Growthink Blog

When it Comes to Venture Capital, Do Like Warren Does


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All of a sudden, it is boom time again for venture capital funds, with over $10.3 billion in fresh capital raised by 578 funds in the 1st quarter, up 36% from 2012.

And high profile exits on deals like Nest, WhatsApp, and Occulus - where fund investors saw returns in excess of 20x their original investments - have caught the public's fancy as to the power of startup and emerging company investing.

So it should come as no surprise that a lot of folks want in on the action.

But for the individual investor, is investing in a venture capital fund really a good idea?

It can be, as the return examples above attest, but more and more it has become a losing game.

Here’s why:

Market Efficiency. With now over one thousand active U.S. venture funds - and with so many of them pursuing similar deal sourcing strategies and approaches - it has become extremely difficult for VCs to find and secure high potential, well priced deals.

The result has been a “regression to the mean” - with alpha performance by fund managers being driven as much by randomness and luck (as it has been with public market mutual funds for decades) as by coherent design.

Fees. The world of low and no load management fees that so transformed mutual fund investing for in the 80's and 90's is far from being on the VC radar.

In fact, as opposed going down, venture fund fees have been going in the other direction, with a number of higher profile funds upping their annual fees to 3% (along with asking for a greater share of the returns) versus the standard 2-2.5%.

These high fees obviously eat away at returns, and more profoundly are in contrast to the “disintermediation spirit” so at the heart of modern technology investing.

Friction. Little discussed in most venture fund models are the high costs of deal sourcing, diligence, and oversight.

It is not unusual for a venture fund to sort through thousands of possible investments, deeply diligence a few hundred, prepare and submit term sheets on a few dozen, and then do zero deals.

This all costs money.

And all this doesn’t even begin to measure the management and oversight costs on the deals that are done – which at their barest minimum range from quarterly board meeting attendance to monthly, weekly, and sometimes daily calls and meetings with portfolio companies.

All this work is necessary to do venture capital right, but is also expense and friction filled.

Now, funds do work to charge some of these costs back to their portfolio companies, but usually these offsets flow to the fund’s General and not its Limited Partners.

So what to do?

Well, for those that love the startup and emerging company asset class, but are reluctant to either a) put all of their eggs in one basket via investing in one particular startup directly and / or b) get the problems with the current VC model per the above, here are two ideas:

1.    Explore Crowdfunding sites like Crowdfunder.com and peer-to-peer lending sites like Prosper.com and LendingClub, all of which offer various forms of fractionalized and securitized investing into the asset class.

2.    Do Like Warren Does. The Berkshire Hathaway model of an “operating company owning other operating companies” can be a great gateway to the asset class, combining both diversification along with the the “pop” and fast liquidity potential that a single company investment allows. Well-run companies like this that focus on the startup space are hard to find, but when one does they are definitely worth a closer look.

In short, when it comes to asset class, the advice here is to avoid the VCs and explore investment models – some new and some old – that provide access to it in a lower cost, higher expected return, and all-around more investor-friendly way.

To Your Success,

P.S. Like to learn how to apply these principles to your portfolio?   Then attend my webinar this Thursday, “What the Super Angels Know about Investing and What You Should Too.”  

Click Here to learn more.


The Greatest Steal Ever


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I grew up watching Larry Bird. My dad was a huge Boston Celtics fan (which is relatively odd considering he grew up in New York City). So, I became a huge Celtics fan too. And I was a big fan of the heart of the Celtics’ Larry Bird.
 
This guy never gave up.

In fact, if you watch this 40 second video - https://www.youtube.com/watch?v=H_RJ5XN8TK8 - you’ll see what I consider the greatest steal ever...

The Celtics were losing by 1 point with only 5 seconds left. And the other team had the ball. The game was essentially lost. But then Larry Bird intercepted the inbound pass and passed the ball to Dennis Johnson. Johnson scored the basket and they won the game.

While Larry Bird’s steal was phenomenal, if his teammate Dennis Johnson wasn’t in the right place and didn’t execute on his layup, Larry Bird’s efforts wouldn’t have resulted in a win.

As an entrepreneur, you also need great teammates. Since you can’t possibly build a great company by yourself.
 
In fact, great entrepreneurs are more like Larry Bird the coach (who “hired” and coached his players into being the best they could be) than Larry Bird the player (who performed key tasks and made his co-players better).
 
