Worth Zero

Ron Conway accelerates investments to real-time | VentureBeat.

So, not that Ron Conway will really care about my opinion, but I am going to give it anyway because I think that this view is at the root of the widespread delusion. In brief, the reason why so many of these companies fail is because the ability to invent coupled with the resistance to working for someone else is called entrepreneurship. No, it’s not.

You need an investment portfolio as described because so many of these companies will fail. Conway says “we are funding innovation”  … maybe. But most of it is not COMMERCIAL.  This is a product focus / push approach. It’s the approach of most inventors. It results in funding lunatics. You might get a few gems, but they’ll be very expensive to get to. You are going to have masses of failures doing this. Hang on … there are masses of failures! This is outlined in a previous post where it’s pointed out that 50-70% of Angels are losing money. The solution, more money doing the same thing … seriously?

Of course everyone shouldn’t get funded. The big names Twitter / Facebook / etc still are yet to prove they can make money. In the end, if they don’t, they are going to be dead.

The fundamentals apply:

• you must have a product people want
• the customers must be willing to pay for it
• the customers must be willing to pay a price that will support your chosen distribution model
• you must be able to sell enough of them to make it worth doing

All the companies that don’t have ALL of the above will eventually run out of people stupid enough to fund the next round … whether you store your photos and share them with your friends there or not.

I have an idea, how about Angel investing as described in the books. You put in some money, you get involved with the company, it’s in an industry you understand so you have contacts, you mentor the young entrepreneur … I think you’ll have a much better chance that the ‘shooting at a pinhole target with a shotgun’ approach.

But what would I know …

Can’t recall how I got here, but Simeon Simeonov via peHUB » Angel Investing By The Numbers does some great analysis on Kauffman data Angel Group returns. OK … so it seems my numbers were really optimistic in my opening post. In fact, 50-70% of Angels take out less than they put in.

In fact, it could be worse because of the non-compulsory nature of this. Everyone wants to talk about their wins … human nature. Not so sure they are lining up to talk about losses, particularly when it’s wealthy folk discussing being bad at investing.

This is, seriously for just a minute, an absolutely frightening set of numbers. No matter how you look at this, unless you are the guy who got the 55x, you a probably haemorrhaging cash … not fun and needs major league attention.

Any wonder the bathtub is empty! Angels in groups are being bled dry. The commonly peddled wisdom is that they do better than Angels on their own … I have been doubting this for a long time, and I still do. I hear as many stories of individuals doing well as groups, probably more.

Has anything changed since the GFC, or is the deal criteria the same … and should we therefore expect more of the same results? Maybe the proponents within the Angel Groups of chasing different deal structures and earlier exits without a VC round deserve more attention.

Then again, you could just spread yourself across a minimum of 25 companies so you ‘should’ at least get your money back!

Seems to me that if you have to take a portfolio approach to this, you better love it because sure as hell the stock market is a lot more liquid.

This topic has been analysed to death, and the most common thing you hear is that a serial entrepreneur / repeat CEO (even if they fail) is a way of significantly de-risking a business. (See Stickman Pitches the Angels – Serial Entrepreneurs )

This interview with Tom LeFevre is a pretty good summary of the types of personalities and experience levels of people that end up as startup CEOs. His examples of ‘likely to fail’ CEOs he points out:

1. Ex-corporate (will not do own photocopying, starts BBQ with $100 bills)

2. Inventor / Research (very busy creating the perfect product … no rush to market)

3. Never been a CEO before (not high enough up the corporate food chain to have had to think about ‘everything’)

4. ‘Salesmen’ of various persuasions (busy raising funds, or generally hustling but eyes not on the main game)

5. Ex-small business people (no experience with corporate systems, scale and compliance)

Anyway, worth a read and some good points made including his assessment of who’s more likely to succeed.

The previously successful ‘serial entrepreneur’ is more likely to succeed in a venture (34% compared to 22% for a first timer) … but that’s a lot less of a gap than you’d expect by the talk. It’s discussed here too around some Berkley research with different numbers but the same type of spread. The really interesting thing is that second time entrepreneurs who failed the first time aren’t that much more likely to succeed than first timers, but are favoured by ‘the magic formula’ (deal screening criteria). Successful seems to to need a common definition, but that’s a topic for another day.

The biggest venture backed companies that come to mind for me were mostly first timers … some Angels I interviewed for my book thought that entrepreneurs were bigger risk takers the first time and ‘lost their edge’ a bit after that because they knew what they were in for. From my personal experience, I can see that this could also be true.

So while a previous failure as a startup CEO may be a marker that Angel groups have been convinced to rate highly, reality is it’s statistically a very weak one.

Living the Dream …