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 …

Thanks for joining me here for a regular serving of BBQd startup sacred cow. I have developed a deep need to deliver reality to the early stage ecosystem. Penn and Teller do BULLSHIT, I am doing WORTH ZERO. You might be the Anthony Robbins type who bounds out of bed in the morning, does few star jumps and then runs 5 miles before updating your personal wealth and happiness plan. Please go somewhere else, you will get hurt here.

After almost 6 years around early stage ecosystem (inventors, investors, entrepreneurs, ‘consultants’, IP Lawyers, etc) I either have to put my head in an oven, or write about my experience and observations … I am a coward, so I am writing. Also writing a book about this stuff, but that’s a topic for another day.

It’s not to say that I don’t like the space. Actually, I love it and my own (ad) venture as investor / shareholder / CEO in Scarpar has been a huge learning experience. I can genuinely say that I had absolutely no idea what I was doing when I started the process and have, like most, made a stack of mistakes. With what I have learned, if I had the same opportunity again to get involved in Scarpar I would run a million miles. This said, it looks at this stage that despite half a dozen near death experiences we’ll get to market late 2010 / early 2011 thanks to a couple of  investors taking a punt on us at proof of concept phase. Pre-revenue investments are actually not as common as you might get the impression from the outside.

So, don’t take it that I think everything about Startup Land is bullshit. I don’t. However, there seems to be a disproportionate amount of bullshit around this space. I would say order of magnitude higher than corporates based on my experiences although granted there are deluded people surrounded by their own personal layers of bullshit there also. It reminds me of that famous scene in the movie The Accidental Hero with Dustan Hoffman …

I feel it is my duty to deliver a massive reality brochure. If I hear one more ‘power of the idea’ or another inventor tell me that they have found a solution to the Mexican Gulf oil disaster, I may still take the oven option.

Back to the point … so, why Worth Zero? That’s because I have learned that a great idea is in fact worth on it’s own; ZERO. Nada. Nothing. Ideas need action / execution and:

In addition, and I am the master of understatement here, it is really helpful if people actually want your product or service (idea) enough to pay for it! It’s also really helpful if they want your product or service enough that they’ll pay a price at which you can, not only make a PROFIT, but you can justify the cost of establishing the business. That relevance of whether or not the product or services is ‘good’ / unique / legendary / world changing / etc is small compared to having sufficient demand at the right price to justify commercialisation! Butter stick anyone?

This is clearly about commercialising new ideas / knowledge / intellectual property, not about establishing a corner store, a handyman business, or any similar business. The complexities of commercialisation do not exist in these types of ventures. Product managers do deal with commercialisation, but they have capital available not to mention colleagues with complimentary skills needed. This is not reality for most startups.

Many inventors I have come into contact with seem to think that they should be paid for their ideas. Bad News (and not the last) … nobody is going to pay for your good idea. In fact, in my day job, I deal with inventors as part of my role … about 500 in the past 18 months. There are some common themes. I have met and spoken to some very nice and bright people who are inventors as a result of my day job. I have also met and spoken to some absolute lunatics. Unfortunately, invention is seen as an easy path to riches. Nope. Well, rarely at best. So, the inventors are likely to get a fair bit of friendly advice here. Let me start by saying nobody is going to buy your ‘idea’ and do it for you, and we can build up from there.

Now onto investors. Most members of Angel Groups in Australia rarely invest. There are some exceptions, but groups have a lot of spectators in the form of consultants (looking for work), government folk, people who ‘just like to be around startups’, and (as perverse as it sounds) people who seem to like the gladiatorial aspect … Christians to Lions = ‘Pitchers’ to Angels.

Very few angels in Australia have done more than a couple of deals. In the US, it is (well, was) mostly different. I say was, because the GFC (and the years of very few exits) have greatly slowed the rate of investment. There does appear to be a higher level of honesty amongst many of the US investors on the good / bad / ugly of early stage. There is still a healthy amount of denial though even when faced with the facts. I do observe some common issues.

I haven’t met many investors who’ve made any money out of arms-length investments in early stage companies. This is not to say nobody makes money out of early stage investing, only that it’s hard even for people who’ve made a lot of money before as a senior exec or entrepreneur. Not many people do well out of it for a variety of reasons. I have a few theories about this, and since this is my blog kingdom, and I am the king here, I will be publishing my official royal decrees on this topic over time

A quick note to all those asking, “If you’re so smart why aren’t you rich?” The answer is because I invested all my cash into Scarpar! Not that I’d be rich now, but it has put a significant dint in the retirement schedule.

There are some powerful personalities in the investor ecosystem in the US and in Australia. Frank Peters talks about a room full of Type A personalities … I am afraid that I do not defer to their greater knowledge unless they publish the honest answers to the following:

1. How many arms-length companies have you invested CASH (not just time) in?

2. How many in the past year?