Performance Works Partner Ron Weissman was invited to Queenstown, New Zealand to help their growing angel investment community distinguish between good long-term businesses and great angel investments.
The key: capital efficiency.
Auckland’s National Business Review covered the event and the following is a repost of their article. Enjoy!
The biggest mistake made by angel investors, who play a key role in supporting Kiwi start-ups, is not understanding the company’s capital model before investing, says Ron Weissman, a member of Silicon Valley’s oldest angel organisation, Band of Angels.
New Zealand has 600 people registered in angel clubs and another estimated 200 to 300 who are active privately while more than 2000 are thought to have invested through equity crowd-funding platforms since last August. Angel investors and networks have invested a total $374 million in young Kiwi companies since 2006.
Band of Angels, which has been operating in San Francisco since 1994, has 150 members who have invested US$231 million in 277 deals, of which they have exited a quarter.
Weissman said angel investors shouldn’t confuse their capital model with that of the start-ups they’re putting money into but they need to understand the company’s capital model before investing. Capital-efficient deals are an angel’s best friend rather than an exciting story.
He cites the example of a biotech start-up likely to need $US100 million over a 10-year period to become sustainable. That requirement for so much follow-on funding from venture capitalists who come in after early angel investors means they risk their stake being heavily diluted.
“The larger the amount of money the industry needs to raise, as a norm, the worse it is for you as an angel investor, and that’s why you have to understand the company and industry’s capital requirements,” he said. “That’s why we look at companies that are likely to need $US10-15 million to get to sustainability.”
Another mistake rookie angel investors make is forgetting that for every $1 invested at the start, they’ll need to reserve another $3 to $4 for follow on investment to avoid cram down – where an early investor’s stake is reduced by new investors putting money in.
The third most frequent mistake angels make is being too greedy on the valuation of the company in the early stages, Mr Weissman said.
If the valuation is too high, there may be a down round with the next stage of investment which is where the valuation is lowered and early investors suffer a bigger dilution of their stake. Down rounds typically happen when a red hot economy starts to slow significantly as happened in the 2000 dotcom crash.
Mr Weismann said angel investors should “create their own luck” by understanding the eco-system the investee company operates in and having a list of large companies or follow-on investors that could add value to the start-up and create connections with them.
Band of Angels’ investment committees also draw up a list before investing in a company of potential buyers and look at exiting before the company fully matures or an initial public offering to avoid too much dilution, he said.
Why do startups fail? They run out of cash, of course! Well, no. Actually, that’s only the #2 reason. If startups fill an important need, they usually find the cash — from investors, customers or friends. So what’s the top reason for failure? CB Insights analysis of The Top 20 Reasons Startups Fail indicates the #1Continue Reading
I’m a fan of creating and selling Minimum Viable Products (MVP). I don’t know how many times I’ve quoted Eric Ries‘ recounting how Zappos started selling shoes: Photograph at a retail shoe store → Post online → Purchase at a retail to satisfy online demand → Ship to customers → Learn, refine, repeat Why? AllContinue Reading
My son has $23.6 billion. $7.2 billion in cash. He also forecast Airbus’ failures with their A380. He’s a rabid fan of the plane and sings its praises constantly…the suites, the capacity, the range. But he doesn’t use them for his own airline. He’s not alone. As this NY Times article notes, no airline inContinue Reading
Quickly identify performance gaps in yourself or your organization by understanding how personality can bias the problems we take on and what value we offer.Continue Reading
In “Are you investing in the tree or the hole?,” we talked about the danger of seeing failure of an initiative tied to the idea and not execution. Sometimes failures are about poor execution, rather than a poor concept, but too often, that difference gets confused in the minds of managers. It works the otherContinue Reading
When you’d talk to Steve Jobs, he’d make every decision sound like a “poison decision.” But I believe Steve Jobs was Steve Jobs largely because he knew which decisions were Poison and which were Optimization. How can you use this for your decisions?Continue Reading
A marketing responsibility I see often undervalued is the creation of Organizational Voice—the tone you use consistently across different media. I often work with corporate clients who never developed a Organizational Voice, so I end up creating it for them. The “Voice” I prefer for most business conversations with people who are not specialists inContinue Reading
The problem isn’t too little smart money, it’s too many dumb deals The meme of the month is “The Series A Crunch.” According to Crunch Theory, many worthy seed-funded startups lack follow-on capital because VCs now have smaller funds or have moved later stage. CB Insights estimates $1 billion in seed financing will be “incinerated” andContinue Reading
A newly published book called “How Children Succeed” shines a light on the inadequacies of traditional education. Paul Tough, a journalist for The New York Times, argues that the qualities that matter most in today’s world have more to do with character and skills like perseverance, curiosity, optimism, and self-control. He asserts that IQ is lessContinue Reading