I'm an entrepreneur myself. Salaried life frustrated my need to challenge myself. I was easily bored by process and reporting. In short, I became unemployable. I grew up in a house full of my father's wacky inventions (holographic fires, carburetor balancers, jet nozzles, squirrel-proof bird feeders etc), all of which lost him the money he'd made consulting for other people's companies on boring things like process and reporting. Dad's creativity missed one vital component that successful entrepreneurs discover. It's not about what you want to sell, it's about what people want to buy.
I too learned this the hard way. Fortunately I persevered and eventually did learn it to make a few bob as a result. Now I spend most of my days seeking out entrepreneurs who might be able to put the following to good use:
- My Experience
- My Connections
- My Money
Someone has toStart-ups almost always begin their precarious lives using money from the three Fs... Family, Friends and Fools. A few manage to struggle on, known as bootstrapping, until they achieve profitability with no additional input required. This is known as organic growth. In other words, they can continue like this, perhaps growing steadily, until either disaster strikes or they get bought.
Sometimes they become even more ambitious and seek funding to accelerate their growth by opening new markets, scaling-up existing resources, buying competitors, buying upstream suppliers or downstream sales channels, or developing new products. This is relatively risk free and funding is usually supplied by banks or by what's known as Series A acceleration funds. Typically such acceleration requires in excess of £1m - which is usually outside most angel scope - in the UK at least. Business valuations are also much higher at this stage since the companies are making money and the risk is therefore relatively low. In other words, your potential to make a lot of money with a modest investment is much reduced. There are many specialist investment funds who seek this lower risk growth opportunity.
And then there's what's sometimes called the 'Valley of Death' where start-ups who don't achieve organic growth end up. Their 3F money gave them insufficient 'runway' to reach break-even. In short, they're going to need help before their money runs out. These are very high risk businesses. The founders basically didn't achieve the revenues they anticipated when they started. There are a number of reasons why this might have happened, and the more skillful angel knows how to spot the ones that have residual potential, from those spiraling towards inevitable oblivion.
The most common reasons start-ups run out of money are:
- It took longer than anticipated to launch the product
- It's launched, but fewer people or businesses than expected wanted to buy it
- Its specification, pricing, marketing or sales effort might need to change
- Competition was stronger than anticipated
- And most common of all - There might have been a gap in the market, but there wasn't a market in the gap (my dad's problem). The product didn't previously exist because not enough people were keen to buy it... or its timing was wrong.
But it's not always about avoiding impending disaster. In fact more often than not, the businesses who pitch to us have identified where they might have gone wrong initially and now understand what they need to do to get back on track. They say insanity is to keep doing the same thing while hoping the outcome will be different. Smart business people stop doing the wrong things, and either try something else, or stop altogether.
So an angel often helps businesses to change direction. It's not always easy to encourage entrepreneurs 'to smell the coffee', but most realise that something needs to change, and they are usually keen to listen to experienced business people who can help them see the wood for the trees. Again with the metaphors...
So angeling (is that a word?) is not just about spotting winners. It's about helping to train them to become winners by asking the right questions, suggesting ideas from your bank of diverse experiences, and it's about being honest in pointing out truths that need to be said. It's also about pleasure and it's about discovery. How amazing to be part of a new world which, with your help, might be better than the one we've created. Maybe that's why we're called angels.