VC

Not All Angel Investors Are From Heaven

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On Angel Investors

As entrepreneurs, in the initial stages of the startup, we often think that the answers to our problems will come in the form of an angel investor. By definition, angels are high-net-worth individuals who get involved early in the company’s life, bringing capital, sector knowledge and network, and relevant expertise.

Angel investors usually invest anywhere between $20k-$300k and take on 10-30% ownership. They spend some of their time coaching entrepreneurs, opening doors, helping the company build the team and product, participating in strategic decisions.

Not all angel investors are the same

However, not all angel investors are the same. Reality has “expanded” the definition of an angel and many times what we see is well-off folks with no particular value-add (beyond the dough) playing the angel role almost as hobby. This is particularly true in less developed markets, such as Brazil (which I know from experience) and the rest of LatAm. Being rich and successful doesn’t necessarily make someone a good angel.

As an example, a retired C-level executive from a large pharmaceutical company may easily have a couple of hundred thousand dollars to spare and decide to invest in a startup. Why not help a couple of smart kids with a brilliant idea for a new technology or web business? What better way to stay busy and motivated!

The problem is that often these investors often have no idea what they are getting into. They just don’t know the real challenges and risks of starting a company. As time goes by, the product doesn’t launch as planned, the bank account gets thinner, and the investor gets nervous.

Entrepreneurs also get frustrated because they had expected miracles from this angel. After all, he is the older, successful mentor, who’s been there, done it all.

But it turns out the guy you looked up to actually doesn’t know much more than you when it comes to building a tech company from the ground. His rolodex only has contacts of retired people from irrelevant sectors. And as he sees his investment going down the drain, he doesn’t think you’re that cute and inspiring anymore.

Of course, I’m painting a pretty extreme scenario here. But the point is that you shouldn’t necessarily accept the first person who’s willing to invest in you. If the angel investor is not a good fit, it’s better to hold your horses, bootstrap the business a bit further, until you find someone who can actually add value to the company.

Originally posted on the Entrepreneur Academy (NEN). Image: nenonline.tv. See also Time To Start a Company – or Not.

What’s your experience with angel investors? Leave us a comment!

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With Disruptive Innovation, Customer Is Not Always Right

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Disruptive innovations and customer feedback

A recent study by ChubbyBrain.com listed the top 20 reasons why startups fail. The #1 reason, ahead of funding, product quality, pricing and other popular ones, was “ignoring or not seeking customer feedback”. However, there are two sides to this.

If your company is launching a disruptive technology, or a at least a truly innovative product, and you really believe in it, taking initial customer feedback at face value may not necessarily be the best way to go. A classic example is the walkman. When Sony was building the product in the 1970s it reached out to potential customers to learn what they thought of it. The most common reaction was to say that the walkman was a stupid idea! Who would walk around listening to music, instead of enjoying it while sitting back in the couch? How would you run errands or even jog with “speakers” on your ears, not hearing what’s going on around you? Had Sony been discouraged by this feedback, it would have probably discontinued the project and missed out on this huge hit.

If not a disruptive innovation, follow the rules

Now, if your product, like the vast majority, is not starting a new market or doesn’t require change in attitude or lifestyle, then of course the story is different. You should adapt to your clients as much as possible, not expect them to do so. This sounds intuitive, but many entrepreneurs (including myself in the past) think their product is so great that the problem, really, is with the rest of the world that doesn’t want it the way it is. Distancing yourself from your “baby” and taking client feedback into consideration is fundamental, both in the product development stage and thereafter.

At the end of the day, it is a judgement call. Do you believe so much in what you are doing – and how you are doing it – that you are willing to risk ignoring customer feedback? Are you breaking a paradigm of sorts to expect to be right over the majority of people you are supposed to serve? Only a very small percentage of startups would fall in this category. If you are one of them, you will have an uphill battle to change people’s behaviors; but one that can have a huge payoff.

See also Not All Angel Investors Are From HeavenImage: pocketcalculatorshow.com

What’s your experience with disruptive technologies? Leave us a comment!

Time to Start a Business – or Not

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What to ask yourself before starting a company

Before launching a startup, an entrepreneur must ask him or herself the following question: Can I support myself for the next 18-24 months? This is specially important if you’re in your late twenties or early thirties.

It doesn’t matter where support comes from. It could be your parents, your own savings, your partner’s job, or a liquid asset you’re willing to sell at some point. It could even come from your first investor, such as an angel, although very rarely outside investors are willing to pay you a (decent) salary, especially in the early days of a startup. The important thing to remember is that it will take longer than you think before your company is making money to pay you, or an institutional investor joins in with a paycheck.

Don’t expect short-term returns when starting a company

Drawn into the excitement of launching their ventures, entrepreneurs usually underestimate the sacrifices to come. Optimists by nature, they assume that something great is going to happen within a year: a successful pilot or beta launch, an investor, even a first client. Not gonna happen. Success stories about entrepreneurs who dropped out of college or left a job to support themselves on credit card debts are very sexy but incredibly rare. They do however get all the media attention. You won’t read a piece on TechCrunch about the entrepreneur who ran out of steam, shut down his company, broke up with his girlfriend in the process, and had to go back to his parents house.

The concept of time is very different for bootstrapping entrepreneurs and… well, the rest of the world! While you’re bleeding and resources are drying up, potential investors and clients will tell you comfortably: “Come back in six months or when you have more clients”. It’s a brutal catch-22 and it will drive you crazy unless you can’t support yourself and get into real world’s time.

If you’re in the early twenties or otherwise can afford it, screw it, take all risks! Starting a company – successfully or not – will be a great school anyways. If that’s not you, by all means, do also go ahead and pursue your dreams. But make sure you first do some planning on the personal front, soldier.

See also MBA For Entrepreneurs Can Still MatterImage: fotolia.com

Have you ever launched a new venture? How did you support yourself? leave us a comment!