Wednesday, October 15, 2008

Non-Starters in Angel Investing

When the Conversation is Over Before it Begins

I have an espresso each morning at the Priom360 coffee shop in the Arboretum. It’s part of my daily routine. I often meet entrepreneurs and angels during that time to hear their story. In this blog you read about the up and coming companies and the story behind the people making it happen. What you don’t hear about are the non-starter discussions or as I call them, the conversation was over before it began. Here are some examples:

“We’re raising money to build a software system to . . . “

The angels look for the entrepreneur to spend their own money to get the initial software up and running. It’s okay to raise money to develop it further but angels aren’t going to invest money to build the software in the first place.

“We only need $8M to . . . “

The raise limit for the angel group is $2M. If it’s close to that then it’s a possibility but beyond $3M too far beyond that and it goes out of range.

“Our premoney valuation of $20Mis justified by . . . “

There’s almost no investment return in deals that start with a $20M valuation. I won’t say those deals will never get funded but it’s not far from there.

“The market is $10B and we only need to get 3% of it to . . . “

Revenue projections based on achieving market share have little connection to reality. A bottom-up list of accounts in the sales pipeline is much more convincing.

“We have an electronic medical records solution that . . . “

There are some applications that are so difficult to execute that it’s a non-starter. The electronic medical records space is filled with large competitors, an ever changing regulatory landscape, and a challenging customer base.

“Our product requires doctors to make only a minor change in their procedure . . . “

Getting doctors and/or patients to change their behavior is a major challenge. Doctors only change their procedures under great pressure or incentive.

“We only need $2M to run the clinical trials on our therapeutic drug . . . “

The cost of bringing a drug to market is typically beyond the angel raise and only covers a portion of the costs that go into creating the drug.

“We just hired our 14th employee and hope to complete our first customer sale later this . . . “

Startups with large headcounts bring the business plan into question.

“We are raising money to buy condos so we can flip them . . .”

Straight up real-estate deals are just that, real-estate deals. They are not angel investments.

The ultimate conversation stopper is “We just ran out of money and . . . “

If you didn’t manage the last round of funding what does that say about the next round.

Best regards,
Hall T.

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