Angel Investing Tug of War

“Angel Investing Tug of War” ©2014 Tech Coast Angels

“Angel Investing Tug of War”

“Angel Investing Tug of War” ©2014 Tech Coast Angels

It’s a Difference, In Philosophy…

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Entrepreneurs typically only anticipate success:

”We will win!”

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Angel Investors typically only anticipate problems:

”We Hope Rope Doesn’t Break!”

“Angel Investing Tug of War” ©2014 Tech Coast Angels

The interaction between entrepreneurs and early stage investors (angel investors or venture capitalists) can sometimes be a game of “Tug of War” when discussing areas like company valuation, market, competition, exits etc.

Valuation

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Entrepreneurs are Extremely Optimistic (One Could Say “Idealistic”): See high valuations of other Startups Value their idea/company highly Can see nothing but success ahead

“Angel Investing Tug of War” ©2014 Tech Coast Angels

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Angel Investors are Extremely Pessimistic (One Could Say “Realistic”): Most startups fail Many initial company valuations too high More likely to lose money than big return

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Company Valuation Be reasonable given stage of company Will increase as future milestones met Heed investor’s pessimism (“reality”)

Market

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Entrepreneurs See Simple Path to Success: “Only” have to get x% of $B market! Mentality: “Build It and They Will Come.” Getting funding from investors is hard…

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Angel Investors See Long Road to Success: Need to prove market acceptance Selling product more difficult than building “Build It, They Might Not Come.” Getting funding is easy part…

“Angel Investing Tug of War” ©2014 Tech Coast Angels

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Perform Analysis of Market Validate there is a customer & market Work numbers top-down & bottom-up Test market: find your customer first Would customer use product “for free”?

Competition

“Angel Investing Tug of War” ©2014 Tech Coast Angels

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Many Entrepreneurs Say: There is no competition! Existing solutions are archaic, expensive Our product is “unique” for customer

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Many Angel Investors Will Say: There’s always competition! If not direct competition, a “substitute”? How do you get customer to “switch”?

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Create Competitive Selling Argument Identify “Switching Cost” for customers Identify product “substitutes” Need feature/price/performance factor Make buying decision easy calculation

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Exit

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Entrepreneurs Say: We’ll exit to M&A or IPO! It’ll take 3-5 years… …but it’ll be a huge return for investors!

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Angel Investor’s Experience: IPO highly unlikely, scaling expensive Success will take 6-8 years (or more)… …but failure (loss) more likely!

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Exits “EXIT” signs usually RED for a reason! Some investment exits outlive investors Exit plan should be reasonable & … …continually revisited (as part of business)

“Angel Investing Tug of War” ©2014 Tech Coast Angels

Remember Both Sides of “The Rope”… Entrepreneur’s optimism (“idealism”) Investor’s pessimism (“realism”) …and try to meet somewhere in the middle…

Tech Coast Angels, www.techcoastangels.com, the largest angel investor

network in the United States, provides funding and guidance to more

early‐stage, high‐growth companies in Southern California than any other

investment group. Since its inception in 1997, TCA members have focused on

building valuable companies, personally invested more than $100M, and

helped portfolio companies attract more than $1B in additional capital, mostly

from venture capital firms.

TCA members give companies more than just capital; they also provide

counsel, mentoring and access to an extensive network of potential investors,

customers, strategic partners and management talent.

TCA has more than 300 members, including its venture capital affiliates, in five

networks in Los Angeles, Orange County, San Diego, Westlake/Santa Barbara

and the Inland Empire.

Who are the Tech Coast Angels?

“Angel Investing Tug of War” ©2014 Tech Coast Angels