The key is this -- you need to find, hire and then train and coach the best people. Because there are TONS of bad people. I learned this very early on at Growthink. Years ago, I generally gave people the benefit of the doubt. If they said they could do something, I figured they could. And then I quickly realized that some people “have it” and some people don’t.
 
I think “having it” is the quality of people who “do what they say and say what they do” and always try to do their best. You want people who “have it” and at the same time people who are qualified and uniquely skilled at the position you need to fill. For example, while I believe I “have it,” there’s a whole bunch of positions that I’m not qualified to fulfill or which wouldn’t inspire me to do my best work.
 
So, how do you find these great people who “have it” and possess the skills you need. Here are my recommendations:
 
1. Event Networking:
great people have several common traits, one of which is their dedication to ongoing education. That’s why great people generally go to events and conferences. You also need to go to these events, where you’ll find some very talented individuals.
 
2. Being Sociable:
I’ve heard lots of stories of people meeting people at sports events, supermarkets, on a plane, etc., and striking up conversations that results in great hiring decisions. I must admit that I’m not the most sociable person outside of work; but I’m getting better at this.
 
3. LinkedIn:
LinkedIn is a great online network to find qualified people to come work for you. Join relevant LinkedIn groups to find folks with similar interests and who are looking to further their careers. And reach out to the best ones.
 
4. Recommendations & Referrals:
Oftentimes the best hires are the ones that were recommended to you by friends and colleagues. Send emails out to your network and advisors asking if they know someone with the skills you need. People generally only recommend people that they believe are competent, since their own reputations are on the line.
 
5. Executive Recruiters:
while this will cost more money in the short-term, executive recruiters (also known as “headhunters”) can find you great candidates. This is what they do. Importantly, they will often find you people who aren’t actively looking for a new job. These are often the best folks. I mean, would you rather hire an unemployed person looking for any company that will take them, or someone who’s thriving at a company but sees great opportunity in helping you grow your venture?
 
Importantly, in its relative infancy, eBay used executive recruiting firm Kindred Partners to find and hire Meg Whitman. Whitman turned eBay into a multi-billion dollar company and herself into a billionaire.
 
Using one or more of these five tactics will get you qualified job candidates. But, before you hire any, I highly suggest you give them two tests as follows:
 
1. A skills test:
whenever possible, you should test the skills of the job candidate. If you are hiring someone for a research job, give them a research assignment. If you are hiring someone to be a receptionist, do mock calls with them. Etc. I realize that for some jobs, it may be harder to test, but get creative since you want to make sure they will be able to perform.
 
2. A culture test:
if someone comes highly recommended and passes a skills test, it still doesn’t mean they’re the right hire. They MUST match with your company’s culture. For instance, if they’re a stiff, and your company thrives on fun and creativity, then they’re not the right match. Your company culture is critical, so don’t ignore this key test.
 
Hiring the right players for your team is critical to your success. There are no wildly successful 1-person companies that I know of. Imagine for a moment if you had a dream team; a group of employees that were so talented your competitors would be in awe. How good would your company become? How much faster would you accomplish your goals? How great would it be to come to work every day? Think about your answers to these questions, and then start building a great team and a great company today.


Lucky or Good? Companies that Sell for High Exits


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The saddest lament of entrepreneurs and owners of private companies seeking to sell and exit their companies is that they want their businesses to be valued on their future potential, and not its CURRENT profitability.

Given that the typical, offered purchase multiples for smaller businesses – as in those with less than $5 million in EBITDA – can be as low as 1 or 2 times last year’s tax return profits, this is understandable.

In fact, we often see purchase offers based on multiples of MONTHLY earnings – not exactly the “happily ever after” exit dreamed of when these businesses were founded!

Yes, getting a business valued and sold based on factors other than its earnings while by no means impossible nor uncommon, is HARD.

Yet…there are literally hundreds of companies every month that sell for very high multiples of profits, for multiples of revenue, and even companies that are in a pre-revenue stage that sell every day just on the value of their technology, their people, and their work processes.

What do they?

Well, here are six things that companies that sell for high multiples do that you can and should too.

1. They Are Technology Rich. Companies rich in proprietary technology in all its forms – patents, processes, and people – are far more likely to be valued on factors other than profitability and correspondingly attain purchase prices beyond a few times current year’s earnings.

