Archive for the ‘Investors, Investing, Investment’ Category
Compatibility Counts
Tuesday, May 3rd, 2011What is compatibility in the context of small business investing and why is it important?
Private direct investment is very different than buying a publicly traded security. Investors do not have the same regulatory support or liquidity as a publicly traded stock. While we have witnessed a number of publicly traded companies mislead the public with incorrect or incomplete information in the past, at least there is a formal structure with a set of reporting regulations and consequences for failing to adhere to those regs and provide certain information to investors. With startups and small businesses, there is much less information available and very little regulation on what must be shared with investors.
Because of this, there is a greater element of compatibility required between the small business investor and the small business.
Trust and Alignment of Purpose
Understanding this need for compatibility is one of the key topics in the ActSeed Investor Workshop (“How to Evaluate Deals Like a Professional Angel Investor”). Simply stated, we strongly recommend that seed stage investors and startup entrepreneurs are fully aligned in purpose and culture as well as around expected return on investment and “exit strategies”. At the early stages of a business, investors should be viewed as a partner, not as a transaction – a co-pilot and navigation assistance, not merely gas in the tank. The business risk is extremely high in the early stages of a new company and the investor should play an active role in helping the entrepreneur steer clear of pitfalls.
Last year, we created a fun vignette about how ActSeed was like an “eHarmony for startups and investors” – how we help match investor-entrepreneur compatibilities. Recently, we had an inquiry from an entrepreneur who didn’t quite understand our analogy, and interestingly, was persistent in trying to understand how we were an “eHarmony to investors”. So, we drafted a candid reply:
“Simply put, most early/seed stage investors look for strategic and long term compatibility, not “quick hits”. The days of throwing money into something based upon a whim or basic concept are gone.
eHarmony markets their community as one where “people are brought together based on the things that really matter” (the current front page quote on eHarmony.com). ActSeed does the same for investors and entrepreneurs.
To further apply the personal relationship / eHarmony metaphor: investors aren’t interested in “one night stands” and “casual encounters.” Investors are no longer being seduced by what sounds good without verifying what IS good. ActSeed provides a mechanism to help the investor verify and accelerate the due diligence process by 60-90 days.
The common theme from our growing Investor Group members is that they don’t have time to see millions of interesting ideas, but they want to quickly find a few good ones that match their interests AND that provide evidence of preparedness in the core areas of business …PLUS a demonstrated ability to execute a sound plan.”
We know ActSeed isn’t for every entrepreneur, but we pledge to our growing group of Investors that the companies and entrepreneurs they will find within ActSeed’s Entrepreneur Group are ready to “extend trust” through an early presentation of the due diligence issues that will eventually need to be addressed anyway. The sooner this information is “on the table”, the faster a deal can be done or the parties can move on. If you can use the ActSeed process to cut 60-90 days out of the due diligence process, why not?
Within ActSeed, in order for a successful investment to occur:
- ActSeed presents the questions to be answered
- The Entrepreneur must provide the answers
- The Investor must trust the answers
Are you an ActSeed Investor?
If you are someone who wants to invest an amount between $5,000 and $5 million in early stage, seed stage, startup or small businesses, please join ActSeed’s Investor Group. It’s free to join, takes 15 minutes to set up, and allows you to interact on a username basis and allows you to reveal your real identity when and if you choose (to avoid the possibility of “overly ambitious” entrepreneurs).
Learn more about ActSeed’s Investor Group through the resources below:
Click here to download a 1-page PDF about ActSeed’s Investor Group
Watch a two-minute video about ActSeed’s Investor Group:
Join ActSeed (no cost).
Then join ActSeed’s Investor Group.
Let us know how we can help you get set up.
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We Just Found $1 Million and Want to Share It with You
Thursday, March 24th, 2011Earlier this month, we led our first formal seminar entitled “How to Evaluate Prospective Deals Like a Professional Angel Investor” and helped about 40 attendees get started in the world of small business investing.
For two hours, we worked with this group to share the ins and outs of finding, assessing and engaging startups and entrepreneurs. Through an informal poll, we estimate this group represented about $1 million of investor capital. Some were interested in investing $5,000 to $25,000. Others were interested in $50,000 to $100,000.
