Friday, January 8, 2016

2015 Angel Investing Review And 2016 Trends

Looking back at my 2014 resolutions I pretty much stuck to what I had envisioned: I worked very closely with some startups in my portfolio and tried to get them on the path to cash flow neutral. I led the first deal with the Band of Angels. My network building activities were largely focused on Germany where I am increasingly getting clued into the venture capital and startup ecosystem.

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How did the markets fare in 2015?

Public markets treaded water. The DJII started 2015 at 17823 and ended at 17425. The six year runup which started at the 7062  low point in February 2009 has come to a halt. The tech IPO pipeline bore very few exits in the first half of the year, and Square was the only better known company that was able to go public after the summer. Presumably, there still are 531 tech companies in the IPO pipeline, and 145 unicorn companies. Some unicorns may turn out be undercorns.
While the above trends are important when it comes to exits, angel investors play at the seed stage. Valuations were still high and seed money was still flushing around like it had been printed yesterday, although the investing pace may have cooled off just ever so slightly. It is worth pointing out three events and trends that may lead to future disruption in the seed investing space
  • Angellist raised $400m from CSC to be invested with the top 50 Angellist syndicate leads, effectively doubling the amount that has been invested via the platform so far.
  • A seed investment in Silicon Valley now means $1 to $1.5 million invested at a $6 million pre money valuation. Current seed capital firms have raised larger funds and have become the new Series A investors. New pre-seed investors are likely to fill the gap and make the first investments in the $200 to $500 thousand range.
  • The quantification of startup signals is continuing and now extends to the earliest stages. Large VC firms have invested heavily in this, and third parties such as Mattermark and CBInsights are providing related products and services.

How is my angel investment portfolio performing?

According to CB Insights, 22% of all companies that raised a seed in 2009-2010 have had an exit. To gain a perspective, let’s look at the statistics based on 11 investments between 2009 and 2013: Three are dead, and the money is gone. Four exits have made some money or have the potential to make money.  7 of the 11 investments have raised follow on funding. In 2015, Readypulse raised $5 million Series A funding in March,  only to be followed by Retailnext raising a whopping $125 million Series E in April.

I made two new investments. I led the Band of Angel’s investment in Savvy where Thomas Arend and Hamish Chandra are building a global platform where learners and teachers connect for live, one on one video learning sessions.

Where did all the time go?

I closely worked with the CEOs of two of my 2014 investments. We discussed fundraising strategies, hiring, M&A and a range of other strategy and management topics. I took many trips to Germany, and in particular to Berlin, and connected with VCs, angels and startup CEOs to understand the startup scene in Germany and in Europe. As in prior years, I was also heavily involved in deal screening, coaching and mentoring. I looked at more than 100 potential deals and talked with as many startups. My blogging activities centered around ‘how to invest’ and ‘how to manage’: Founders and markets, the elusive Minimum Viable Product, and the Business Model Canvas, just to mention a few.

What is ahead for 2016?

It is anyone’s guess what the markets will do in 2016, but 2015 ended on a jittery note. The economy in China is headed southwards. The IPO pipeline is bursting with unicorn candidates, although some of these will certainly be relegated from that list. And while Black Swan events by definition cannot be predicted, it is worth observing that there haven’t been any for many years now.

Venture funds need to deploy money in Q1, but that may be it.The pressure on startups to generate traction, a. k. a. revenues, will continue to increase and will separate the wheat from the chaff when it comes to raising the next round of funds. Not much new here, really.

Ideas will become more important again as ‘momentum’ investing and FOMO will die out. The quantification of early startup traction will further commoditize investing, and will force investors to engage in more due diligence.

B2B2C Is Dead. Long Live B2C2B!

Many startup and mature software companies are looking for Business-to-Business-to-Consumer (B2B2C) models as a new business opportunity to sell to other businesses. The idea is to start with a B2B approach, and then offer the services to the customers or employees of those enterprises.

In fact, consumer packaged goods manufacturers (CPGs) are a key target group. Why? CPGs want to build relationships with their end consumers, a relationship that has been typically owned by intermediaries such as retailers and restaurants.

I have seen numerous startup initiatives with CPGs and in other industries fail: A warranty app that wanted to connect end users to manufacturers. A bar app that wanted to connect patrons to beverage producers. Healthcare apps that wanted to connect patients for specific diseases with doctors and hospitals. An app for non-profit organizations that wanted to provide donors with a complete experience.

However, these businesses - the ‘B’ in the middle of B2B2C - typically lack the understanding of their end customers behaviors. They also know that they don’t know their end customers, and that is why they are interested others providing B2B2C apps. So if the first B - the startup providing a service - and the second B - the business customer - are both lacking in understanding the end customer C, nothing good will happen.


Ultimately this is the classic case of differentiating between users and buyers. A product needs to delivers value to end users, and only when it is desirable, it will also become viable with buyers. Building a successful product therefore requires an intimate understanding of the end customer, and is no different than any other B2C model, whether the target is a consumer, or an employee in a company. LinkedIn, Glassdoor, Box and many other SaaS startups are successful examples: Often, the product is free for the end user. Above and beyond the individual usage, the value to the business customer lies in the interaction and the analytics. The products are often seeded with user generated content using a ‘give to get’ model where for people to see information they have to post own data. As Tom Besse of Glassdoor said ‘you need to focus on something or someone so people will start talking about you’.

So there are no shortcuts to building products for businesses and their end customers and employees, but there are dead alleys. 

Stop calling it B2B2C - if a five letter acronym is required, B2C2B is the only path that will lead to a successful outcome.

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