As an example, the likelihood of a medical device company being sold or taken public is twenty times greater than that for a services - or a low-to-no proprietary technology company - doing so.

2.They Have Gold at the End of their Rainbows. Businesses that sell for high multiples communicate exciting and profitable future growth.

Their managers demonstrate understanding of the big 21st century “macros” - i.e. how technology evolutions and globalization will impact positively and negatively their industry, market, customers, and competition.

Concurrently, these managers understand the micros well too, especially how their business’ human capital will adapt and grow as change happens. 

All this translates into well-developed stories that if their businesses aren’t making it now, there is gold (and a lot of it!) at the end of their rainbows.

3. They Are Great Places to Work. Businesses that sell are usually characterized by that good stuff that we all seek in our professional environments.

They are culturally cohesive. If they don’t have low employee turnover, they at least have well - defined career progression paths. And their compensation policies align and pay well with desired performance.

Quite simply, they are great places to work and are reputationally strong within their industries.

4. They are Process and NOT People Dependent. Businesses that are overly dependent on charismatic owners or a few dynamic salespeople or engineers rarely sell because the majority of their value can simply walk out the door tomorrow and never come back.

Important aside: for those entrepreneurs that harbor the desire to sell but not the ambition to build a meaningfully sized, process-based organization should then focus their exit planning almost exclusively on technology and intellectual property development.

If they are unwilling / unable to do this, then they should put the idea out of their head for now and invest this energy into more meaningful pursuits.

Like my favorite - making absolutely as much money today as one possibly can.

5. They Have Good Advisors. Businesses that do everything right but have messy financial statements because of poor accounting, messy corporate records because of poor or non-existent legal counsel, and messy “future stories” because of poor exit planning and investment banking advice, simply do not sell.

Sure, they may get offers, but invariably these deals fall apart in diligence and at closing.

And as anyone that has ever been through a substantial business sale process knows, almost nothing in business is as time and energy-draining as is getting close to a business sale and not getting it done.

6. They Get Lucky. Luck remains a fundamental and often dominant factor that separates the businesses that successfully sell from those that don’t.

The best entrepreneurs and executives don’t get philosophical nor discouraged by this but rather they embrace it.

They try new things. They follow hunches. They make connections.

They start from the pre-supposition of “accepting all offers” and work backward from there.

They and their companies can be best described as “happy warriors” – modern day action heroes ready for the fight. When they get knocked down, they smile, wipe their brow, and get right back in the fray.

And you know what? Our happy warriors, living and thinking and working like this day after day channel some mystical power and draw great luck and more to themselves and their companies.

Yes, companies that sell are the good and lucky ones.

Follow the advice above and fortune just may smile on your company and those you invest in too.


Who, Why, When: 15 Minute Due Diligence for the Modern Investor


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Over the last two weeks we have discussed the motivations of private equity investors, and then characteristics of companies with breakout potential.

So now we are at brass tacks: actually making Yes/No decisions on specific deals and opportunities.

In other words, handicapping the probability of a company’s investment return projections actually coming to pass.

And relatedly, fair pricing and terms upon which to consummate a deal.

It is upon these “Due Diligence” matters where the real - as opposed to the theoretical - money on early stage deals is made.

Now, due diligence - as it is done by serious, professional investors - is an enormous undertaking.

It often requires hundreds and sometimes thousands of hours of accounting, legal and background reviews and checks, along with third party validation and research as to claims regarding market opportunity, competitive landscape and customer pipeline, traction, and satisfaction.

It can be as time, energy, and expertise intense as any business process or project one could possibly imagine.

And because it is so, for almost all individual investors doing it thoroughly and right is almost always completely unrealistic.

Luckily, there are some shortcuts that can yield similar investment insight.

I call them the “Who, Why, and When” 15 minute Modern Due Diligence Checklist.

Who. Easily the most important question to ask of any endeavor of importance: Who is involved? What are their personal and professional histories and backgrounds? Of leadership, business, investment and life success? Who are the professional partners (Law, Accounting, Banking, etc.)? Who is on the Board? (Is there a Board at all)? Who are the Customers? The Partners? The Employees?

When it comes to whether a deal is good or not, the answers to these “Who” questions is more often than not all you need to know.

Why. Why is a deal happening? Why are those who are involved in fact…involved? Why is the deal being offered to you?

Start with Why.

