Angel investor: Want my money? Here's my checklist

http://www.alleyinsider.com/2008/10/angel-investor-roger-ehrenberg-want-my-money-here-s-my-criteria

by pakafka • 18 years ago

68 45 18 years ago

cbrinker• 18 years ago

Not sure if that's exactly for the YC crowd. While everyone would love to have a multi-million dollar business, the reality is that there are a lot of smaller good ideas that don't need $1mil+ funding.

I think YC takes a better approach in the way of financing. However, I think YC forces a group to be extremely frugal and thoughtful in their fiscal decissions. I think receiving large funding may lead to improper investments to younger entrepreneurs; but that's just my $0.02.

dhuck2• 18 years ago

I bristled at this: "A business that needs no more than $1-$2 million in financing to become a $25-$50 million (exit value) company, simply by executing the core business plan."

That is an insane requirement for return. I'm not sure how that's even possible - or if any company has even managed to do that. Someone prove me wrong?

arockwell• 18 years ago

I'm sure plenty have managed to it. Iirc, Omnisio had less funding than that and sold for $15 million to Google.

mseebach• 18 years ago

Broken thread, see http://news.ycombinator.com/item?id=324853

jd• 18 years ago

$25 million is a lot of money, but so is $1 million in funding. Most web 2.0 companies need no more than $100k or so to get to profitability, and can easily exit at $2.5 million. Same ratio, but it sounds a lot more achievable. So the only real issue is scale.

Bear in he's talking about enterprise software (i.e. support contracts, custom software, consultants). When you start doing custom work and get paid by the hour your revenue goes through the roof. So you can get to a $25 million valuation pretty easily, if you're willing to be a software/consultancy hybrid.

fallentimes• 18 years ago

We're trying.

sd• 18 years ago

It seems like the core message (apart from getting to profitability quickly) is pretty important to YC startups keen on getting acquired - "in a poor economy, companies really need to find better, cheaper, and more efficient ways of operating."

In other words, stop making widgets that turn your Facebook friends into zombies and start creating ones that make it easier for people to sell or make things.

wensing2• 18 years ago

In other words, stop making widgets that turn your Facebook friends into zombies and start creating ones that make it easier for people to sell or make things.

Or make it easier to be informed (saves time).

Prrometheus2• 18 years ago

>- "in a poor economy, companies really need to find better, cheaper, and more efficient ways of operating."

The economy isn't that poor, though. Ignore the headlines. Watch GDP, GDP per capita, and unemployment. If those things aren't going negative, then people are still going to spend money.

Politicians live by demagoguery and fear. Businessmen should look at facts.

mpfefferle• 18 years ago

Does this mean that the enterprise is back in style again?

nostrademons3• 18 years ago

Enterprise (or paid small-business services) always comes back in style in recessions. Look at 2002: the two big IPOs were PayPal and LoudCloud/Opsware. It's because ad spending - and particularly, ad spending in unproven mediums - tends to fall dramatically when money is tight. It's the first thing to go, well before productivity enhancements.

Of course, this means that for entrepreneurs starting companies now, consumer may be the way to go. It'll take a couple years to ramp up, and by then, the field has been thinned because investors only want to invest in enterprise startups. So there's more chance of the surviving companies getting the consumer attention they need to survive.

Sucks for people (like me) who started consumer web startups in 2007, though.

ph0rque• 18 years ago

> Sucks for people (like me) who started consumer web startups in 2007, though.

Do you have anything you're working on now, Jonathan?

infoarbitrage• 18 years ago

dhuck, let me clarify. what i am looking for is a clear path to that level of an exit without a company needing to spend more than $1-$2 million. this means getting customer traction, market validation, and revenue momentum. However, I acknowledge that some businesses require a B round to get there. I don't view this as a problem. What i do view as a problem is needing $5-$10 million before you can say "this is a viable business with an attractive exit opportunity." thanks for raising the point. roger

shafqat• 18 years ago

Everything you said makes sense. In fact, I think your requirements should apply at all times, not just during tough market conditions. There's really no excuse for startups not to be lean, agile and cheap. Maximizing output from scarce resources is what entrepreneurship is all about.

