About a month ago, the venerable New York Times published a piece about The New Rules of Angel Investing. You can read the entire Times piece here
The New York Times references a Center for Venture Research study showing that total angel investments in the first half of 2009 were approximately 70% of the previous years total – and that the average deal size itself had also shrunk by about 30%.
With apologies to Kermit Pattison, the author of the Times article: No $#@&!
The U.S. lost in excess of $10 trillion of wealth in 2008 – about 1/3 of that from erosion of home equity and 2/3 from erosion of stock market values. In such circumstances, is it really very surprising that the amount of liquidity made available by angel investors declined dramatically?
Mr. Pattison goes on to suggest that companies can still obtain angel funding, but there are several key points to consider. Essentially, they boil down to:
2. Have realistic valuation expectations.
3. Plan for future financings.
4. Practice pitching.
5. Know where to find ‘em.
6. Get coached.
I’m going to refrain from further snarky comments about the obviousness of these suggestions (and the fact that they are important all the time – not merely when angel investing has seen a 30% decrease). To be fair, Mr. Pattison and the New York Times are on the right track – the suggestions set forth have merit. Unfortunately, the article is a bit like cotton candy – sweet, light and fluffy but without much substance.
I’m going to address the six key suggestions made by Mr. Pattison and endeavor to extend the core of the piece with substantive ideas on how you can take action in seeking angel funding. Hopefully, I’ll succeed in offering you some practical strategies.
- Bootstrapping. It’s easy to propound this tip to entrepreneurs. “Try and finance your own growth” doesn’t take much in the way of thought when offering advice. Obviously, the more you can do this, the better off you are in regards to financing and operating your business. The fact is, most entrepreneurs bootstrap, so this piece of advice is of little practical use. Instead, think about strategically bootstrapping with specific goals in mind – and measure the effects.
Your primary focus, upon taking initial capital investment, is almost always to achieve regular positive operating cash flow. If you are looking to raise capital, it is imperative that you structure your business and operations with that goal in mind. Take a look at various bootstrapping tactics you might use (or are using) and relate them to your capital raising goal.
An easy example is officer salaries. If you and other officers take reduced (or no) salaries and plan to do so until you reach breakeven, show this to prospective investors as a key part of your operating plan. If you’ve found cheaper labor, negotiated vendor discounts or acquired assets below their cost value, demonstrate how this factors into your ability to reach positive operating cash flow. Most of you are going to bootstrap in one fashion or another simply to keep your business growing – take pro-active steps to plan that bootstrapping and show a prospective investor how it will assist you in achieving positive cash flow.
- Valuation. Yes, valuations have fallen – but so what? Valuation discussions are always difficult. The simple fact is investors and entrepreneurs are on absolute opposite sides of the table on this issue until the investment is consummated. One key point about valuation, implicit in the New York Times piece, is whether it’s a buyer’s or seller’s market. During the froth of the internet years (and to a lesser extent 2004-2007), valuations were so out of line because so many dollars were chasing quality (and not so quality) investments. That’s obviously no longer the case. As an entrepreneur, there are several key steps you should take regarding valuation before initiating a financing process:
Be aware, that if you present with this level of professionalism, the negotiation will likely shift focus to your financial modeling, rather than the metrics of the valuation itself. Be ready to present the reasons why you’re company is different (i.e., better) and deserves the highest range of possible valuation.
This entry has grown a bit long, so I’ll address the last four points made in the New York Times article in my next post.
In the meantime what are your thoughts on the practical elements of bootstrapping and valuation?