When. The old adage that “Time kills all deals” is also a great harbinger into the likelihood of a successful investment outcome.

How long has the deal been shopped? How urgent/desperate are those involved to get the deal done?

Now, these questions cut both ways. I as much want to see entrepreneurs that need to get a deal get done versus those that perhaps just want it to be so.

Need, in its best sense, drives urgency and action.

Want is often lighter, less substantial, and thus more prone to delays and “almosts” versus results and return.

Who. Why. When.

Mediocre answers to any of these and almost certainly the deal is not right.

But as they are all spot on, well then the next question to ask is often “What are you waiting for?”


The Two P’s Behind Michael Jordan’s Success


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Earlier this month, the Milwaukee Bucks basketball team was sold by Herb Kohl for $550 million. What’s interesting was that in 2003, Michael Jordan was interested in investing in both the Milwaukee Bucks and the Charlotte Bobcats. However, for his $50 million, neither organization would give him managerial control.
 
So, Jordan passed on the opportunity to invest in either. However, over the following seven years, the Bobcats imploded and Jordan was able to purchase the entire team for $175 million in 2010. Since then, with full managerial control, Jordan has turned around the Bobcats team (the team made the playoffs this year for just the second time in history). As a result, the value of Jordan’s investment has gone way up. In fact, it’s most likely considerably higher than the $550 million just paid for the Bucks.
 
So what is it about Michael Jordan that’s made him succeed in both sports and business?
 
My answer: Preparation and Practice
 
According to the book "How To Be Like Mike: Life Lessons About Basketball's Best," as a player, Michael Jordan's practice habits and conditioning regimen amounted to an "almost alarming harshness."
 
In fact, many experts, such as Florida State University professor K. Anders Ericsson, argue that practice continually trumps talent.
 
Prominent examples of success attributed to continuous practice besides Michael Jordan include:
 

  • Bobby Fischer: While Fischer became a chess grandmaster at the young age of 16, he had nine years of intensive study and practice beforehand.

  • Warren Buffet: Buffet is known for his extreme discipline and the significant time he devotes to analyzing the financial statements of organizations in which he considers investing.

  • Winston Churchill: Churchill is widely considered one of the 20th century's best speakers. Historians say he compulsively practiced his speeches.

  • Tiger Woods: Tiger developed rigorous practice routines from an extremely young age, and devoted hours upon hours each day to conditioning and practice in order to improve his performance.

 
As you can see, and as is pretty intuitive, preparation and practice are keys to success in sports. And in business, it’s the same.
 
Consider these examples that entrepreneurs often face:
 

  • Developing your business plan? Make sure you prepare the right information. Conduct solid market research to ensure your market opportunity and strategy are sound.

  • Giving a presentation to an investor or prospective client? Be sure to spend significant time preparing. Make sure you develop the right slides. Make sure you practice it and deliver it smoothly. Make sure you’ve anticipated the questions that might arise, and have answers for each.

  • Meeting with an employee to improve their performance? Make sure to prepare your list of items in which they are doing a good job, and a list for which they must improve. Practice delivering the information and prepare answers for questions they might ask.

  • Holding a company-wide meeting? Make certain you have a clear agenda. Prepare an outline to follow and a list of key points you need to get across. Practice delivering your presentation to get the greatest impact.

 
Importantly, for these and other business situations, think about your goals. What is the goal of developing your business plan? What is your goal of presenting to an investor or prospective customer? And so on. Having these goals clearly in mind when you prepare and practice ensures you prepare for the right outcomes.
 
Legendary football coach Vince Lombardi once said, “Practice does not make perfect. Only perfect practice makes perfect.” Perfect practice means you’ve done your preparation, for instance, learned what perfection is. And both on the sports field and in your business, doing the right preparation and practice will pay significant dividends. So, be sure to make preparation and practice a part of your daily routine.


In Investing, Does Fortune Really Favor the Bold?


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Last week my post on investment motivations generated a lot of great responses.

Many were of the genre that “…Yes these companies you describe sound amazing - awesome technologies, exciting markets, management with knock-your-socks off resumes, but when it comes to actually investing them….

…How do I even have a chance of separating the wheat from the chaff?

The superstars from the also-rans?

Or, more to the point, the ones that will make money from the ones that won't.

This is the ultimate question, isn’t it?

