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Notes for the graveyard of dead deals
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Notes for the graveyard of dead deals
Tech Coast Angels
, Angel Investors, investing in technology in/
most of Southern California
Oct 17, 2010
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Notes for the graveyard of dead deals
1. “The Graveyard of Dead Deals” by Tech Coast Angels - October, 2010 The following are companion notes to the Tech Coast Angels presentation “Graveyard of Dead Deals”, a presentation on typical “deal killers” when presenting early stage investing deals to investors. The sec- tions to follow describe the major themes of the presentation in more detail and are intended to sup- plement the presentation for presenter or audience. Note that these are just a sampling of some of the more major “deal killers”, you can add many more to this list with anecdotal information. Theme 1: “Product Issues” One common area where deals may fail to attract investors is when there is an issue with the product or service the entrepreneur is presenting: the product or service is not unique, there is no strong intellec- tual property or proprietary technology behind the product, there are no barriers to competition or imitation, or the product is simply perceived to have problems standing out in its market. “Be unique: have a unique product or service” Investors see many deals and are aware of what is “trendy” in the industry. Many companies present and want to be the next “Google” or “Facebook”: although we respect your ambition, we would ideally like to see unique products or services. It takes a lot of time and money to take on an existing large company, find a unique niche of a large market for your product or service, maybe you aren’t the next “Google”, but you have some unique product they could use? Your company may start small but have the ability to eventually be a “giant killer”. Detail your uniqueness. “Have strong IP or proprietary technology” Intellectual property like patents or proprietary technology like specialized hardware or software give investors more confidence in the uniqueness of your product or service. IP and proprietary technology are unique to your company and not available to competition. Describe current or future IP or proprie- tary technology, why it is important and why an investor should value it. “Build a “moat”: have a barrier to competition” Tied in with IP and proprietary technology, does your product or service create a “moat” around a cus- tomer that makes it difficult, if not impossible, for competitors to cross? Maybe it is your product and distribution model, your product and strategic partner or your product in general that offers an inherent barrier to competition. If you think you’ve built a “moat” to keep out competition, describe it in detail. 1 “Graveyard of Dead Deals” Companion Notes to Presentation ©2010 Tech Coast Angels
“Ideally: be a disruptive force in your market.” Try to detail how your company, your product or service has the ability to be a disruptive competitor to your market. Does your technology have the price and performance advantage to chip away at en- trenched competition? All new companies may not be disruptive and yet have the ability to be wildly successful, but if you think you have the chance to be a disruptive “pain-in-the-@#$” to your competi- tion, describe your thoughts to investors. See Clayton Christensen’s “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail”: on the concept of small companies creating “disruptive” technology that have the ability to turn an existing market upside down for competitors. Theme 2: “Management Issues” At the end of the company presentation, investor “A” turned to investor “B” and said: “I just love this product, but with this deal, the people are the problem.” Sometimes investors have issues with management because they are perceived as “un-coachable” or unwilling to listen to feedback, critical or otherwise. Other times, investors see management from large companies that may have problems adjusting to a small growth stage startup. There are even times where a startup CEO shouldn’t be CEO, yet lets vanity get in the way of the best future interest of his company. Finally, is the management team committed to the company, do they have “skin in the game”? “Be coachable: consider investor feedback.” Investors may not always be right individually when commenting on your technology but when you get a collective group of 30 or 40 giving you the same theme in feedback, you may want to consider the in- formation. No one is right 100% of the time: listen, absorb and be “coachable”. “Vary team strengths: startup and growth stage.” Startups require different skill sets than large companies: make sure your management team has a di- verse set of complementary skills. The startup phase may have team members that excel during that time period but are dismal failures during the growth phase. Sometimes individuals are able to adapt to any situation they face. Be aware of potential management team issues, investors may point them out to you, be honest in your appraisal of the perceived or real risk. “Value success of company over personal goals” Don’t let personal vanity get in the way of reality: even if a company founder believes in their heart of hearts they are CEO, President, CTO etc., let results and feedback from investors weigh on the decision 2 “Graveyard of Dead Deals” Companion Notes to Presentation ©2010 Tech Coast Angels
