Startups and angels: Along the way to success

Does the world need "tough" entrepreneurial coaches?

No.

I have, twice in the last week, listened to "haven't really been there, but have talked about it" types expound upon how they work with aspiring entrepreneurs (some of them students) and "really make them sweat."  They gleefully tell stories of their fearsome, tough reputations and their critical prowess.

This seems to be some sort of virtue based upon toughening up people for the real world.  Getting them used to dealing with "Shark Tank" type investors so these aspiring entrepreneurs can be prepared.

I think that I would never lie to someone about their business prospects or flatter them just to do it.  But I would also never "drill" someone just to "toughen them up."

Entrepreneurs represent the best of America.  They take risks, create opportunities, satisfy customers - the list goes on.  Entrepreneurship is what the rest of the world looks to the US for.  And for those of us who have been lucky enough to get to be around aspiring entrepreneurs, we should realize it's a privilege every single day, not a podium from which to act like a pompous windbag.  

And if my son or daughter came from from college and told me that some teacher had proposed to treat them this way, I'd be, well, perturbed and might find an inelegant way of expressing this sentiment. 

If you're an entrepreneur, expect to be treated with respect by investors, advisors, teachers, all of them. Expect also to be told the truth (not to get the snipe hunt runaround). 

Lower values, higher risks? Or a paradise for investors?

I'm just reading a post from Wisbusiness.com by Joe Kremer of the Wisconsin Angel Network.  (WAN is a trade group of angel organizations in Wisconsin; I'm on their board.)  Joe, a friend and colleague, is writing about the "great deals" in venture valuations that have been created by economic conditions.  

It's inarguable that valuations are lower.  Relatively late stage pharma ventures, just to cite one example, tend to be doing second and third rounds at depressed values.  

It seems to me there are several reasons for this.  

First, there's less money.  Most obvious, I suppose, is that the investor just has less money to invest.  Thanks to portfolio allocation theory, over-weighted classes get reduced and capital reallocated.  This is a big factor for VC funds.  (They tend to be a lagging indicator of the economy since their investors are allocating resources after they're generally earned,(like wages of workers in pension funds) or in many cases, donated (to the foundation-investor.) So the VC funds have less to invest.

Venture company performance also depresses future new investment as investors use what cash they have to keep worthy portfolio companies alive.

Second, start-ups aren't immune from contextual issues, such as being tied to under-performing sectors of the economy, like housing, or participating in capital intensive high change markets like solar panels or wind turbines.  If the venture with these characteristics is worth investing in, the business is going to take longer and cost more to get to its milestone.

Third, angels in particular have had unpleasant experiences with second rounds that are venture led where down-round terms are painful and expensive.  So one conclusion might be to hold back more than one normally might, creating less money for new ventures.

All of that leads to a tighter money supply which tends to drive down prices.

And, of course, valuation in a start-up is a measure of risk, not a value of the company.  It is the way entrepreneurs and investors agree on what the market value of the risk being assumed actually is. If I'm buying a company, I care about the price relative to the benefit I acquire.  If I invest in a start-up I care about the company's ability to produce a return that covers the risk I assume.

So, while I like and respect Joe, I disagree that "it's a bargain paradise out there."  Risks are higher, exits are slower, (and might be lower) and I have less to invest.  So I pick carefully.  If I am the only one doing that, values won't fall, but if a lot of people pick carefully, then values will come down.