

Angel investor: Want my money? Here's my checklist - pakafka
http://www.alleyinsider.com/2008/10/angel-investor-roger-ehrenberg-want-my-money-here-s-my-criteria

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joshu
The problem with this list, in my mind, is that it's a checklist of
descriptions of a successful company.

If the signs are this obvious then the valuation would already be high enough
to be unattractive to an angel.

I've done some (roughly 8 deals) angel investing myself, and prefer to look
for something market-shaped; matching buyers to sellers, or similar; a team I
would seriously consider working for; and a working prototype for me to look
at.

The first is because that's the kind of thing I like to think about and
because I think those tend to be scaleable businesses, the second is because
as an angel I want to actually spend time for them, and the third because I
think most powerpoint presentations are crap.

There are some additional parameters around investing (like how much the
valuation is) but I'd much rather help an entrepreneur who is going to shoot
for the moon.

~~~
wheels
It's similar to Sequoia's "Elements of Sustainable Companies", but well, not
as focused:

<http://www.sequoiacap.com/ideas/>

(Currently down, Google cache below)

<http://tinyurl.com/4byylj>

I really like the Sequoia list -- perhaps because it's like a point you can
look at and aim for when trying to sort out business ideas.

~~~
joshu
I'm just saying what works for me. But I'm also looking to have fun, etc. I'm
reasonably sure I don't want to be a VC...

~~~
wheels
I meant the "problematic" list -- not yours. What you said jives with what
I've heard from other angel investors -- that it's more of a gut feeling /
labor of love than a calculated investment.

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wensing
_A business that has an inherent call option, that could boost its base-line
exit value by at least 10x_

I will go ahead and expose my novice status and ask: what is an inherent call
option?

~~~
nickb
It's just a financial vernacular. Call option is a type of a contract that
gives the buyer an 'option' to buy the underlying instrument (a derivative or
a stock in this case) at a later date at a specified value. Simply put: the
buyer will profit if the value of the company increases.

So all he's is saying that he is looking to invest into a business that will
rise in value over time and that will be sold to a third party – "an inherent"
part – and he also means that he's not looking to invest in "lifestyle"/"we'll
pay out dividend"/"37sig" type businesses. And the last sentence fragment is
self explanatory: he expects the value of the company to increase the value
over time by at least 10x so he makes back roughly 10x on his investment
(roughly since it doesn't really work out like that with IRR).

~~~
netcan
I thought it meant mean that in the event of success, he can increase his
investment.

------
cbrinker
Not sure if that's exactly for the YC crowd. While everyone would love to have
a multi-million dollar business, the reality is that there are a lot of
smaller good ideas that don't need $1mil+ funding.

I think YC takes a better approach in the way of financing. However, I think
YC forces a group to be extremely frugal and thoughtful in their fiscal
decissions. I think receiving large funding may lead to improper investments
to younger entrepreneurs; but that's just my $0.02.

~~~
dhuck
I bristled at this: "A business that needs no more than $1-$2 million in
financing to become a $25-$50 million (exit value) company, simply by
executing the core business plan."

That is an insane requirement for return. I'm not sure how that's even
possible - or if any company has even managed to do that. Someone prove me
wrong?

~~~
jd
$25 million is a lot of money, but so is $1 million in funding. Most web 2.0
companies need no more than $100k or so to get to profitability, and can
easily exit at $2.5 million. Same ratio, but it sounds a lot more achievable.
So the only real issue is scale.

Bear in he's talking about enterprise software (i.e. support contracts, custom
software, consultants). When you start doing custom work and get paid by the
hour your revenue goes through the roof. So you can get to a $25 million
valuation pretty easily, if you're willing to be a software/consultancy
hybrid.

~~~
joshu
This is not the sort of situation I would invest in. If you are billing by the
hour, it is unlikely to be a leveraged business, and the investment return is
unlikely to be as comfortable. Additionally, due to the smaller size, there
would have to be many, many investments; it's hard to find many of very good
quality.

~~~
acgourley
It's very hard to sell to large sized enterprise without supplying custom
work. You're right that the custom work isn't leveraged, but it's a
prerequisite to get your product installed into their (often silly) IT
structure.

This only requires a portion of your engineering and support resources, and
there is no reason you could not establish strong ties to an existing
consulting organization to be the "consulting services" arm of your company.

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infoarbitrage
dhuck, let me clarify. what i am looking for is a clear path to that level of
an exit without a company needing to spend more than $1-$2 million. this means
getting customer traction, market validation, and revenue momentum. However, I
acknowledge that some businesses require a B round to get there. I don't view
this as a problem. What i do view as a problem is needing $5-$10 million
before you can say "this is a viable business with an attractive exit
opportunity." thanks for raising the point. roger

~~~
dhuck
Couldn't agree more with the idea with about ignoring companies that say they
need $5-$10 mil in order to be a "viable business." Today's companies (look at
ycombinator) can do that with much, much less. $1-$2 mil seems like a good
level - more than I would personally need! :)

To restate/clarify my original point (messed up the thread, my bad): getting a
valuation of $25 mil to $50 mil, with a TOTAL investment of $1-$2 million is
very hard. Google and a few choice companies may have done that, but I think
that's definitely the exception. A lot of good companies are out there that
aren't Googles (take over the entire market in 5 years) that deserve
investment, as well.