First of all, we are certainly not referring to “stock picking” to beat the markets. Everyone knows that this is not possible. (And if you have even a sliver of remaining doubt on this point, read this article).

And we're not talking about high profile, private companies that have already raised tens (and sometimes hundreds) of millions of dollars and are deep in the investment news cycle.

High-flying venture-backed companies like AirBnB, Dropbox, Uber, TangoMe, and Domo.

For these companies and hundreds of others backed by venture capital firms, by the time the public knows about them, almost always the best opportunity to invest in them has long past.

And, for the most part, we are also not talking about businesses or projects competing in mature and well-covered like Real Estate.

For sure, there are lots of solid real estate investment opportunities, but as it is such an efficient and well-covered market – with tens of thousands of investors seeking projects and deals of all sizes that the likelihood of finding those that offer returns even slightly above average is pretty low.

And let’s also cut out investing in “things” like art, collectibles, and commodities. While in places interesting for sure, statistics over a long period of time show that their average investment returns is significantly less than that of an S&P index fund.

So what investors seeking alpha are left with almost exclusively is that most special segment: startups and emerging companies.

Companies almost always with these characteristics:

They are Small. As in less then $10 million in in revenues and less than 30 employees.  Not hard and fast rule, but holds true 95%+ of the tie.

They have an Ambitious Leader. At the beating heart of these companies is almost always a charismatic individual that leads big and manages small.

A leader with an articulate “point of view” on where a market and an industry are heading.

And who can then translate this vision to the day-to-day small business discipline required to turn dreams and visions into objective reality and results.

They Compete in Big Markets. This one is easier than ever before. Why?

Well, with a 7 billion person strong, $84 trillion global economy, almost every business – even those in the smallest of niches - has a large global opportunity.

Of course, to profit from them opportunities requires great leadership and management (see above) but the opportunities are everywhere.

Companies with Thoughtful Revenue Models. This is where the ability of a company's leader to think and act both “big” and “small” are so critical.

Quite simply, companies that build asset and equity value for their shareholders are vigilant in ensuring that their monetization strategies are built around long-term customer retention and satisfaction, and NOT short-term gain.

Companies that are Lucky. The new and eternal mantra of our age is luck. Books like the Black Swan, Fooled by Randomness, and the Age of the Unthinkable profess on it.

Famous technocrati like Brian Chesky, Drew Houston, and Garret Camp pray to it.

Aspiring entrepreneurs who seek their name in lights pray to it.

And the average man unwilling to step outside of his box gets none of it.

Yes, as it has been true since Roman times in our booming deal economy for investors and entrepreneurs like Fortune does Truly Favor the Bold.

The question, of course, is will it favor you?


[Report] Here’s Why the Stock Market is Broken


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Remember the bull markets of the 1980s and 1990s, when everybody was making money in the stock market?

Bad News: Those days are GONE… and they’re not coming back

Click below to discover mine and Growthink’s exclusive report on WHY today’s stock market is broken -- and what you can do about it:

http://www.growthink.com/stock-market-dead <-- Click here

It’s almost hard to imagine how strong stock market returns used to be…

Just look at the average annual returns of the Dow Jones Industrial Average from 1982 to 1989:
•    1982: 19.61%
•    1983: 20.27%
•    1984: -3.74%
•    1985: 27.66%
•    1986: 25.58%
•    1987: 2.26%
•    1988: 11.85%
•    1989: 26.96%

The good times continued in the 1990s. On January 1, 1990, the Dow Jones was at 2,810. By December 31, 1999, it had exploded to 11,497 -- an increase of 409% in just 10 years.

But today’s stock market is BROKEN.

From 2000 to TODAY, the Dow Jones has only moved from 11,078 to 16,700 (only 40%). And INFLATION has reduced purchasing power by 37%... which means the net returns of the Dow Jones have been close to ZERO.

Download this report and discover why the stock market is broken – and what you can do about it.


The 5 Most Important Entrepreneurial Skills


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It’s been 15 years now since I started working with entrepreneurs. Over this time, I’ve seen lots of successes, and unfortunately lots of failures.

So, I started thinking, “what is it about those entrepreneurs who have achieved the most success? What are their common attributes and skills?”

While the initial list was pretty large, when I boiled it down, there were 5 common attributes or skills that the successful entrepreneurs all had. I’ve listed them below.