Some were young and had full time jobs, but craved the opportunity and upside of investing in a startup. Some wanted to use some funds from a self-directed IRA and one person had recently sold his long-held business and was driven to explore investing to keep his mind and business acumen stimulated.
What all attendees had in common was a desire to understand some of the nuances of small business investing – what to look for, what to expect and what to avoid.
What our attendees learned:
- Understanding the early stage investor landscape, the different types of early stage investors and how investing in a small business is different than buying and selling publicly traded stock.
- The importance of identifying deals that are in areas where direct experience exists.
- The Tangibles: A “checklist” approach of the issues a prospective investor should address with the entrepreneur before proceeding.
- The Intangibles: Issues beyond intellect and into instinct, where a shared sense of trust and aligned purpose are important.
- Actual testimonials from angels who have invested in and have nurtured multiple early stage businesses.
- Forms and compliance: Documents each prospective investor should know about when pursuing a deal, as well as the role and importance of legal counsel in “doing the deal.”
- Action Items and Next Steps: sharing tools and tactical activities that transform small business investing into a systematic process so investors can make informed decisions.
What we learned:
The interest in small business investing is enormous. Through this inaugural conference, we have received local media attention and will soon have some national exposure. We have been invited to host this workshop in three other cities and are exploring two potential national webinars as well. In short, we learned that we have an important role to help coach a new generation of investors.
The diversity of those interested in learning how to approach startup investing is broad. Men, women, all age ranges and ethnicities. There seem to be quite a few people who want to be part of the startup revolution, but don’t have the ability to strike out on their own, or just don’t have their own ”big idea” they want to commercialize. But they want to be part of the new business ecosystem and they have some of the estimated trillions of dollars that are “sitting on the sideline” ready to support an entrepreneur with well-prepared business model.
Finally, we learned that responsible investors want to be as well-prepared as the entrepreneurs they are considering investing in. We learned that ActSeed’s Investor Group is a great tool for new investors to evaluate startups looking for funding.
Conclusion
In summary, what’s good for the entrepreneur must be good for the investor, and vice versa too. It cannot be out of balance. Intangibles like trust, synergy, purpose and company culture are important. Investment should only occur when there’s a focus on “business basics” with transparency and reciprocal communication between investor and entrepreneur; this is not the same as buying a share of Microsoft or GE. As a small business investor, you must be engaged as an ongoing partner in helping your business investments succeed.
ActSeed carries a clear message to all participants in early stage business creation and growth: “Preparation for success helps avoid behaviors that lead to failure.”
If you are interested in hosting one of our Small Business Investor Workshops locally or via webinar or if you are interested in becoming a small business investor, please contacts us at info@actseed.com.
If you are an aspiring seed stage or angel investor and want to get started now, you can join ActSeed’s Investor Group (there is no cost to join) and start applying the principals we share in our workshop immediately. Learn more about the ActSeed Investor Group here.
We are already working diligently to find and guide more investor millions that we can connect to well-prepared entrepreneurs.
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RevenueLoan: Filling an Important Gap in Small Business Funding
Thursday, March 17th, 2011You need an infusion of capital to grow your business.
The bank says you have insufficient collateral or they don’t lend to businesses in your industry.
Venture capitalists and angel investors aren’t usually interested unless they think you are going to unseat Facebook or cure cancer (home run plays in healthcare and IT) in the next 18 months.
So where can you get the funding you need to grow your business? Who is going to step boldly into this funding gap that the majority of American small businesses fall into?
RevenueLoan!
Utilizing the Royalty-Based Finance (also known as ”Revenue-Based Finance”) model of lending, RevenueLoan provides growth funding to businesses who are not being served by conventional lenders.
No collateral? No Problem!
A royalty-based loan does not require any collateral.
Not interested in giving up 10%, 20% or even 50% of your company for funding? You may have an alternative!
A royalty-based financing does not require you to sell part of your company to the investor. You remain in complete control of your business. You simply agree to pay a small percentage of your monthly revenues – generally less than 5% - until an agreed-upon multiple of the original loan amount is reached.
Yes, this does make royalty-based financing more expensive than a bank loan (if you even qualify for a bank loan), but a royalty-based deal also makes your monthly payment vary in harmony with your revenues. Try telling your bank that you missed your revenue target this month and don’t want to pay the usual amount, and see what they have to say! With a RevenueLoan, flexible monthly payments that don’t deplete your operating capital are business-as-usual.
