Call option is a type of a contract that gives the buyer an 'option' to buy the underlying instrument (a derivative or a stock in this case) at a later date at a specified value. Simply put: the buyer will profit if the value of the company increases.

So all he's is saying that he is looking to invest into a business that will rise in value over time and that will be sold to a third party – "an inherent" part – and he also means that he's not looking to invest in "lifestyle"/"we'll pay out dividend"/"37sig" type businesses. And the last sentence fragment is self explanatory: he expects the value of the company to increase the value over time by at least 10x so he makes back roughly 10x on his investment (roughly since it doesn't really work out like that with IRR).

I thought it meant mean that in the event of success, he can increase his investment.

Not sure if that's exactly for the YC crowd. While everyone would love to have a multi-million dollar business, the reality is that there are a lot of smaller good ideas that don't need $1mil+ funding.

I think YC takes a better approach in the way of financing. However, I think YC forces a group to be extremely frugal and thoughtful in their fiscal decissions. I think receiving large funding may lead to improper investments to younger entrepreneurs; but that's just my $0.02.

I bristled at this: "A business that needs no more than $1-$2 million in financing to become a $25-$50 million (exit value) company, simply by executing the core business plan."

That is an insane requirement for return. I'm not sure how that's even possible - or if any company has even managed to do that. Someone prove me wrong?

I'm sure plenty have managed to it. Iirc, Omnisio had less funding than that and sold for $15 million to Google.

Broken thread, see http://news.ycombinator.com/item?id=324853

$25 million is a lot of money, but so is $1 million in funding. Most web 2.0 companies need no more than $100k or so to get to profitability, and can easily exit at $2.5 million. Same ratio, but it sounds a lot more achievable. So the only real issue is scale.

Bear in he's talking about enterprise software (i.e. support contracts, custom software, consultants). When you start doing custom work and get paid by the hour your revenue goes through the roof. So you can get to a $25 million valuation pretty easily, if you're willing to be a software/consultancy hybrid.

This is not the sort of situation I would invest in. If you are billing by the hour, it is unlikely to be a leveraged business, and the investment return is unlikely to be as comfortable. Additionally, due to the smaller size, there would have to be many, many investments; it's hard to find many of very good quality.

That tends to be the cash-cow that enterprise software vendors grow into (SAP, Oracle, et al), though I agree that it's not the place you want to target from the get-go. It probably does have some seductiveness if you're boot-strapping.

It's very hard to sell to large sized enterprise without supplying custom work. You're right that the custom work isn't leveraged, but it's a prerequisite to get your product installed into their (often silly) IT structure.

This only requires a portion of your engineering and support resources, and there is no reason you could not establish strong ties to an existing consulting organization to be the "consulting services" arm of your company.

We're trying.

It seems like the core message (apart from getting to profitability quickly) is pretty important to YC startups keen on getting acquired - "in a poor economy, companies really need to find better, cheaper, and more efficient ways of operating."

In other words, stop making widgets that turn your Facebook friends into zombies and start creating ones that make it easier for people to sell or make things.

In other words, stop making widgets that turn your Facebook friends into zombies and start creating ones that make it easier for people to sell or make things.

Or make it easier to be informed (saves time).

>- "in a poor economy, companies really need to find better, cheaper, and more efficient ways of operating."

The economy isn't that poor, though. Ignore the headlines. Watch GDP, GDP per capita, and unemployment. If those things aren't going negative, then people are still going to spend money.

Politicians live by demagoguery and fear. Businessmen should look at facts.

dhuck, let me clarify. what i am looking for is a clear path to that level of an exit without a company needing to spend more than $1-$2 million. this means getting customer traction, market validation, and revenue momentum. However, I acknowledge that some businesses require a B round to get there. I don't view this as a problem. What i do view as a problem is needing $5-$10 million before you can say "this is a viable business with an attractive exit opportunity." thanks for raising the point. roger

Everything you said makes sense. In fact, I think your requirements should apply at all times, not just during tough market conditions. There's really no excuse for startups not to be lean, agile and cheap. Maximizing output from scarce resources is what entrepreneurship is all about.

So can we get in touch with you re: funding? ;-)

Just to be sure-- does your list have an unstated requirement of "...and also has an office in New York" (or other specific location)?

If not, that's great! If so, I think it's fair to include that in your criteria if it's important to you.

Couldn't agree more with the idea with about ignoring companies that say they need $5-$10 mil in order to be a "viable business." Today's companies (look at ycombinator) can do that with much, much less. $1-$2 mil seems like a good level - more than I would personally need! :)

To restate/clarify my original point (messed up the thread, my bad): getting a valuation of $25 mil to $50 mil, with a TOTAL investment of $1-$2 million is very hard. Google and a few choice companies may have done that, but I think that's definitely the exception. A lot of good companies are out there that aren't Googles (take over the entire market in 5 years) that deserve investment, as well.

These investments might not produce a valuation of $25-$50 mil after 5 years (like Google, etc etc) - but maybe they would after 10, 12, 15 years. This is where I think we agree.

...so you want to invest in businesses that will deliver good ROI in a short time. Makes sense.

