I am always telling entrepreneurs to take the Angelsoft application seriously because most investors do not read business plans. Even if you aren’t applying to an Angel Group or VC that uses Angelsoft, you can still use our software to generate a perfect PDF one-pager. Even better, include a video pitch so investors don’t have to read anything at all.
As an investor document, can we declare the business plan dead? Is it a remnant of a more cumbersome age? Before we do, I kicked the question over to a few Angels and VCs. I will update this post as the responses come in.
Personally, I think it’s no longer a document that investors are interested in. They take too much time to read, and in this agile business environment, they’re outdated the moment you finish them.
However, I do think it’s a valuable exercise for the entrepreneur:
It forces you to evaluate and quantify the potential of your business
If invited to pitch, you will face a firing squad of questions. With a business plan, you will know the answers
When you are finished, you will have a better understanding of your business
The business plan has shifted from an investor document to an entrepreneur document. It’s an exercise so you know everything there is to know about your business. It doesn’t have to be perfect, and it doesn’t have to be pretty. You should be spending your time building your company, not compiling a book. That’s just my opinion, I’ll update the investor responses as they come in.
The goal was to bring together fund investors, venture capitalists and entrepreneurs from all over the world and discuss investment strategies, the right and wrong practices of venture capital in emerging markets. It was really interesting to see all the parties of the value chain interacting together; the LPs, the VCs and the entrepreneurs.
Representatives from Draper Fisher Jervetson, Intel Capital, and IFC World Bank were among the panelists, covering topics including cross border investment, the role of R&D, and collaboration with angel groups.
Audio files of the conference sessions are available here.
Golden Horn Ventures is the first early stage venture capital fund in Turkey, and is quickly emerging as one of the savviest VC firms on the Angelsoft platform.
Read more about the group and their thoughts on venture capital, globalization, emerging markets and technology on their blog here.
Angelsoft is, and always has been, fully committed to the early stage investment ecosystem. Our platform has been accelerating “the right deals finding the right money” for over 4 years now and we boast over 8,000 accredited investors and over 450 qualified investment groups.
As our name implies, when we launched this company we saw the immediate need for angel groups to use our platform. What has happened naturally, is that other types of investment groups have come banging down our doors to get on the system as well. What we have found is that most investment groups all follow a similar process and have the same challenges. This is true for angel groups, business plan competitions, seed funds, and even many venture capital firms.
The common challenges we found:
Establishing a good relationship with current and prospective entrepreneurs
Managing the organization’s deal flow / deal log
Quickly identifying the good deals from the bad
Processing and handling unsolicited submissions
Collaborating amongst partners / members
Tracking and reporting on activities of the organization
Sharing deals with other investment groups
It’s no accident that the features of Angelsoft map to these list of challenges - and with every iteration we provide more and more functionality to our customers.
The most exciting thing that has been happening lately at Angelsoft is a groundswell of Venture Capital groups that focus on early stage investing asking for Angelsoft accounts. There has been SO much interest that this fall we are dedicating an ENTIRE iteration (and perhaps more than one) to building VC-specific features. Where are these feature requests coming from? From the over two dozen venture capital groups that are currently using Angelsoft to solve all the problems listed above and more.
Occasionally we get asked if Angelsoft would re-brand the product line for VC’s. Perhaps it’s something we would consider in the future - but what we are finding that is very exciting is that most VC’s know that their mission is about providing value to entrepreneurs and their limited partners, and whatever you call the product — if it does that — then mission accomplished.
Angelsoft, in providing software for ALL types of early stage investment groups, sees deals that flow and get shared in all types of directions. From business plan competitions to angel groups, from angel groups to VC’s, from group to group, from VC to VC, from VC’s down to angel groups, and basically any combination that you can think of.
Angelsoft makes all of this easy and it happens live within our software all the time.
It’s starting to get a lot more press in the blogosphere, as well. David Spreng of the National Venture Capital Association and Knox Massey of the Angel Capital Association authored an article that was posted on David’s blog, Lightbulb. The article discusses how VC’s and Angel Groups are starting to work together with increasing frequency.
netwroTExt is a Bellingham based company providing a service that allows users to send free texts to a group via their phones and their computers.
The amount of funding was undicslosed, but I got a chance to speak to their CEO and Founder, Derek Johnson. In regards to the round, he said
“we raised it to re-launch the website under it’s new name, Tatango. This website is much cleaner, easier to use and will incorporate many features that were missing with the original website. This website will go into private beta on July 15th. Last weekend alone we received over 1,000 beta invite requests. ”
networkText grew to over 15 million text messages since their launch in late 2007 and now have over 400,000 users. They are now currently looking to raise another angel round or go straight to VC’s.
