# Trigger Warning – this article contain truth about startups. Stop here if you are happily deluded. #
Now that I have your attention, I have bad news … nobody has it.
To quote Frank Peters, the former chairman of Tech Coast Angels in the US, “If there was one, it would’ve been worked out long ago.” There appears to be a rough process you have to go through, but there are no absolutes. Paul Buchheit’s post here is the nearest thing to reality in my experience and he concludes that:
Idea * Judgment * Ability * Determination * Luck = $$$
Every Angel Group group and VC will tell you that you need:
– preferably a serial entrepreneur
– a good product … actually make that a ‘paradigm shifter’
– an addressable market with a minimum of $500m
– compelling intellectual property
– a team with domain experience
– patents and other intellectual property
There is a growing body of evidence that current investment screening criteria is not working. If it were working, this article and others would not have to struggle so hard to say that Angel Investing is good … in fact, you strip a few big deals out (and their winners) and everyone else loses. The late Luis Villalobos from Tech Coast Angels in California, estimated that you need to be in 25 deals before you would (by his analysis using their data and monte carlo simulation) be unlikely to lose money. Whether it’s 10 deals or 25 deals, it’s still pretty ordinary odds when you are playing with real money. It seems that the screening formula might be broken if the result is that over 50% of investors are getting a negative return even without putting a time value on money.
If you think further about the traditional model where Angels invest and then VCs follow, you can look at VC exits / success to approximate Angel success.
- The VCs only expect between 1 and 3 of every 10 of their companies to survive (exit positively).
- Only 1-3% of companies that seek venture capital get it according to some insiders.
- Let’s be generous and say that 30% of angel companies get funded by VCs.
- Let’s also say that most of the ones that don’t are dead, or ‘lifestyle businesses’.
We now have 21/30 Angel funded startups dead. (write them off) Of the remaining 9 … maybe only 1 gets a big exit. So, 1/30 Angel funded businesses are going to give the big return … maybe even only 1/30 will give any return. It’s easy to see how you need to be in a hell of a lot of deals to ‘guarantee you won’t lose’ … Compare this to a black / red bet on roulette (slightly less than 1:2) or the average horse-race where you have a 1:10 chance usually of at least doubling your money (usually). Betting on the horses should not be better odds than investing in early stage companies.
The companies that get there (and this needs some definition, but for the purpose of this particular point let’s call this exits positively returning to all parties) have a few things that stand out.
1. HUSTLE / FRONT
You are going to be punching above your weight for most of the company’s existence, so you need someone (preferably more than just the CEO) with the ability to ‘hustle’ (entrepreneurial X factor, gut feel, sales ability). It’s the ‘how the hell did you get them to do that’ deals that make the difference. The journalist that writes you up, the contract you get with a massive partnering organisation, the supplier that carries you when they should send you to the wall. These may also be classified as luck, but to some degree you can make some of your luck with massive coglioni.
2. GENERAL BUSINESS ACUMEN
That is, professional execution of day to day business matters. A lot of early stage folk think that someone else will write the business plan or build a financial model or do the market research or make sure compliance issues are dealt with. They will, as soon as you have the money to pay them. Until then, it’s all up to you.
3. SUFFICIENT SALES OF A PRODUCT PEOPLE WANT AT A PRICE YOU CAN MAKE MONEY
Your product needs to at least be perceived as unique by the purchasers. They need to want your product enough to want to pay you for it. The amount they are prepared to pay, and the number of the customers who are prepared to pay, needs to enable you to make a profit which will ultimately give your investors between 6x and 10x exits. Pretty simple really 🙂
Mostly you have find these but if you already have them, you have a big advantage. Contacts are one of those things you would have if you have domain experience. Domain experience is one thing that can make success just that little bit more likely. Not having it means you have to learn ‘a whole industry’. Good mentors / contacts can be located over time from within the particular industry, but it is a hell of a lot easier from the inside. Domain experience is probably a lot more important than doing a startup before (serial entrepreneurship). With contacts you can raise capital, get customers, and generally give whatever it is the best chance of getting there. With the right CEO and domain experience a startup, with everything else being equal, is in with a proportionally better chance.
No more than 1% of the hundreds of inventors and entrepreneurs have adequate capital. In most cases, perhaps 95 to 98 per cent of cases, they do not even have the basic amount of capital required to begin the process. Capital is something you simply cannot do without and there is no doubt that whatever you estimate you’ll need, you can probably triple it to get to the real number. You can find ways to bootstrap some things, particularly if you’re a tech company and you can write the code to get a Beta / minimum viable product out. This doesn’t work so well with physical products. You cannot get by with no capital, particularly if you start the patent process … bring your credit card/s.
You needs lots of this. There is a very fine line between persistence and insanity with respect to startup companies. It might be that the difference between the two is whether your gamble to put more time, money and effort into your project comes off for not. If it comes off, it was persistence … in fact sheer business brilliance. If it doesn’t come off, then it was insanity. Persistence is one of the things that stands out with the companies that are still going over many years. It is the unwillingness to give in. You might be out of money and really looking to have no way forward. Maybe you aren’t really dead, just having an NDE. It seems that most companies that get there have been almost dead at least once, and often multiple times.
Often defined as preparation meeting opportunity or right place and right time. It’s much more than this though. Every company that makes it seems to have had some major luck at some time. Startup company histories don’t happen in a nicer linear organised structured way. It’s generally frantic and chaotic. Luck often comes in the form of securing a first large customer / sale. Or it might come in the form of securing the financial support of a supplier. Sometimes luck even comes in the form of something truly random like a chance meeting on a flight. There is a famous example of this in Australia where a former journalist was selling a car to fund her product development and got talking to a gentleman who came to look at the car. The guy was the well known business identity and ended up being her investor and long-term mentor. Luck happens. Call it Grace (if you are an M. Scott Peck fan), call it serendipity, call it whatever you want. You can’t order it, but you are going to need some, so hope it arrives.
So, here is my magic formula:
A great Idea is WORTH ZERO without the following:
+ A Driving Entrepreneur
+ +Business Acumen
+ Enough Demand at the Right Price
Then maybe you’ll get $$$.
Do you need some some intellectual property? It’s better if you have something but sometimes you can be first to get critical mass and win without much in the way of IP. Patents are great for patent attorneys. They’re also part of the magic formula. If you are talking to angels or VCs, you’ll need something.You can be first to market (or even second or third) and still win. Brand recognition matters, trade secrets are powerful, design matters … patents are just one option.