1. Vision & Leadership: Entrepreneurs must have a vision of where the company will be in the future.  In addition, you must be able to communicate your vision so you can motivate employees, investors, and partners to help you achieve that vision.

You must be able to identify staffing needs, expertly fill them, and lead your team to success. Rarely (actually never) do entrepreneurs build successful companies all by themselves.

2. Focus & Execution: Entrepreneurs must focus to make sure that goals are achieved, customers are satisfied, and employees are motivated.

For most entrepreneurs, staying focused is harder than it sounds. Be careful not to be seduced by the next exciting opportunity without executing on the priorities at hand.  And don't let perfectionism prevent you from taking action, either; at the end of the day, a product on the market is better than a product shelved due to lack of focus, execution, or perfectionism.  Get to market and get feedback from your customers as soon as possible.

3. Persistence & Passion:  As an entrepreneur, you must be passionate about what you are trying to accomplish. In addition, you must be willing to commit whatever is needed of them, whether it's time, energy, money, or other resources. 

You must persist through trying times (which will be frequent), and fight as much as needed to achieve the goals you have set for yourself and your team. I’ve never met an entrepreneur who didn’t struggle through hard times on their path to success. So, don’t give up when hard times hit you.

4. Technical skills:  As the owner of your firm, you may not need to be the most skilled technician on your team.  But you need to have necessary foundational knowledge to be able to lead your technical team and make informed decisions.

For instance, in my dashboard business, I can’t technically build most dashboard charts myself. But I know the metrics that must be plotted. And I understand the basic framework with which charts are built. As a result, I know whether a certain chart is feasible and approximately how long it should take to create. This is the information I need to effectively lead the organization.

5. Flexibility: Successful entrepreneurs understand that the world and the environment in which they operate are constantly changing. While you must focus on the end game, you also must adapt your strategies and offerings to meet changing market conditions.

Remember that many successful companies resulted from flexibility, particularly when their first idea didn’t pan out. Such as PayPal, which radically changed its business concept when its core technology of allowing one PalmPilot to pay another wasn’t gaining enough traction.

So, be persistent to a point when something’s not working. But realize that change and flexibility might be required.

The good news is that each of the above traits and skills can be acquired. You can teach or force yourself to be more flexible. You can set goals and give them laser focus. And so on. Make each of these attributes a habit, and you will have no choice but to achieve the success you desire.


What Every Investor Wants


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Last week my post on Silicon Valley - where I posed that the Valley as an investment hub had become overbought, and that the best opportunities were trending elsewhere - elicited some great responses.

Perhaps my favorite was from a Midwest VC, in reference to one of his portfolios companies in the data center space..."Here is an excellent company which is part of our VC portfolio that is…in the midst of the cold Midwest in Rochester, Minnesota, a location where few Silicon Valley folks are brave enough to consider for investment."

Another came from a well-known super angel from Dallas, “very much admire the wealth and innovation coming from SV, but it is time for investors to step out and see all of the great technology companies starting and growing outside of California.”

I appreciate these sentiments very much, and they got me thinking as to what are the common threads amongst those that love, work and invest in the startup and small business sector.

It starts with a set of beliefs. First and foremost, a clear and passionate recognition that the blessings of our way of life depend on our thriving free enterprise system.

And a deep and abiding respect for those that create wealth via their own hard work, creativity, and opportunistic sense of risk and reward.

For the entrepreneurs, the owner-operators, “the risk takers, the doers, the makers of things.”

Those brave souls that embody Picasso's famous credo of "work being the ultimate seduction.”

From whom business is far more than simply a way to make a living.

AND as they do it, they make money.

A lot of it.

In fact, the vast majority of startups and small companies earn a far higher return on invested capital than their larger publicly-traded brethren.

In fact, companies on the Inc. 5000 - a list of the country’s fastest-growing privately-held companies - average annual revenue growth of over 70%.

And a good number of these companies take in outside investment to accelerate their growth.

Some from professional investors - private equity and venture capital firms - and some from individual, “angel” investors.

And when the better among them do, those that love and are passionate about entrepreneurship, about technology, and about making money, want to participate.

Here’s why:

1. High Rate of Expected Return. Angel investing is by far the highest expected rate of return form of investing, Research from the Kauffman Foundation Angel Returns Study and the Nesta Angel Investing study, compiled by Robert Wiltbank, have demonstrated that the "...average angel investor (across the U.S. and UK) produced a gross multiple of 2.5 times their investment, in a mean time of about four years."

