Friday, November 11, 2016

Always be Closing - How to be a Lead Investor For Other Angels

Angel investors provide startups with their expert counsel and own capital but lack the financial fire power of larger institutional funds. They can overcome this frustrating situation and increase their level of involvement and influence by becoming lead investors and inviting other angels to pool money and add complementary expertise. This larger brain trust and combined rolodex of a team of experienced angels can be a significant help to a startup CEO. In fact, the right ‘dream team’ of advisors can deliver unique expert counsel that small VC firms are unable to supply. This approach also allows other angel investors to invest in areas outside of their comfort zone.
Attracting additional angel investors can be a daunting task. The opportunity needs to be marketed and sold to other investors all the way from getting their attention to closing the deal and defining an ongoing engagement model.
These syndicated deals provide the entrepreneur with efficient access not only to funding, but also to a set of angel investors with a broad set of skills and a willingness to help the venture post funding.

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To start, the lead investor should be familiar with the industry and work with the startup to understand the basics of the business. The lead should also conduct a thorough background, and potentially criminal, check of the founder. Pre-existing term sheets need to be well understood. If there are issues with the terms, they need to be made transparent before the process commences. The lead investor should come into the deal in a clean way, and not as an advisor who has been compensated with cash or stock. Conflicts are not uncommon and should be disclosed.

The founding team and the lead investor need to work hand in hand during the critical stages in selling a deal to other angel investors: Getting attention, creating interest and due diligence, and closing.


The lead investor’s first task is to attract the attention of the other investors. Angel groups are ready made vehicles to expose opportunities to like minded investors. These investors in turn may have additional, ‘secondary’, ecosystems they are interacting with. The communication with angel group investors largely follows a two step approach starting with an executive summary,  followed by a group presentation. The lead works with the startup on their summary and presentation and uses it as a mechanism to refine the strategy.

Interest and Due Diligence

Angels are interested in new investing opportunities for many different reasons - some believe in certain markets, others in great founders, and others are looking just for good investment opportunities. Ideally, all three come together.

This due diligence phase is also one of discovery for the new angel investors, even if the lead and other angel groups have already done own due diligence. Spending more hours on due diligence correlates with greater returns. Angels want to learn from the entrepreneur, and they also want to learn from each other. They prefer to learn by directly interacting with the founders and with each other in in-person meetings. In this phase, the lead should reach out potential investors who can add significant value but who may not have been interested initially. As the due diligence team attracts other investors, the lead should recruit investors with complementary skills and experience, e.g. in IP law, relevant technology, target market etc. Lead investor and founder should have identified these skills prior to closing, and make the introduction between the startup and these angel investors.

Ideally, the lead investor crafts a short 2-4 page due diligence memo to summarize investment thesis, market size, customer needs, uniqueness and competition, financial projections and funding strategy, exit strategy, deal terms, risks and what needs to be believed, and a leadership assessment - the memo doesn’t have to have the extent of Roelof Botha’s now classic Youtube investment thesis. Expected valuation, existing terms, traction, and team background influence investor interest. The founders should set up a due diligence web site, and the lead investor can organize a  feedback site for the interested investors only. Negative information that is obtained during the process needs to be disclosed.
The number of interested investors is likely to drop significantly during this phase, often as much as 75%. The number of potential investors may matter less than their qualities and contributions: Some angels have great expertise, some are great connectors, and have large funds.

Decision and Action

The due diligence phase has been completed. The lead investor negotiates the terms and changes to the terms on behalf of the other investors and may be negotiating directly with the company's attorney. Preferably, one of the investors groups has their own independent attorney to do the investor negotiations.

Interested investors have said ‘yes’ to the opportunity, but they haven’t written the check yet. The angel investors are seeking affirmation that this is a good deal, and the lead needs to convince the investors that they really want to invest in this opportunity. Simple distractions created by other competing deals and vacation absences can be reasons for potential investors to drop off. In fact, in syndicated deals it is not uncommon for the number of potential investors to drop off by more than 50% from the previous phase. One helpful tactic is to to keep up the sense of urgency by tightly managing the time between the due diligence and deal term completion. Lowering the valuation can also help to get a deal done. Enthusiastic support from other members of the due diligence team can be helpful in attracting a broader interest from other angels.

The lead investor takes the deal all the way to closing, making sure the legal paperwork is correct, signed, and the funds come in from all who committed. After the close, the lead investor typically stays involved with the company either as an advisor or board member.
In closing: Convincing additional angel investors to come in on a deal is difficult. Success for the lead investor should be defined by the process, and not the outcome.

Thanks to Karen Riley, Ken Arnold, Don Lee, and Bob Kyle for their insights and comments.