It seems to me that the hardest part about implementing an idea is probably figuring out how to make money out of it and, since that is something (smart) investors require for starters, my question is: How does one come up with a business model for, say, a website for monkey owners to ask questions about their food (not the owners', the monkeys' :))?

Is the grand majority of websites limited to rely on advertisement or are there some constructive guidelines to help in this subject?

Generally, I get the sense that you can either come up with a new business or a new business model. Both at the same time is rare.

Interesting point. I'm currently working on it. My impression is that it takes as much effort to design and implement the business model than to design and implement the product (idea). Another conclusion I draw from this effort is that it requires different skills and competence. It would be unusual to be good (or preferably the best) in all domains, but I believe it is possible.

My rule of thumb, to be successful in each domain, is to explore zones left in the shade (disregarded) and find something new and profitable. This applies to the idea (solving a problem) as well as to the business model.

A good strategy to be creative is to identify the assumptions we make, check their validity and see what comes out when you change them. Combine this with the appropriate combination and exploitation of the fundamental forces in play (assuming one has taken the time to properly identify them), and you can come up with a revolutionary and disruptive business model. If you manage to be very objective, rational and exhaustive in the exploration and evaluation process, this can work. (I hope I can prove it soon :] )

I see the startup community as an ant colony, following main tracks as a flock and just explore a bit away from the main paths. If one wants to increase the chance to discover something really new and disruptive, one has to follow orthogonal paths which means calling back into question common assumptions and habits. Otherwise you'll be in competition with zillions other ants, most of them being much more efficient and competent than we are.

Exactly. Thinking outside the box is usually not easy; you have to be able to abstract yourself from the domain you are considering, otherwise you are biased from start and might miss obvious information.

I find it interesting that he is interested in enterprise ROI types of technologies. Something I think is undervalued here at Hacker News.

I don't know that enterprise technologies are undervalued at HN, as much as they often cater to a smaller market. My side project (to my main start-up which is my main side project) is enterprise focused, and I'm sure I'm not the only one. But enterprise is rarely as interesting as consumer. Doesn't mean not useful or interesting, just not AS interesting.

ROI is the key concept here to me. In a down economy, being able to save people money is a huge asset. If you can directly measure the benefit to your customers that's even better.

Does this mean that the enterprise is back in style again?

Enterprise (or paid small-business services) always comes back in style in recessions. Look at 2002: the two big IPOs were PayPal and LoudCloud/Opsware. It's because ad spending - and particularly, ad spending in unproven mediums - tends to fall dramatically when money is tight. It's the first thing to go, well before productivity enhancements.

Of course, this means that for entrepreneurs starting companies now, consumer may be the way to go. It'll take a couple years to ramp up, and by then, the field has been thinned because investors only want to invest in enterprise startups. So there's more chance of the surviving companies getting the consumer attention they need to survive.

Sucks for people (like me) who started consumer web startups in 2007, though.

> Sucks for people (like me) who started consumer web startups in 2007, though.

Do you have anything you're working on now, Jonathan?

Right now, I'm pulling pieces out of GameClay, polishing them up (including writing docs & tests, and code cleanup), and releasing them as open-source. I expect to be done with that in a week or so, though. Then I'll either try my luck in the salaried job market or start another startup.

I don't understand why this is supposed to be a bad time to monetize through the customer. Maybe it's bad if you are relying on getting advertising revenue from indiscriminate advertisers in the mass market, but....

We're doing something consumer focused and are close to breaking even on content costs after about a month in beta with less than 500 users. We're planning to increase our ad spending significantly, and I couldn't care less if our customers spend less money overall as long as we are their best option for the product we sell them.

I could see this being a problem if you have to position yourself as a cheaper, better alternative to established competitors to survive, but the issue there is more about branding than business model; can you move from being a low-cost play into being a premium brand if you need to cut revenues to compete in a crowded market?

Just build your product into the best product it can be and you'll change the market. Let others worry about competing with you and focus on giving people tons of value for the money they give you. As long as the market exists, you'll do ok.

Our problem was really that we were a "vitamin": something that was kinda-sorta-tangentially-useful, but didn't solve a clearly-defined, pressing pain point. Which is really my screw up and not the economy's fault, but the point is that a strong economy can mask these problems ($500M valuation for Slide?) and let entrepreneurs get away with startups that really shouldn't exist.

I suspect that there are still many entrepreneurs in a similar boat - as recently as a month ago, there were "Critique my startup" posts that presented startups that really weren't all that useful, and YC has funded a couple that in their present form are pretty weak.

Causation or correlation?

ugh, here's a better idea, i'll self-fund so i don't have to indulge stupid cunts and the lists they scribbled down in the business section of barnes and noble

if things were nearly as much of a lock as this person demands, i sure as shit wouldn't have to slum it with angel funding, i could go to a marquee vc firm

I agree. Being an angel is, in my mind, about belief. If value can be easily demonstrated, the valuations would be higher.

I don't think it's about being demonstrable. Start with plausible. A lot of the items are about intent. While you can never be sure that items like '1-$2m tops before reaching 25 -$50m value' are a yes, you can often be sure that they're a no.

It might be in the strategy. The strategy might not be viable without more down the line.

Works as an exclusion list.

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