Startups and angels: Along the way to success

The Other Guy's Point of View

"It depends on your point of view," is a universal principle.  I have been reading some technical valuation papers lately and one author points out that the first time entrepreneur frequently "decides they need $2M and will 'give up' 25%, so the  'valuation' is $8M" without considering the investor's interests or point of view. 

Here's a "guest essay" from John Huston, manager of the Ohio Tech Angels that adds a point of view (tongue in cheek) from the angel's vantage point on "How to Avoid A Successful Exit."

SEVEN STEPS FOR PRECLUDING PROFITABLE EXITS (aka “WORST PRACTICES”)

1)  Acquiesce to the entrepreneur’s requested stratospheric valuation in the first round (because you can’t build a friendship if you start by being disagreeable).

2)  Don’t bother to estimate how much additional dilutive capital might be required to orchestrate an exit (because crafting a Capital Access Plan involves too much imprecision to have value.)

3)  Base your potential return calculations on an IPO exit versus a company sale (because the enterprise is less likely to re-locate post-IPO).

4)  Disregard data about historic M & A exit proceeds for VC-backed enterprises in the same industry (because today’s market is obviously in flux, as evidenced by one recent transaction).

5)  Base your investment decision solely on who has already committed to invest (because this avoids wasting time on boring due diligence which they probably have already performed).

6)  After making your initial investment move to the “mute money mode” (because by spurning opportunities to assist the entrepreneur you can retain your objectivity).

7)  Only participate in the first round (because by being a “Willie One Check” you not only will have invested all your money at the lowest valuation, but will also avoid haggling over term sheet provisions regarding Pay to Play or Pre-emptive Rights).

Note:  The efficacy of these steps can be vastly enhanced if angels will just make the following assumptions when reviewing a business plan:

    a)  The founder/inventor deserves to remain CEO until the exit (besides, this horse is such a winner any jockey can ride it to the finish line).

    b)  It is unlikely the enterprise will encounter any challenges not covered in the  business plan (since it is so thorough).

    c)  When new investors are needed they will grasp the value I have provided the   company to date (so they will surely respect my existing terms).

    d)  The level of detail in financial forecasts is highly correlated with accuracy (so the more complex the financial forecasting model, the higher the likelihood its        predictions will be achieved).

    e)  There are some transformational ideas which truly do “sell themselves” once they are made available to the marketplace (and fortunately this is one of them because “great science can trump any sales strategy”).

    f)  If cash flow break-even can be achieved with just a tiny market capture percentage, then sales will not be a daunting task (especially if the forecasts haven’t even considered penetrating possibly gargantuan international markets).

    g)  For medical devices:  If a device obviously improves patient outcomes the  medical community will embrace it (because physicians are solely concerned about enhancing patient experience).

© 2008 OhioTechAngels; John O. Huston ([email protected])

Thanks, John.

Trust but Verify...or Always Make New Mistakes

Life teaches lessons. 

Most of us think of them as mistakes.  But they're really lessons repeated until you learn them.  The one that annoys me today is one that I thought I'd learned, but had inadequately remembered the details. 

This is about hiring sales people. Good ones are very precious, and hard to hire.  (Does that sound like an excuse?  Ever done that?)  Years ago, we had a sales slump of a couple of quarters in length and I hired "against type," as they say in the actor's studio.  I hired a blustery "sales" guy who was really, in retrospect, a talker.  But we "needed" someone right now, and he was miraculously available.  So I hired him.  Turned out he falsified the prospect list for months while he spent a lot of expense money on nonproductive trips.  Guy #2 - two years later - much the same story.  Found out he had falsified a resume, hired his friends as "sales people," threw lavish parties, and sold nothing and called on no one.  Guy #3 - years after #2 - was falsifying time records and financial statements.

Trust But Verify

I think the lessons being taught here are - perhaps - obvious in retrospect but are also critical to entrepreneurs. 

If you want to build an entrepreneurial business you have to build trust with your team and your customers and your suppliers and partners.  But, call it plan management or call it verification, you must have systems in place that give you independent confirmation of what is going on.  Whether that means talking to prospects yourself regularly, sending others along on sales calls, independently spot auditing time and financial records, or checking off planning goals, none of this implies a lack of trust.  it implies a business need to set clear goals and independently verify they are being executed.  Have the bank statement mailed to your home and bring it to the office - opened - so that people know you read it.  Check a couple of orders every now and then to make sure they are accurate.  There are a bunch of these simple rules you can put in place for your own business.

Don't Fight Fires You Don't Have

Entrepreneurs often feel that time is of the essence.  We cannot wait because an opportunity will pass us by.  And sometimes that may be true.  But it wasn't - really - in these three cases.  It was just my own impatience to get moving.  (My partner hired guy #3 but he was the only person he talked to.)  If we had  described the position in outcome based objectives, diligently checked references (Read Hire With Your Head) and interviewed alternative candidates, if we had waited until we knew, none of this would have happened.

We were fighting a fire, which we really did not have. The rush of being fast blinded my ability to take my time, find the exact fit, and then set objective, measurable expectations properly to assure everyone of success.  If the people we did hire had been the right ones, expectations and measurements would've made them more successful. 

It's an interesting side note how consistently the wrong people object to verification, objective goals, or other measurements.  if you find this, be worried.

A very successful entrepreneur speaking in one of my classes recently said that his principle is always fire someone when you first think of it because it never gets better.  Another lesson for another time.