Worth Zero

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.” My observation is that there is a rough process you have to go through, but there are no absolutes. I think that Paul Buchheit’s musings here are good 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

- some intellectual property

- a team with domain experience

- etc

I think that there is a growing body of evidence that current investment screening criteria is not working. If it were working, this article 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. Frank Peters was saying in one of his podcasts recently that one of the Tech Coast Angel founders, the late Luis Villalobos, estimated that you need to be in 25 deals before you could (by his analysis) 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 to me 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 … so they say.
• 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 (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.

My observation is that 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 I think that 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. I observe that 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

4. CONTACTS

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 I think can make success just that little bit more likely. From my own experience, not having it means you have to learn ‘a whole industry’ … I found some good mentors / contacts from within the particular industry, but it would have been a hell of a lot easier from the inside. This said, I probably wouldn’t have become involved with the particular company if I did have domain experience because it was just too left field. I think domain experience is 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. You still need the right CEO personality type, although the jury is out on which is best. With the right CEO and domain experience I believe that a startup, with everything else being equal, is in with a proportionally better chance.

5.  CAPITAL

I would say that no more than 1% of the hundreds of inventors and entrepreneurs I have dealt with have 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 out. But you cannot get by with no capital.  This is particularly true if you start the patent process … bring your credit card/s.

6. PERSISTENCE

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.  I think if I look back at my own experience, and those I have observed, persistence is one of the things that stands out with the companies that are still going. 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 to me that most companies that get there have them. I recall Frank Peters telling me that when he had his software company he had to make a sale on a particular day in order to pay his outstanding tax. He made the sale and ultimately  ended up turning Plaid Brothers Software into a big business that was sold to an even bigger business. Almost Dead … sounds like my next book!

7. LUCK

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.  In fact most companies that make it seem to have had multiple NDEs (near death experiences). 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 a chance meeting on an aeroplane. 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:

+ Business Acumen
+ ‘Front’
+ Persistence
+ Enough Demand at the Right Price
+ Luck
+ Capital

Then maybe you’ll get $$$.

As bizarre as it sounds, one of the most common delusions of inventors is ‘the worldwide patent’. In Australia, as most other countries, you can actually start the patent process yourself at a very modest cost; $80 here. Now the problem with this is every lunatic has $80 … so patent offices, if you are listening, do something about this. You are fuel on the delusion fire. Even worse in Australia we have a thing called an innovation patent … too much detail to go into here, but the bar is lower as are the costs. This means that you people (and when I say ‘you people’, I do mean ‘you people’) can get the impression that you actually have some intellectual property because you have one of these granted. Whether this, or a provisional or are in process somewhere my advice is – turn off Pink Floyd and PUT THE BONG DOWN!

One service that the patent attorneys could perform for humanity is to let everyone who comes in to speak to them about a patent understand that it’s a COUNTRY BY COUNTRY PROCESS. Yes, there is the PCT (Patent Co-operation Treaty) which is actually a worldwide PROVISIONAL, not a worldwide patent. That is, it establishes the date of the ‘invention’ but nothing more. It’s not a grant of rights. This happens when the patent is examined and granted by individual countries.

In general, even if you go through the PCT process, at some point you must choose which countries you want to go into ‘application phase’ in. These are the countries where you will be examined by the chosen countries patent offices. You may then be granted a patent in that country. Yes, you can save a bit of mucking around via the EU agreement, but an EU application is not every country including some critical Scandinavian countries so it pays to be aware of what the limitations are including what translation costs you may incur and individual country fees even if you are approved by an EU examiner.

The cost of patents is is another post, but let’s cross Get A Worldwide Patent off our bucket list … what do you think?