Since this loan structure is based upon your revenues, this is not a good fit for most startup businesses that haven’t started generating consistent revenues. …but if you have an established revenue stream and just need a cash infusion to bump your business up to the next level, RevenueLoan may just be the lone YES in a forest of NO.
ActSeed is glad to welcome RevenueLoan as a valuable resource to the ActSeed community for small businesses and the entrepreneurs who are building them into durable, sustainable, competitive participants in our economy.
Learn more at www.RevenueLoan.com.
A Conversation with Fellow 'Trep Community, GrowVC
Thursday, February 17th, 2011Recently, we were invited to talk with Markus Lampinen of GrowVC. The resulting podcast covers a range of topics that are of interest to entrepreneurs and even angel or seed stage investors. We constantly highlighted how “preparation matters” and why those who take a focused, committed approach to establishing their business can leverage services like ActSeed and GrowVC to increase their chances for success.
In the interview, we talked about how ActSeed and GrowVC complement each other and how our focus is on providing resources to entrepreneurs who understand the importance of fundamental planning and preparation, including providing avenues to investors and other sources of capital that are needed to build a durable, competitive business.
GrowVC is based in the UK, Finland and Hong Kong, but has a budding presence in the US, too. With ActSeed’s growing international presence, our combined geographic reach enables our entrepreneur members in every locale to have a global reach almost instantly.
ActSeed is looking forward to expanding its collaboration with GrowVC’s crowd-funding platform and other resources for its Entrepreneur Group Members. We are also excited about integrating ActSeed’s Scored Evaluation Profile into GrowVC’s community of entrepreneurs.
We hope you enjoy the podcast. Click on the microphone below to listen. You can also read the post on the GrowVC web site here.
Again, we thank Markus and also Jouko Ahvenainen, Founder & Chairman of GrowVC, for the opportunity to participate in the GrowVC podcast series.
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Royalty-based Venture Investment: A Creative Funding Alternative
Monday, November 29th, 2010Imagine an investment approach where you can fund an early stage company and not have to worry about – or wait for – a blockbuster IPO or acquisition many years out before realizing a return on your invested capital.
Angel and venture capital investments are traditionally defined as an equity stake in an early stage company where the investor provides funding when the business risks are high but the potential payout is also very large. While VC still is largely a “home run” investment approach, angels and some smaller funds are applying an innovative approach to early stage investing that still includes higher risk and reward, but is more of a “base hit” investment approach.
Royalty-based deals are not new, but the use of this funding approach for early stage companies is somewhat novel. For decades, oil and gas companies have used this deal structure to finance prospecting activities.
How It Works
In a nutshell, a royalty-based investment is more of a debt instrument (liability) instead of equity. While the actual financial structure may vary, the gist of the deal is a company borrows money and agrees to pay a royalty (percentage of its gross revenues) until a defined multiple of the original investment has been repaid.
One example: a company borrows $200,000 and agrees to pay 10% of its gross revenues to the lender until $800,000 has been repaid. This may take one year or ten years. The return of 4x may seem excessive to a borrower, but it may take many years to repay, so there is more risk to the lender than a typical commercial loan, and unlike a conventional angel investment, the company may not be giving up any or much equity (yes, an equity component could be incorporated into this structure).
Ideal Candidates (Early Stage Companies) for This Type of Financing
Royalty-based deals typically require the company to already be generating a reasonable stream of revenue. If a startup is still in the “pre-revenue” stage, most of the royalty-based venture financing firms will not be interested.
More Information:
Royalty Capital New England (http://www.royaltycapital.us) from Boston does these types of deals
Revenue Loan (http://revenueloan.com) based in Seattle also does these types of deals
GigaOM Article from 2009 that talks about revenue based financing and coins the term “Class R Stock” (http://bit.ly/ClassR_Stock)
A video of a presentation from Growth Science International (http://www.growthsci.com) that discusses royalty-based financing:
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How Investors Find, Mentor & Work with Successful Entrepreneurs
Friday, November 5th, 2010On November 2, Foley & Lardner and CONNECT hosted another solid emerging technologies conference in San Diego. The theme this year was “Do You Speak Entrepreneur?”.