These investments might not produce a valuation of $25-$50 mil after 5 years
(like Google, etc etc) - but maybe they would after 10, 12, 15 years. This is
where I think we agree.

------
BenS
...so you want to invest in businesses that will deliver good ROI in a short
time. Makes sense.

------
nocivus
It seems to me that the hardest part about implementing an idea is probably
figuring out how to make money out of it and, since that is something (smart)
investors require for starters, my question is: How does one come up with a
business model for, say, a website for monkey owners to ask questions about
their food (not the owners', the monkeys' :))?

Is the grand majority of websites limited to rely on advertisement or are
there some constructive guidelines to help in this subject?

~~~
chmike
Interesting point. I'm currently working on it. My impression is that it takes
as much effort to design and implement the business model than to design and
implement the product (idea). Another conclusion I draw from this effort is
that it requires different skills and competence. It would be unusual to be
good (or preferably the best) in all domains, but I believe it is possible.

My rule of thumb, to be successful in each domain, is to explore zones left in
the shade (disregarded) and find something new and profitable. This applies to
the idea (solving a problem) as well as to the business model.

A good strategy to be creative is to identify the assumptions we make, check
their validity and see what comes out when you change them. Combine this with
the appropriate combination and exploitation of the fundamental forces in play
(assuming one has taken the time to properly identify them), and you can come
up with a revolutionary and disruptive business model. If you manage to be
very objective, rational and exhaustive in the exploration and evaluation
process, this can work. (I hope I can prove it soon :] )

I see the startup community as an ant colony, following main tracks as a flock
and just explore a bit away from the main paths. If one wants to increase the
chance to discover something really new and disruptive, one has to follow
orthogonal paths which means calling back into question common assumptions and
habits. Otherwise you'll be in competition with zillions other ants, most of
them being much more efficient and competent than we are.

~~~
nocivus
Exactly. Thinking outside the box is usually not easy; you have to be able to
abstract yourself from the domain you are considering, otherwise you are
biased from start and might miss obvious information.

------
niels
I find it interesting that he is interested in enterprise ROI types of
technologies. Something I think is undervalued here at Hacker News.

~~~
pedalpete
I don't know that enterprise technologies are undervalued at HN, as much as
they often cater to a smaller market. My side project (to my main start-up
which is my main side project) is enterprise focused, and I'm sure I'm not the
only one. But enterprise is rarely as interesting as consumer. Doesn't mean
not useful or interesting, just not AS interesting.

------
mpfefferle
Does this mean that the enterprise is back in style again?

~~~
nostrademons
Enterprise (or paid small-business services) always comes back in style in
recessions. Look at 2002: the two big IPOs were PayPal and LoudCloud/Opsware.
It's because ad spending - and particularly, ad spending in unproven mediums -
tends to fall dramatically when money is tight. It's the first thing to go,
well before productivity enhancements.

Of course, this means that for entrepreneurs starting companies _now_ ,
consumer may be the way to go. It'll take a couple years to ramp up, and by
then, the field has been thinned because investors only want to invest in
enterprise startups. So there's more chance of the surviving companies getting
the consumer attention they need to survive.

Sucks for people (like me) who started consumer web startups in 2007, though.

~~~
ph0rque
> Sucks for people (like me) who started consumer web startups in 2007,
> though.

Do you have anything you're working on now, Jonathan?

~~~
trevelyan
I don't understand why this is supposed to be a bad time to monetize through
the customer. Maybe it's bad if you are relying on getting advertising revenue
from indiscriminate advertisers in the mass market, but....

We're doing something consumer focused and are close to breaking even on
content costs after about a month in beta with less than 500 users. We're
planning to increase our ad spending significantly, and I couldn't care less
if our customers spend less money overall as long as we are their best option
for the product we sell them.

I could see this being a problem if you have to position yourself as a
cheaper, better alternative to established competitors to survive, but the
issue there is more about branding than business model; can you move from
being a low-cost play into being a premium brand if you need to cut revenues
to compete in a crowded market?

Just build your product into the best product it can be and you'll change the
market. Let others worry about competing with you and focus on giving people
tons of value for the money they give you. As long as the market exists,
you'll do ok.

~~~
nostrademons
Our problem was really that we were a "vitamin": something that was kinda-
sorta-tangentially-useful, but didn't solve a clearly-defined, pressing pain
point. Which is really my screw up and not the economy's fault, but the point
is that a strong economy can mask these problems ($500M valuation for Slide?)
and let entrepreneurs get away with startups that really shouldn't exist.

I suspect that there are _still_ many entrepreneurs in a similar boat - as
recently as a month ago, there were "Critique my startup" posts that presented
startups that really weren't all that useful, and YC has funded a couple that
in their present form are pretty weak.

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edw519
Causation or correlation?

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quasimojo
ugh, here's a better idea, i'll self-fund so i don't have to indulge stupid
cunts and the lists they scribbled down in the business section of barnes and
noble

if things were nearly as much of a lock as this person demands, i sure as shit
wouldn't have to slum it with angel funding, i could go to a marquee vc firm

~~~
joshu
I agree. Being an angel is, in my mind, about belief. If value can be easily
demonstrated, the valuations would be higher.

