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5. Do not tell me about your revenue model – tell me about your revenue. I do not trust Excel spreadsheets – projections are usually self-serving crap. Tell me about your revenues to date. CEOs that are not dedicated to generating revenues from the very beginning need to be avoided. I recently reviewed a ‘business plan’ that admitted that the company would be cash flow negative through at least two follow-on capital raises. In other words, if the company were not able to raise the additional capital, the investors would loose their investment. The message behind the business plan was, “we are too busy doing product development to dirty our hands chasing revenues.” These are not companies – they are science projects. If you want to supply grant money, go ahead. If you expect a return on your investment, dream on.
6. Do not go on about differentiators or competitive advantage; tell me about a customer that you took from another company. It is not ideas that I am interested in – its implementation. Show me that you have implemented your ideas – stolen customers – generated revenues. This point relates to the one above. No validation of the value proposition is relevant unless it comes from a customer who has paid real money for what the company has on offer. The real test of the validity of the value proposition is the market – not the investors or the founders.
7. Slow down – I am not interested in being the focus of a heated rush. If you think your business can be described in a few sentences, you are far more simple-minded than the world as I know it. I often suspect that ‘entrepreneur wannabees’ who are good at elevator speeches suffer from ADD. Their attention span is so short that the brevity of an elevator speech is all they can manage. Their vision of business, their business and the investor’s world is so abbreviated that anything beyond instant gratification and casual agreements is beyond them. Getting a CEO beyond the elevator speech and into deeper waters is one of the best ways to test their ability to build and manage a company.
8. Recent trends and the economic downturn have made this an unfavorable time to seek financing. You do realize that, if we do reach an agreement, the valuation of your so-called company will be very low and I will end up owning most of it until you can produce results that allow you to buy it back. I occasionally receive packages on pre-revenue companies with proposed valuations in the millions. My response is always the same – set the valuation at the investment amount and allow the management team to buy in through sweat equity and results. Initially the investors will own most of the company but, with success, the management team can increase their share of ownership. Most investors are very happy to allow the team to achieve a majority position – if they earn it.
These are just a sample of the questions that I recommend investors ask when reviewing a potential investment. Pressing them will improve your returns. If you cannot bring yourself to press them, bring in somebody who can. Whatever they cost, you will be a small matter compared to loosing your entire investment.
© Dr. Earl R. Smith II
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Related Articles:
- Angel’s Sins
- Angel Investing – Governance
- Angel Investing – Hard Choices or Hard Times
- Customers as Financiers
- Exit Strategies Under Current Conditions – Part 4
- Attitudes, Agendas, Interventions and Compromises
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4 Responses to “Angel Investing – The ‘Elevator Speech’ Antidote”
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Thanks Dr Smith II – this is really great advice.
I’ve experienced the wrong end of believing the spreadsheet – and not going into the detail of the assumptions that built the spreadsheet. The interesting discussions are always about the assumptions – and rarely about how much this enterprise will be worth in 3 or 5 years time. If you miss this point, you lose your money.
I also support entirely the ‘prove it’ first approach to business and investment. Even in the bible when Christ turned water into wine at the wedding, the water didn’t become wine UNTIL it was laddled out. In other words, to have miracles happen, you first take action.
Thanks for a great comment Neil. During my time on Wall Street I learned that you begin reading any financial statement from the back forward – start with the footnotes. One of my reservations about an elevator speech is that it contains no footnotes and some investors don’t follow up by verifying the details in the assumptions. You are totally correct – the only sure way to decide is by reading the ‘tracks in the snow’. It’s not the idea that matters – it’s the demonstrated ability of the team to implement and turn the idea into revenue and profit margins.
Sean, Good question – most of the time successful entrepreneurs tap into the three Fs – friends family and fools. It is far better to bootstrap until you can validate the value proposition through the generation of customers. Such an approach also demonstrates the ability of the team to monetize that proposition. There is an article on my website titled Customers as Financiers. That is one example. If you go to angel investors too early in the process, you end up with a very low valuation – and that costs you significant equity in the company. Chief
I found this insightful and thought provoking. It makes sense to me that as an investor you should be looking for substance not flash and that the company should be built around have people who have a record that shows they can get it done.
However, as someone who has just started a company to take IP out of a University so we can develop and ultimately commercialize it I am curious what you would advise a comapny several years away from having a product or revenues that needs to raise money.
In points 4, 5 & 6 you would appear to be advising investors to avoid situtations where the company doesn’t have a product, doesn’t have revenues and that maybe even in a situtation where they have to get through several rounds of funding based on achieveing key milestones.
Where should they go to raise money, are these not often the people who are advised to seek angel investors ?
Appreicate your thoughts
Sean
Very well written. The point is clear. Keep it simple and give me facts not hypotheses. I’ve been to many companies where the local management team is suffering paralysis by analysis. Plan after plan is drawn up but no action follows. A plan that’s not implemented is a waste of time and money and does not serve the shareholders well. Don’t get me wrong, I’m not advocating no plan, but once the plan is drawn up – Do it.