So can we get in touch with you re: funding? ;-)

thorax• 18 years ago

Just to be sure-- does your list have an unstated requirement of "...and also has an office in New York" (or other specific location)?

If not, that's great! If so, I think it's fair to include that in your criteria if it's important to you.

dhuck2• 18 years ago

Couldn't agree more with the idea with about ignoring companies that say they need $5-$10 mil in order to be a "viable business." Today's companies (look at ycombinator) can do that with much, much less. $1-$2 mil seems like a good level - more than I would personally need! :)

To restate/clarify my original point (messed up the thread, my bad): getting a valuation of $25 mil to $50 mil, with a TOTAL investment of $1-$2 million is very hard. Google and a few choice companies may have done that, but I think that's definitely the exception. A lot of good companies are out there that aren't Googles (take over the entire market in 5 years) that deserve investment, as well.

These investments might not produce a valuation of $25-$50 mil after 5 years (like Google, etc etc) - but maybe they would after 10, 12, 15 years. This is where I think we agree.

niels• 18 years ago

I find it interesting that he is interested in enterprise ROI types of technologies. Something I think is undervalued here at Hacker News.

pedalpete• 18 years ago

I don't know that enterprise technologies are undervalued at HN, as much as they often cater to a smaller market. My side project (to my main start-up which is my main side project) is enterprise focused, and I'm sure I'm not the only one. But enterprise is rarely as interesting as consumer. Doesn't mean not useful or interesting, just not AS interesting.

LogicHoleFlaw• 18 years ago

ROI is the key concept here to me. In a down economy, being able to save people money is a huge asset. If you can directly measure the benefit to your customers that's even better.

BenS• 18 years ago

...so you want to invest in businesses that will deliver good ROI in a short time. Makes sense.

joshu6• 18 years ago

The problem with this list, in my mind, is that it's a checklist of descriptions of a successful company.

If the signs are this obvious then the valuation would already be high enough to be unattractive to an angel.

I've done some (roughly 8 deals) angel investing myself, and prefer to look for something market-shaped; matching buyers to sellers, or similar; a team I would seriously consider working for; and a working prototype for me to look at.

The first is because that's the kind of thing I like to think about and because I think those tend to be scaleable businesses, the second is because as an angel I want to actually spend time for them, and the third because I think most powerpoint presentations are crap.

There are some additional parameters around investing (like how much the valuation is) but I'd much rather help an entrepreneur who is going to shoot for the moon.

wheels3• 18 years ago

It's similar to Sequoia's "Elements of Sustainable Companies", but well, not as focused:

http://www.sequoiacap.com/ideas/

(Currently down, Google cache below)

http://tinyurl.com/4byylj

I really like the Sequoia list -- perhaps because it's like a point you can look at and aim for when trying to sort out business ideas.

joshu6• 18 years ago

I'm just saying what works for me. But I'm also looking to have fun, etc. I'm reasonably sure I don't want to be a VC...

furiouslol• 18 years ago

Ever thought of moving back to starting up again?

joshu6• 18 years ago

Yeah. I'm much happier working on products. I'm not going to be a full-time investor -- I'm not suited for it. I mostly started out doing some angel investing to see if it was for me.

I think the main problem here is that I see problems and I immediately want to solve them. The goal for an investor is not to find and solve good problems but to bet on good teams. As Josh Kopelman says, it's about the chef, not the ingredients.

So mostly you end up saying "no" a whole lot. If you give an explanation as to why you don't like it, many entrepreneurs will simply change the details and then expect money, so you can't even generally give a reason. I think I spoke to north of 90 companies to consider even the eight deals I have done. Between that and incoherent summaries, MBAs with just a powerpoint deck, etc, I just get too tired.

netcan3• 18 years ago

I disagree. The first list is. The latter list:

# Initially sells to the enterprise for branding, credibility, awareness and early revenues

# Can get to revenues within 6 months, tops

# Is sold on the basis of ROI, e.g., helps generate revenues or reduce headcount/costs

# Integrates easily with existing platforms and/or programs

# Either leverages existing open source programs or can itself become partially or fully open source

# Has multiple revenue streams, e.g., software, maintenance, services, etc.

That's all describing a particular kind of business. It actually seems like it's describing a reasonable sepcific area: tech/service hybrid focusing on large-ish b2b clients.

