Monday, August 19, 2013

Entrepreneur: What do Angel investors look for?

I often have the chance to interact with entrepreneurs, gulping down some of Seattle’s finest coffees. Its great talking to entrepreneurs, to see the passion, the energy, the great ideas, and the desire to change the world. Like most entrepreneurs, they also have the need to raise money from Angel investors. As I am both an entrepreneur and an Angel investor, I am often asked, what do Angel investors look for? What do I need to explain to a potential Angel investor?

I have a very simple and short way that I explain this to an entrepreneur. If I am investing my money into a start-up, I would like to see a return. For me to see a return, means that the start-up needs to be able to make money. To make money means that the start has a value prop that resonates with a customer. A value prop that resonates with a customer, means that the start-up is solving a problem or meeting a need that the customer has. If the start-up is solving a problem or meeting a need, it means they have researched the space and designed a solution.

This may be an over simplification, but it tells the entrepreneur what to focus on. It does not mean that if you have all those things that an Angel will invest. There are other things to think about as well – some things that raise flags for me.

Over focus on the technology is a flag. Don’t go deep on the technology, unless asked. Entrepreneurs with an engineering background, sometimes fall into the trap of wanting to over explain the technology (I know I have). However, in most cases, technology does not sell itself. I will often ask an entrepreneur to think back to a recent purchase they had and whether they bought that just because of the technology or because they had a need or problem to be solved? I recently put a cold-air intake system into my truck. Did I buy this because its cool and different way to do an air-filer? No, I bought it for better efficiency. That is the need that I have. It was way more expensive than a normal air filter, so it better be more than just cool. Sure, some of us will buy gadgets because we think its cool technology, but in general, when you think about why you buy things, it usually comes down to meeting a need or solving a problem that you have.

Inability to take feedback is another flag. While I may just be investing, and suggesting ideas or asking specific questions, this tells me how the entrepreneur will listen to customer, mentors, employees, and potentially VC’s. This doesn't mean that what I suggest to them is right, its how they deal with it that is the important piece.

To all your entrepreneurs out there, building great technology, make sure its solving real problems or meeting real needs. If its not, it will be hard to sell the product, and hard to get a return back to Angel investors. 

Tuesday, August 13, 2013

Angel investing - Lessons Learned with Rudy Gadre

August 13 at 6pm  Register at Eventbrite
Angel Investing is not a skill that people are born with, it takes time to learn what works and what doesn't work. There are a number of ways to learn these things including learning by doing it and learning from others. The investors in the Seattle Angel Conference are learning by doing angel investing and this workshop will provide an opportunity to learn from others.
Rudy Gadre
Rudy Gadre has funded more than dozen startups in the last two years and has his fair share of lessons learned. Rudy's professional experience spans facebook and amazon, but his passion is in angel investing. He has backed local stars like walkscore and 9slides and is on the hunt for more.
Come join us for a frank conversation with Rudy on the lessons he's learned as a full time angel investor and what edge he feels he has in making great investments over bad investments. Whether you are interested in learning to be an investor or dying to find out what great angel investors are thinking when you pitch them - this is definitely a Seattle Angel Conference workshop you don't want to miss.

Sunday, August 4, 2013

Angel to (potential) Angel: Investing in Startups

I am often asked by friends and colleagues – “Tell me about Angel investing – how does it work, what are the risks, and how do you pick the next Facebook????”. As we embark on the 4th Seattle Angel Conference in September, I thought I would share my answers more broadly here.

A little over a year ago, I got involved in Angel investing after running a startup focused on data security called Newline Software. I wanted to better understand what investors look for, so I jumped in with both feet, joined Alliance of Angels as well as the Seattle Angel Conference. I took 7 months off between jobs and spent my time driving around Seattle listening to pitches, attending demo days, taking part in due diligence, and meeting with entrepreneurs and other investors. I drank a lot of coffee and learned a ton. At this point, I have now heard somewhere north of 150 startup pitches. There are a lot of very interesting ideas out there.

What have I learned? A lot. Trained as a technologist, after being an engineering leader for 20 years at Microsoft, I tended to think more about the technology, and not about the value proposition for the customer and the problems being solved for the customer. As my friend and former Microsoft colleague @CharlieKindel likes to say, I had some things to unlearn from my great experiences at Microsoft.

Writing a check is something everyone knows how to do, but the hard part of making an investment is to determine if the startup you are looking at, has a good opportunity to succeed. Unfortunately many do not make it, and as I explain to potential investors, you should be investing a small % of your portfolio into startups and you should do your homework. When I think about my first angel investment, at which time I did not know what I do now, the business plan and pitch I reviewed as great in and of itself - but I failed to compare it to anything else in the industry, and I didn’t talk to any other investors. I was uneducated as an Angel investor, but I did know how to write a check.

There are many different ways to look at startups and through my experience interacting with lots of investors, listenting to pitches and talking to entrepreneurs, I have developed my own priority list. Talk to other investors, and they may view things differently. Part of what we do at Seattle Angel Conference is to teach you to come up with your own approach to investing. What I look for, in order of importance, is:
-          Team - Great ideas don’t execute on their own. You need a team, preferably with some startup experience, that knows how to execute on a good idea, preferably understands and follows the Lean Startup model, and knows when to pivot. The sooner a startup realizes its idea(s) are not right and can pivot, the less amount of money is burned.
-          Market Opportunity – It needs to be a big enough market, and enough product differentiation that the product can achieve success. Who is the competition? How will the startup differentiate? If the startup is creating the next great search engine, I would decline as that is a pretty saturated market with entrenched competition. If they have figured out a way to do searches by scanning your brain waves, that might be more interesting.
-          Value Proposition – A great question to ask of a startup, is what is the customer value prop? Great technology solutions don’t always translate into customer value. If someone can clearly articulate the value proposition of their product, it usually means they understand the customer needs, the problems they are solving, and how to bring value to the customer. Think about yourself as a customer of many things – the last time you bought a vehicle was it because it met the needs you had or did you buy it based on an innovation in the engine and the exhaust pipe?
-          Sales Strategy – If it’s an addressable market and has a value prop, how are they going to sell it? Ideally they have someone with sales experience on staff. Sales is a lot about connections, building relationships, being able to close a deal. Lacking sales staff doesn’t mean they can’t be successful, however cold calling is hard. Engineers are great at engineering, but not always at sales. If someone tells you the solution is direct sales to small business that is a red flag. That is a sales strategy that is very hard to scale.
-          Product – I tend to invest in products that I understand, because it’s easier for me to understand if someone would buy it, easier to determine if it’s a good user experience, etc. I have seen what I think are great products, but in industries that I don’t know. In cases where I know people in those industries, I have reached out and asked them what they thought. I have learned a lot this way.

Lastly, do you homework. Ask other investors. The great thing about being a part of Angel groups, is the opportunity to network with other investors. Through the Seattle Angel Conference and Alliance of Angels I have had the chance to expand my investor colleague network. The opportunity to ask them what they think about a particular deal, what they know about a particular company, and what sorts of investments they are making.