Tuesday, November 1, 2016

Startup Investing in Germany: The Investor Who Comes Too Late is Punished For Life

A stereotypical Silicon Valley startup raises multiple rounds of venture funding. Many of these funding rounds are well publicized, and hence there are few secrets about new startups and the problems they are intending to solve. Contrast that with Europe, and Germany in particular, where limited information about startups is available, particularly in the enterprise software space: Founders have a culture of self financing, there are few venture capitalists who invest in the space, and hence these startups are not written about nor do they seek attention.

Two recent funding news from the enterprise software space support these observations: Berlin based Signavio raised31 million from Summit Partners in December 2015, and Munich based Celonis raised $27.5 million Series A from Accel Partners and 83North in June 2016.

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Both Signavio and Celonis have demonstrated that an enterprise software startup can bootstrap its way to fast and profitable growth. Their journey also illustrates some important points for investors  

  • The founding teams developed their ideas during their university projects. They were first time founders without a track record in running a business. Public funding from the EXIST program financed both startups for the first year after founder graduation from university. Neither team took on any money from angel investors.
  • Signavio and Celonis were profitable and therefore able to self finance from the beginning. Both companies signed up hundreds of customers in just a few years. Signavio and Celonis did not raise a series A or B until the first funding event about six years after founding. According to CBInsights, startups from the 2009/10 vintage raised an aggregate of $18 million in three rounds during the same time period.
    The focus on business customers and the absence of external funding made Signavio and Celonis largely hidden from the general public.

  • This type of horizontal business process applications are fairly country and even language agnostic and travel easily. Both startups were visible within the international VC community and investors approached the startups multiple times. These funding rounds were contested and in both cases the founders chose international investors with expertise in international expansion, although better term sheets were provided by German investors. Given the inherent profitability of the business, these funding rounds may be the only opportunity for growth stage investors to participate.
Just providing capital to bootstrapped startups is not enough for investors to be invited to participate. Instead, investors need to differentiate by providing additional expertise and value. For angels, domain knowledge and expertise in getting a company started are differentiators. For growth stage investors, experience in scaling startups internationally will be a key advantage.

Investors at every stage need to become proactive and step up their game to be invited to the party. To quote Mikhail Gorbachev: Dangers await only those who do not react to life.

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Sunday, October 16, 2016

Everyone in Business is a Technology Buyer Now

Investor Peter Thiel has stated that ‘limited technological development has mostly been confined to IT’. Historically, technology decisions were made by the IT departments of large companies and by their 3rd party technology partners, starting with IT mainframes in the 1950s. The advent of IBM’s /36 spread computing power to medium sized companies. The advent of the personal computer spread technology within large companies and smaller enterprises.

Technology now has evolved to a point where end users can get their hands on applications almost instantly. Smart mobile devices and Software as a Service (‘SaaS’) are the two major disruptive trends which have accelerated the speed at which technology is adopted. The off the charts usage of mobile phones by consumers has put the traditional technology adoption curves to shame. This accelerated adoption has spilled over into enterprises at every level. SaaS applications have democratized application deployment and usage in every business.


These two developments have allowed for new buyers to emerge in large companies. Departments and groups who have had to compete for capital budgets before can now use their operating budgets to pay for SaaS applications. Marketing and sales are among the first movers and are the fastest growing SaaS segments.

The invasion of mobile and SaaS in enterprises have also democratized the buying decisions and have allowed individuals to buy. In mobile, Bring Your Own Device (‘BYOD’) has become the norm. In SaaS, Box, Yammer are some of the examples of first selling to individuals and managers before IT departments. An armada of startups is targeting every level of buyer in every organization at the right price level.

The easy deployability of SaaS and the simplicity of mobile have also lead to an accelerated technology adoption by Small and Medium sized Enterprises (‘SME’). SaaS is an efficient way to deliver applications for the more commoditized business processes in SMEs. New go-to-market approaches for these smaller solutions have further accelerated the sales cycles and have led to much faster technology adoption.

How Y Combinator Turned Around Their Demo Day Pitches

The Y Combinator program for startups has been a prototype for other accelerators and incubators. The efforts of these programs culminate in the so- called demo days where the startups are pitching their ideas and progress to potential investors. 

Over the past years the content of the pitches seemed to decline with each demo day and the number of buzzwords and assertions reached new highs. Investor frustration culminated and listening to these pitches became a waste of time.