Prrometheus2• 18 years ago

It's not bad for an angel to focus on one subclass of business models that he feels capable of understanding and judging.

wensing2• 18 years ago

A business that has an inherent call option, that could boost its base-line exit value by at least 10x

I will go ahead and expose my novice status and ask: what is an inherent call option?

nickb• 18 years ago

It's just a financial vernacular. Call option is a type of a contract that gives the buyer an 'option' to buy the underlying instrument (a derivative or a stock in this case) at a later date at a specified value. Simply put: the buyer will profit if the value of the company increases.

So all he's is saying that he is looking to invest into a business that will rise in value over time and that will be sold to a third party – "an inherent" part – and he also means that he's not looking to invest in "lifestyle"/"we'll pay out dividend"/"37sig" type businesses. And the last sentence fragment is self explanatory: he expects the value of the company to increase the value over time by at least 10x so he makes back roughly 10x on his investment (roughly since it doesn't really work out like that with IRR).

netcan3• 18 years ago

I thought it meant mean that in the event of success, he can increase his investment.

quasimojo• 18 years ago

ugh, here's a better idea, i'll self-fund so i don't have to indulge stupid cunts and the lists they scribbled down in the business section of barnes and noble

if things were nearly as much of a lock as this person demands, i sure as shit wouldn't have to slum it with angel funding, i could go to a marquee vc firm

joshu6• 18 years ago

I agree. Being an angel is, in my mind, about belief. If value can be easily demonstrated, the valuations would be higher.

netcan3• 18 years ago

I don't think it's about being demonstrable. Start with plausible. A lot of the items are about intent. While you can never be sure that items like '1-$2m tops before reaching 25 -$50m value' are a yes, you can often be sure that they're a no.

It might be in the strategy. The strategy might not be viable without more down the line.

Works as an exclusion list.

nocivus2• 18 years ago

It seems to me that the hardest part about implementing an idea is probably figuring out how to make money out of it and, since that is something (smart) investors require for starters, my question is: How does one come up with a business model for, say, a website for monkey owners to ask questions about their food (not the owners', the monkeys' :))?

Is the grand majority of websites limited to rely on advertisement or are there some constructive guidelines to help in this subject?

joshu6• 18 years ago

Generally, I get the sense that you can either come up with a new business or a new business model. Both at the same time is rare.

chmike• 18 years ago

Interesting point. I'm currently working on it. My impression is that it takes as much effort to design and implement the business model than to design and implement the product (idea). Another conclusion I draw from this effort is that it requires different skills and competence. It would be unusual to be good (or preferably the best) in all domains, but I believe it is possible.

My rule of thumb, to be successful in each domain, is to explore zones left in the shade (disregarded) and find something new and profitable. This applies to the idea (solving a problem) as well as to the business model.

A good strategy to be creative is to identify the assumptions we make, check their validity and see what comes out when you change them. Combine this with the appropriate combination and exploitation of the fundamental forces in play (assuming one has taken the time to properly identify them), and you can come up with a revolutionary and disruptive business model. If you manage to be very objective, rational and exhaustive in the exploration and evaluation process, this can work. (I hope I can prove it soon :] )

I see the startup community as an ant colony, following main tracks as a flock and just explore a bit away from the main paths. If one wants to increase the chance to discover something really new and disruptive, one has to follow orthogonal paths which means calling back into question common assumptions and habits. Otherwise you'll be in competition with zillions other ants, most of them being much more efficient and competent than we are.

nocivus2• 18 years ago

Exactly. Thinking outside the box is usually not easy; you have to be able to abstract yourself from the domain you are considering, otherwise you are biased from start and might miss obvious information.

edw519• 18 years ago

Causation or correlation?

Angel investor: Want my money? Here's my checklist

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