All over the schools, media, we are told that if you want to be a successful entrepreneur, you have to raise money. If that is true, Business Angels is your first stop.
Tonight, I will go to INSEAD's business angel's monthly reunion. I know what I will see. I know because I very often go to business angel reunions.
Business angels are individuals, like me, like you, who are successful. Some times, BA are entrepreneurs. Most of the time, they are executives. They want a "piece of the dream"...
... Or more bluntly, they want to separate from some of their hard earned cash, and buy a lottery ticket that could worth millions. If it's a winning ticket, that is.
I am always baffled by the risk they take, and frankly, by their thought process associated with this level of risk. They have about one chance out of 20 to see any of their money back (most of them don't know that number actually). They give away 5 000 to 10 000 euros each to people they don't know. Of course they do "Due Dilligence" checks before writing that check, but their analysis is flawed at the beginning.
1 out of 20
Imagine: you have 100 000 euros to spare on top of your long term investments (Fortune 500 portfolio, mortgage payment, your children's plan, your own and your spouse's retirement plan,...). I know BA who have actually less than this to spare.... and you decide to go into BA investment/lottery, and invest 5 000 euros into 20 startups (most BA don't go that far). You go to pitch sessions, listen to 100's presentations, and select about 20-10% of the candidates for further due diligence process.
In the heat of the action, you start to dream, big, and take unnecessary risks. At the selection process, I have seen applications with an offering that was already existing on the market and led by former executives of a target industries, or generating revenues, with a fair expected ROI of about 20 to 50%, being.... ruled out. And applicants that had gigantic flaws from the beginning (only technical team, no prior business/industry knowledge, young, no contacts, using buzzwords and cutting edge innovation with potential IP conflict, not experimented or existing on paper only), being accepted for follow up scrutiny.
So this is where you should be saying that this is what you should do to raise the attention of the investor at this stage: innovative teams have more chances. Raise money !
Yes, but there is a catch. 2 actually.
No experience/sales/traction = no money
The first catch is what happens during the due diligence: being selected does not mean receiving the check. The process's objective is to assess the risks of the investment by gauging the team, its past results, it's technical solidity. The team that conduct this risk analysis is a composed of experts, investors, entrepreneurs, high profiles. I have been instrumental in some of those analysis, we are thorough.
Most of the candidates fail that part. Reasons are that the team never worked together, they are not aligned, they never started a business, the numbers and facts are misrepresented from the pitch, the competition is too established, there is no traction, or no sales.
To pass this analysis, you must be either a team of rookies that worked together in the past and managed to get results (money is better than users, but hey, that kind of companies is rare anyway in a pitch session), or an experienced team of serial entrepreneurs. In this last situation, a good powerpoint deck is enough because between the time you pitched and the time the du diligence team arrives, you most likely have moved towards a deal.
That is to say that the pitch part is here to select the people only, on their stage performance. not on the content: bad team, you fail after. You must master the art of the pitch, and go beyond.
The second catch, is to understand the numbers and your chances. 50 k€ will get you nowhere, so you have to raise more money to start. And nothing attracts money better than money: if you get one check, you are most likely to get some others, probably 5 others. So if you fail at a particular BA round, you most likely won't get another one. The ratio I witnessed is about 15 pitches, 5 due diligence, 1 investment. Given it's a winner takes all kinda situation, 1 successful investment requires beating 75 competitors, that is 1.3% chance of success.
That is low, but, if you are a first time entrepreneurs, smile, you are part of the 98,7% part of the curve.
What can you do to beat the odds?
Read on our next post
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