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The latest summer 2016 Y Combinator demo day was a welcome return to fundamentals. The presentations were consistent and conveyed important information:
  • the space the startup is addressing
  • the problem and how the job is done today
  • the number and type of paying customers and how much they pay
  • the growth in monthly recurring revenue (MRR)
  • the size of the opportunity (the total addressable market - TAM)
  • how much bigger the opportunity could be
  • the duration of the sales cycle
  • summary - the name of the startup, the customers, and the growth
Clearly, this is not rocket science, but demonstrated customer validation. 

If all the demo days got back to these fundamentals it might actually be worth listening to the startup pitches again.

Sunday, March 27, 2016

The iPhone revolutionized mobile in 2007. What's going on in IoT?

In the telco world, the owner of the network from the device to the backbone was king. The network operators controlled the transport, and traditionally decided which devices were permitted as end point devices. But starting with the introduction of the iPhone in 2007, the value has migrated to the end user devices and the applications. At the time of writing in early 2016, Apple, Google and Facebook are three of the top five companies by market capitalization.

When will 2007 be repeated for the Internet of Things?

It is worthwhile recalling the elements of a generic network infrastructure and the developments in the telco space

  • Sensor packed end point devices.
    In the telco industry these are mobile phones and DSL/cable modems. Mobile phones in particular have developed into platforms with an ever growing number of applications leveraging the many sensors in the phone. The mobile phone manufacturers have consolidated.
  • Wireless or wired data transport from from the end point device to an aggregation point.
    In wireless, WiFi for short distances, and cellular networks for longer ranges. Wireless carriers have spent billions on licensing spectrum from national regulators. Cable companies have cleaned up their coaxial cable infrastructure to transport increased bandwidth. Fixed line phone companies have even put fiber in place of the twisted wire copper pairs.
  • Concentrators to aggregate data from the devices.
    Cell sites, DSLAMs, or CMTSs are all owned by the telco providers.
  • Backhaul networks to transport signals from the concentrators to the backbone.
    Initially these were owned by incumbent carriers, but starting in the late 1990 massive amounts of fiber were deployed to create multiple backbone networks.
  • Platforms to manage the network and distribute applications.
    In the mobile space, the phone has emerged to be that platform and bifurcated into one high end closed system (iOS) and one open device ecosystem (Android).
  • Application services running on top of the network. Google, Facebook. Enough said.

The winners in IoT will invent new uses cases and creatively deploy devices. In the consumer space, the ‘Things’ can be the human body, the home, the car, or anything else owned by a person. Wearables and home automation are off to an early start, and cars are not far behind.

In the enterprise space, the owner of the ‘Thing’ location will pick those devices and applications associated with the most promising use case. Beacons may be an early use case for retail, and there is a wide range of industrial use cases emerging.

As these deployments and applications scale and reach critical mass, platforms emerge. Nest’s platform program is a case in point for the home, and others are likely to follow.
For many IoT applications, wireless and wired networks are already in place. The evolution of the IoT landscape can leapfrog the network deployment phase and its captive devices and fast forward to the IoT equivalent of 2007.

Wednesday, March 2, 2016

It's The IoT Device, Stupid!

The Internet of Things (IoT) is a catchall headline for a seemingly unlimited number of use cases and applications. While human interaction with mobile devices has quickly become ubiquitous, the Internet of Things requires interaction with sensor devices.

No device access, no IoT.

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Participants in the IoT value chain who are downstream from these sensor providers - systems integrators, telcos, network providers, software companies - need to understand the respective device landscape to be able to capture significant value. To raise the stakes even more, device management requires provisioning, securing, managing, and updating these systems, and hence exclusive access to these devices will likely be the norm, similar to mobile phones. In the consumer IoT space, Nest and Fitbit are just a few examples of such vertically integrated ‘walled garden’ systems.

18 billion IoT devices were deployed by the end of 2015.
Significant capital expenditures have already been made, and can be leveraged to defer, reduce and even eliminate initial device expenditures. Yet, budding downstream players need to answer a number of questions to assess the feasibility and viability of their IoT business case:

How many devices have already been deployed? Who owns these devices? How can the devices be accessed? Is the device access exclusive? Are edge clients and gateways required to transport the data? Who will pay for the cost of the HW deployment?  Who owns the data? Who can grant permission to access the data?

Another 32 billion IoT devices will be deployed between 2015 and 2020.
Complex IoT devices are getting cheaper quickly. Low-cost single purpose sensors are already available and can be used as a beachhead to achieve lock in. If the IoT devices are not in place today, additional issues need to be addressed::

Who will bear the cost of deploying the devices? Who will own the devices? What is the economic incentive to deploy them? Whose permission is required to deploy the devices? Who are the visionary users and customers ? How quickly can the devices be deployed? How many will be installed and active in three years from now?

Locking up access to the end device is required and necessary, but is not sufficient to win. As Ben Evans from Andreessen Horowitz has said: ‘Anything that can be measured or connected or controlled, will be’. The race is on.