as well. Are you interested ultimately in the success of the company or your personal idea of what is success for you? Again, you might not agree with an individual opinion but take a “collective” opinion into consideration. “Be committed: have ‘skin in the game’.” Investors ideally want team members to have “skin in the game” (time, money or both) to show there is a level of commitment that will bridge bad times, as well as good. Are team members committed financially and emotionally to this company? Have they committed their own money to building the company so far and how much time has been committed to date? If a very recently created company, what is the “opportunity cost”: have the team members left existing lucrative opportunities to work in the company? Theme 3: “Valuation too High” Like the tide of an ocean rising and receding, valuations of startup companies fluctuate with the econo- my. However, recognize that valuations have to be reasonable in the context of their time and entre- preneurs should cite data or “comps” to back their argument. Investors see lots of deals and can pro- vide you data as well. “Have a reasonable valuation: later rounds build on it.” Valuations should be reasonable for the round being raised. If you have just an idea or otherwise are very early stage, don’t expect to have a large pre money (pre investment) valuation for your company. Note that if you are planning many rounds of funding through the growth phase, each round builds on the previous and the foundation should be milestones accomplished – not perceived value. A VC invest- ing on top of an overpriced earlier round will surely “massage the capitalization table” along with valua- tion and not leave you or your prior investors, in a happy mood. A funding round’s valuation should take into account not only where you are with your business, but where you are going. “Use comps or comparables: company or industry” Back valuation discussion with data: use other company or industry example at same stage. Take into consideration the current macro economic climate, the current macro angel investing environment and any other issues that may affect an investor’s mindset (maybe M&A activity in your space, or lack the- reof). For angel investors specifically remember they write checks with their own money, it isn’t like a VC getting paid to invest other people’s money: they are particularly sensitive to the current valuation and the dilutive effects of later rounds of investment. “Investors see lots of deals, value their input” 3 “Graveyard of Dead Deals” Companion Notes to Presentation ©2010 Tech Coast Angels
For the most part self-explanatory: investors will surely tell you the data they see in real time, you should absorb and value what they see in their “deal flow”. Theme 4: “No Market Validation” Ideally, investors are looking for great innovative products in high growth markets that will ultimately yield large investment returns. Does this sound like your product and market? If so, present detailed information on the market and its future high growth, why customers are in need of your product to resolve a particular business pain and any other corresponding data to back your claims. In addition, can you show how this round of financing will step wise work toward your product and mar- ket goals? “Investors want high growth, will market support it? Is your product’s market large and does the year-to-year growth trends support high growth into the future? Larger markets with high growth potentially offer more leeway for startup companies to progress with a product introduction and still potentially recover from missteps. Investors not only see the ability to iterate a new product in a large market but ultimately also the possibility of outsized re- turns on their investment. Detail specifics of your target market(s) and how the product fits in now, and in the future. “Potential customer references(s), what is their pain?” Can you give examples of customers that are willing to buy your product if it were available today? What is the “pain” for the customer that you solve and what is special about your product that solves this pain? Why would the customer choose your product over existing competitive solutions or compet- itive “substitutes” for your product? Potential customers will ideally be buying your product: explain to investors why. “Ideally: prototype, test market and show data.” Although not always possible, ideally prototype, test with a representative customer and share results. Not only is this great data for an investor, it is great data for your company: you can potentially incorpo- rate early customer feedback, iterate product and have a much more stable entry into the market. Cus- tomer data builds value to your company narrative for the investor. 4 “Graveyard of Dead Deals” Companion Notes to Presentation ©2010 Tech Coast Angels
Theme 5: “No Exit” All good things must come to an end: show your potential investors the likely “exit” for this company, be it an acquisition (M&A: Merger or Acquisition) or less likely, IPO (Initial Public stock Offering). Try to be explicit about the time frame for exit and likely target exit scenarios. Be realistic, to yourself as well as investors. Again, use appropriate examples and data. Who are the Tech Coast Angels? Tech Coast Angels, www.techcoastangels.com, the largest angel investor network in the United States, provides funding and guidance to more early-stage, high-growth companies in Southern California than any other investment group. Since its inception in 1997, TCA members have focused on building valuable com- panies, personally invested more than $100M, and helped portfolio companies attract more than $1B in additional capital, mostly from venture capital firms. TCA members give companies more than just capital; they also provide counsel, mentoring and access to an extensive network of potential investors, customers, strategic partners and management talent. TCA has more than 300 members, including its venture capital affiliates, in five networks in Los Angeles, Orange County, San Diego, Westlake/Santa Barbara and the Inland Empire. 5 “Graveyard of Dead Deals” Companion Notes to Presentation ©2010 Tech Coast Angels
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