While the full day of panel-driven sessions was meant for tech companies, most the wisdom shared applies to almost any emerging company in any industry.
While there was plenty of content about intellectual property, privacy and outsourcing, not surprisingly, the most popular session topics centered on investment, funding and financing.
The opening general session included a panel of local southern California angels and venture capitalists, including JP Lapeyre of the Tech Coast Angels, Ted Alexander of Mission Ventures and Carl Eibl of Enterprise Partners.
One particular exchange revealed some excellent insight worth sharing here with entrepreneurs in any industry. Even those who are not looking for funding will find this dialogue insightful. The moderator, James Chapman of Foley & Lardner, asked the panelists, “What do you look for in an entrepreneur?”
The answers included:
- “Passion.”
- “People who can get it done.”
- “Done is better than perfect.”
- “It’s all about execution.”
- “Someone willing to have a dialogue with, and listen to, their investor.”
- “Rapport is important.”
- “Self-awareness. Knowing where your gaps are”
- “Adaptability.”
These answers resonate with the ActSeed team and we hope resonate with every entrepreneur. These responses emphasize our mantra that investors seek not only the good idea, but a team with a demonstrated ability to execute the idea in a disciplined, planned manner.
This does not suggest creating a rigid plan and pursuing without regard to realities as they unfold. This also does not suggest “making it up as you go”.
It does, however, underscore the need to have a thorough plan that is constantly being interrogated and refined, which is the foundation and purpose of ActSeed’s Entrepreneur Profile / Evaluation process.
What answers would you add to the ones given by the conference panel?
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If You're Raising Capital (and you probably are), Read This Book
Thursday, May 6th, 2010“You can tell a story in a sentence; you can tell a story in a paragraph; and you can tell a story in a 20-minute pitch. Startups need to do all three.”
– from “Pitching Hacks” introduction
I’ll try to be as concise in my post as the book is in guiding you toward successful fund raising.
Nivi and Naval have a storied career with startups, both as fund-raising entrepreneurs and as investors, not to mention facilitators for other entrepreneurs and investors.
I’ve authored more business presentations, projections and plans than I’ve read about how others do it. But I’ve read a few books, and “Pitching Hacks” is the most concise, the most pragmatic and the most useful.
If you are about to “walk the fundraising gauntlet” – even if you’ve lived on Sand Hill Road before – read this book. For the first-time entrepreneur, it’s a gold nugget of guidance. For the seasoned startup veteran, it’s a superb refresher.
As authors Nivi and Naval say: “Investors don’t invest in businesses. They invest in stories about businesses.“
To buy this incredibly affordable book (<$19), go to the Amazon-powered ActSeed Marketplace (or if you prefer, go directly to Amazon)!
How ActSeed Approaches Funding Matters
Sunday, October 4th, 2009To understand where our mind is when we think about investment and funding, it’s helpful if we tell you where we’ve been and how our thinking has been shaped. I originally come from an investment banking and finance background, both academically and professionally. I’m an “old school Graham & Dodd” kind of guy. Think “fundamendal analysis“. While I’ve spent the better part of two decades working with and for startups, I got my start in the business world in Morgan Stanley’s meat grinder of an investment bank. …a great boot camp to transition from the world of academia to business.
My intention is to translate this into simple terms and metaphors here. My hope is that I can share my experience and a bit of financial wisdom while introducing you to the wisdom of others who I know and discover.
But again, just to be clear, I’m a proponent of “The Wallet Economy” more than “The Attention Economy”. Maybe we’ll dedicate some future, more intensive, blogging to this distinction. For now, please know that I care about helping you think about positive cash flow, making profits, spending less than you make and having some perspective on how to achieve this instead of lucking into it. The Wallet Economy focuses on providing a product or service for which someone else is willing to pay. The Attention Economy requires some sort of operational subsidy (investor funding, etc.) while “eyeballs” are being amassed in hopes that another entity wants to acquire the population of users; think “user generated content” and “ad-serving” business models…
Finally, I do hope that “Funding Matters” evolves into a dialogue between reader and author and together we can keep this section relevant and valuable for all of us as we create and build our businesses.
Cheers!