Wednesday, February 17, 2016

Letter From An Angel Investor To An Aspiring Founder

Dear Jane Founder,

You, the aspiring entrepreneur, walk into my office to pitch your idea. You think that you have invented a new way to turn lead into gold. My job  is to distinguish between the few great ideas and the many lousy ideas that I see day in and day out.

Let me explain: Early stage investors such as myself are willing to take on a high risk investment to achieve commensurate returns. As such, I am looking to invest in early stage founders and their startups. I am cognizant that, at this early stage, my ability to judge is complicated by a lack of product validation. A Minimum Viable Product would certainly reduce my investment risk, but it would also reduce my expected returns. And in fact, early usage, revenue, and ‘traction’ are no guarantors for later success.

In the absence of that early validation, there are four inquiries which help me assess the quality of your idea and of your thinking. Before you have even built a prototype.

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  1. What problem and whose problem are you solving?

    You listen to the customer, and you clearly understand the customer’s main problem and the viability of the existing solution. You know the single performance measure that is most important for the customer. ‘ Because customers don’t care about your idea. … We tend to fall in love with our ideas, but you need to test your ideas. Do your customers want your value proposition?

    You have identified the customer segment with the most urgent need to have the problem solved.

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  1. What is special about your idea, and how are you planning to validate it?

    Having contrarian ideas is hard. I am looking for ideas that are non-consensus to produce outsize return. To quote Howard Marks: ‘To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them – ideally all three.’ Peter Thiel is asking whether you have a secret, an important truth that very few people agree with you.

    Chris Dixon has characteristized the best ideas as (a) powerful people dismiss them as toys; (b) they unbundle functions done by others; (c) they often start off as hobbies and/or (d) they often challenge social norms. Paul Graham has stated that ‘the best ideas look initially like bad ideas’.

    I check my own biases for overlooking contrarian ideas by using diagnostic questions such as ‘Isn’t this a niche play? Is this just an ‘interesting’ investment? What do you do again? What do you want to be when you grow up?’

    You have solicited as much feedback on your idea as possible. Ideas, even before you build a product, need to be tested. If an idea remains a secret it simply means that is lacking validation. Even Einstein didn’t come up with the Special Theory of Relativity all by himself.

    You have identified the right user, and have talked to enough of them. You have A/B tested to target the right audience. You have confirmed that the problem to be solved is relevant and urgent for the user. You have validated the solution by understanding the user through precise observation and user feedback. You can answer Sequoia Capital’s question Why now?
    You can do all of this with a simple storyboard before a single line of code is written. Y Combinator makes the team walk through every step of the idea first, and only then convert it into a product.

  1. What market are you going after?

    Winning founders find great markets.

    Now that you already understand your target customer, you understand the market you are in. Andy Rachleff has suggested that the market always wins: ‘When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins.’

    You understand whether your idea addresses an existing market - the code words to look out for are ‘better mousetrap’ and ‘continuous innovation’ - or whether you are addressing new buying segments and are creating a new market - ‘disruptive innovation’. Understanding the category where the startup fits and who are the leaders in that category is crucial. Paul Martino from Bullpen Capital says, ‘There’s an advantage of investing in nascent markets and backing something before it becomes obvious to others.’

    Your startup should introduce the customer to a new category of product or service. Ann Miura-Ko from Floodgate invests in category kings, in those startups who define their category: ‘What is the category where this fits? Is it a category worth winning? Is it a category where the startup can become king?

    For existing markets, you understand the different dimensions such as: How big is the market globally? Are there any dynamics that will change it? How much of the market can you serve? How much of the market can you get?  What stops the incumbents from copying your idea? What would you do if you were competing with yourself? Y Combinator’s application is asking ‘What do you understand about your business that other companies in it just don’t get?’

    Understanding the addressable market is about making choices: ‘[...] you have to compromise on one dimension: you can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter.’

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  1. How are you going to make money?

    You have validated a price range by talking with customers. You find creative ways to prove that you deliver value to the user and can make money even before an MVP. Coin created a simple web page where people could order and pay even before Coin had a product. They reached their $50,000 pre-order goal in just 40 minutes. If your product is not web based, you have tested pricing assumptions in repeated conversations with potential customers.

Ultimately, I am asking all these questions for one reason only: What is your level of insight? It’s okay if you don’t have all the answers, but I expect that you have clearly thought about the known knowns, known unknowns, and the unknown unknowns. Only then will I listen further when you talk about traction, team, funding, product, channels, revenue and cost.

With warm regards

Your angel investors

Christian Dahlen & Oana Olteanu