2. Home Run Potential. Smaller operating companies are the only form of investment that offer true "home run" potential.

Almost all great fortunes have been made via positions in small companies that became big. The list is legion, and runs from Standard Oil, DuPont, and Ford, through IBM, Hewlett-Packard, Wal-mart, Microsoft, and Oracle, to modern day supernovae like Amazon, Google, LinkedIN, Facebook, and Twitter.

And yes, Whats App and Occulus, too - companies still early in their business life but having already created fortunes for their early investors.

3. Connectedness. Perhaps my favorite, investing in smaller, private companies offers a connectedness, realness, and "human scale" interaction best compared to philanthropy.

It is the spiritual opposite of index, derivative, and Federal Reserve tea leave gazing that so unfortunately is what the media now considers “finance.”

Quite simply, early-stage investing is one of the last, pure forms of doing good while doing well…

…making a high personal expected, economic return decision while contributing to the entrepreneurial force of the world and providing fuel for innovations of all types that make it a better place.
What is better than that?

 


Answers to the 5 Most Common Angel Investor Questions


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On Wikipedia, I found the word "angel" defined as "a supernatural being or spirit, often depicted in humanoid form with feathered wings on their backs and halos around their heads."

While this might depict an "angel," it certainly is a far cry from the definition of an "angel investor."

Below I define exactly what an "angel investor" is along with answers to the other most common angel investor questions.

1. What is An Angel Investor?

 
The term "angel investor" is officially defined as a private investor who offers financial backing to an entrepreneurial venture.
 
When several private investors form an organization to collective fund ventures, they are known as an "angel investor group."
 
The act of providing the financial backing is known as "angel investing."
 
The amount of angel financing is significant. According to the Center for Venture Research at the University of New Hampshire, each year over 60,000 ventures raise over $20 billion from angel investors.

2.  Will an angel investor invest in my ______ (insert restaurant, hotel, technology, website, product, app, salon, etc.)?

The answer to this is "yes."

Software is the top sector that receives angel funding, representing approximately 23% of total angel investments annually.

Healthcare Services/Medical Devices and Equipment (14%), Retail (12%), Biotech (11%), Industrial/Energy (7%) and Media (7%) are the next top sectors.

Importantly, that leaves an "other" amount of 26%. And ìotherî includes every type of company there is. So, yes, there is an angel investor out there who would fund your type of business.

3.  What is the difference between angel investors and venture capitalists?

Venture capitalists differ from angel investors in that they typically provide more money (generally at least $2 million) and focus on companies that have achieved more operational milestones than companies generally funded by angel investors

Other key differences include the following:

  • Venture capitalists are professional investors. That is what they do for a living. Angel investors do not invest for a living.
  •  
  • Venture capitalists invest other peopleís money in ventures. Conversely, angels invest their own money. As a result, angel investments are not always based on the potential return on investment (ROI) of the deal (the primary concern of venture capitalists) but may result from other factors such as simply liking the entrepreneur and wanting to help them out.


4.  What return on investment do angel investors want?

There is no set formula for the return angel investors want. In general, they simply want a "fair" return. "Fair" might imply millions of dollars if your company eventually goes public and is valued at billions. Or, "fair" may be a 15% return, or a reasonably higher return than they would receive if they invested in the less-risky public stock market.

The key is to figure out what the prospective investor deems to be ìfairî and offer it to them.

5.  Where can I find angel investors for my company?

The best place to find angel investors is through networking. Who do you know? Who do your friends know? Who does your attorney know? And so on.

And then once you meet those referrals, ask who they know. And so on. By networking, you can reach tons of prospective angel investors and raise the funding you need.

Importantly, the vast, vast, vast, vast (yes, I know I just said ìvastî four times!) majority of angel investors are what I call "latent angel investors." That is, they don't know or walk around thinking of themselves as angel investors. But, they have the means, interest and ability to make angel investors.

Latent angel investors are the BEST for entrepreneurs, since they arenít seeing tons of potential companies to fund. As a result, if they see one good deal, thereís a good chance theyíll fund it. Conversely, those investors who see tons of deals are less likely to fund any particular venture.

Now that you know the answers to the five key angel investors questions, use this knowledge to raise this great funding source for your business.


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