I first heard about John Paul DeJoria back in the mid 1980 and have followed his career on and off ever since. Here's a man who belonged to an L.A. gang member in his youth and was at one point homeless. Today he's a billionaire. This is a video worth watching because Paul explains how he started his company without any money. He exemplifies what the Smart Startup Guide is all about.
John Paul DeJoria: 2011 Entrepreneurship Conference Keynote
... only 51 companies out of 20,395 that were processed through their system over the last 12 months received funding. The odds of writing a New York Times Best Seller are greater than the odds of getting funded by an angel!
Even though I have been writing about this problem since 1995, I had no idea that the odds could be so poor. The typical numbers are one out of every 500 companies applying for venture capital gets any and perhaps one in every 200. The Angelsoft numbers translate to one in 400.
That's why it's called the Financing Valley of Death. Investors want entrepreneurs to prove their mettle by surviving it before any checks are written.
Don't kid yourself about business plans, Powerpoints, and elevator pitches eliminating this test.
A revenue-based financing instrument called a Revenue Royalty Certificate.
I'll gladly pay you Tuesday for a hamburger today. - Wimpy
The above quote sums up in one line what most first time capital seekers sound like to angel investors. I say this because the number one concern of investors is the preservation of their capital which includes the ability to extricate it from the company within a reasonable amount of time.
When the investor asks what sort of liquidity event the entrepreneur plans to create for this purpose and when, the answer is invariably vague. "Oh well, if everything goes perfectly we will IPO in a few years or be acquired by a big company." That folks is as confidence inspiring as Wimpy's famous offer. Investors require a minimal level of certainty. Vague answers only scare them off. That is the first big deal-killer.
The second deal killer is an inability to agree on a valution. The entrepreneur needs $500K and is offering 20% of the company for it. That's only fair, right? The angel wants 51% because of the high level of perceived risk. The chasm between the two valuations is in most cases too wide to bridge.
The third big deal-killer is over how any potential profits may be split if they do occur. Since the startup will be a private company initially the founders will want to minimize taxable income via the standard ways. This usually means that nothing is left over to share with the passive investors. Considering that his money could be tied up for five or more years without any return, can you blame the investor for not being excited enough to write a check?
Is there a solution? Is there a way to eliminate these three deal-killers? The answer is yes. It's done by using a revenue-based financing instrument called a Revenue Royalty Certificate.
One of the amusing (and sometimes exasperating) things that you notice as you get older is that people keep "discovering" the same obvious points year after year, and when they do they act like Christopher Columbus spotting land in the West Indies in 1492.
Last year, a research team at the University of Maryland B-School discovered that venture capitalists don't really read business plans. If they do look at them at all, it's to read the executive summary and management team section to see if any credible people are part of it. If they are still interested, they will then initiate a series of meetings that take place over months in most cases before making a decision. So the lesson here is don't put too much faith or money into your business plan. Smart investors know that they are as objective and accurate as a personal ad on a dating site. I first learned that hardly anyone actually reads business plans back in the late 1980s.
Now another academic has made yet another discovery which will send shock waves through the startup world. Are you sitting down? Here is it: investors don't like putting their money into companies that are more than an easy car commute away. In many cases, this means that any opportunity outside of a 25 mile radius gets rejected. In cases where an investment is made outside this radius, it's usually of a smaller size according to the study.
“We saw that visiting a company day to day made a real difference, and investors were willing to write bigger checks if they could do that,” he says. From Tian’s research, venture firms don’t necessarily abide by the so-called 20 minute rule, where venture capital firms typically want to invest in startups located within a 20 minute drive of their office, but a greater distance does make a VC hold on tighter to its purse strings. (source)
If the reasons why aren't obvious, allow me to spell them out for you. Investors, both VCs and angels, like to meet face-to-face on a regular basis with the people running their startups because their money is at risk. If an angel investor cuts a check for a new telehone system, he likes to be able to drop by and see that the money was spent on exactly that and not on a vacation for the CEO. Moreover, startups stumble and falter all the time. It's an accepted part of the game. When it happens investors want to be able to meet with the mangement team face-to-face to work out a solution. Sometimes people have to fired or hired and the investor wants a say in the matter. That's all hard to do if the company requires a plane ride to visit.
The lesson here is that if you are seeking capital you need to be near the people with money in the vast majority of cases. If you're not near them, consider moving. If you're not willing to move for the sake of your business then you may not be as committed to its success as investors would like see.Investors will simply assume that real agenda is to create a nice comfy life-style business for yourself with their money.
The worst thing anyone can do is hope that investors from another country will wire them money.
So yes, geography is a major factor in your ability to raise money from investors.
This is a BBC show on the Dragon's Dens from around the world. In the USA the show was called Shark's Tank.This is part 1 on how to
raise capital from angel investors. Some of the business ideas are unintentionally hilarious. However, the show is packed with valuable insights and tips for anyone trying tom attract capital from angel investors. I should add that I have always disliked the label "angel investors" because it implies that they are as free with their money as a doting 89 year old aunt. They're not. Instead they are hard-nosed business people.