David S. Rose takes Tech Confidential on a tour of the building in which Angelsoft resides. The same building now houses the New York Angels, SparkSpace incubator, Cloud9 (angel investment offices), and Angelsoft. This covers nearly the entire ecosystem: from Angels, Angel groups, Angel investment software, and entrepreneurs.
The Investor Community is made up of investors that rely on each other to moderate the best deals to the top of the pile. Investors can give a deal a Thumbs Up or Thumbs Down rating. The deals with the highest ratings get moderated to the top. These ratings are anonymous and are shared with the entrepreneur on the Application Manager.
Investors can also post comments on Investor Community deals. They can choose if they want to share this comment with the entrepreneur. They can also choose to share the comment anonymously. Entrepreneurs are given the ability to post ONE non-editable reply to every investor comment. Comments are displayed in the news feed and the Reply button is located at the bottom of the comment.
Some common questions:
Can all the investors in the community see ratings and comments: Yes. This is an Investor Community, and they are collaboratively rating and commenting on deals so the best rise to the top. Each investor in the community has a reputation, and investors keep the author in mind as they read comments.
Can I respond to a comment: Yes. A Reply button is located at the bottom of each investor comment on the News Feed. Entrepreneurs can post ONE non-editable reply to each investor comment. This reply is displayed in the Investor Community and is visible to all investors.
I have a great rating and positive comments but I wasn’t contacted for further discussions: Many investors are actively involved in in the community. An investor will often rate a great deal that is not right for them or their group.
I received a poor rating or comment: An investor decided to share their review with you because they want to help. Negative feedback is often more valuable than positive. They are alerting you to something important that you should know. Take whatever suggestions they make seriously and update your application accordingly. Be sure to update your application before Replying so you can alert Investors to the change.
Perhaps the single biggest area of confusion in the world of early stage investing is the answer to the question “what should an ‘appropriate’ return be for a VC or angel investor in a startup company?” This is crucial, because the answer directly affects the valuations that investors are prepared to give early stage companies, and the assumptions that underlie the answer are the context for the long term relationship between the investor and the entrepreneur.
Before the question can be answered, however, there are several different numbers and theories involved, and it’s important to understand each of them in context:
IRR (Internal Rate of Return) is the return on an investment OVER TIME, usually expressed as an annual percentage rate (that is, if you invest $10 on January 1 and get back $11 on December 31, that would be a 10% IRR.)
ROI (Return on Investment) is the return on an investment REGARDLESS of time, and is usually expressed as how many times the original investment is returned (that is, if you invest $10 and get back $30 at some point in the future, that would be a 3x ROI.)
PORTFOLIO TARGET RETURN is the IRR that an investor hopes to receive in total, taking into account ALL of the investments, profits and losses made in a given time frame.
ASSET CLASS TARGET RETURN is the IRR that an investor hopes to receive from all investments of a certain type (such as CDs, stocks, bonds, venture capital, angel investments, etc.)
TARGET ROI is the ROI that an investor hopes to receive on any one particular deal, taking into account the typical holding period for an investment of that type.
TIME VALUE OF MONEY is a fundamental economic concept that means $1 in your hand today is worth more than $1 a year from now (because you can put that dollar to work during the year, and make more money with it.) As such, ROI calculations are meaningless without an associated time frame. A 10x return that an investor would be ecstatic about if it came back in six months, would be a major disappointment if it took twenty years to come back.
RISK/RETURN TRADEOFF is the principle that the more risk there is in an investment, the higher return there needs to be to compensate for it. As such, an investor willing to take a 2.3% annual return on a US Treasury bill (essentially risk-free), might require a 12% annual return to be enticed to invest in a higher-risk corporate ‘junk bond’. (See tinyurl.com/6fby2v)
PORTFOLIO BALANCING means that most investors aim to diversify their risk/return profile by investing in several different types of asset classes, because in any given year one class will do better than another…but it’s difficult to predict which. It is therefore not unusual for the same investor to hold both US T-bills AND junk bonds, as well as several other asset classes. (See a fascinating historical chart of the relative returns from different asset classes over the past 20 years: tinyurl.com/5jygn2)
VENTURE/ANGEL INVESTMENTS in early stage companies are considered (for good reason) among the riskiest possible investments one can make. A majority of startups, no matter how promising, fail completely within a couple of years, losing 100% of the money that was invested in them. On the other hand, there is no way that an investment in T-bills (or General Motors) could ever have the potential return of an investment in a company like Google or Facebook.
Sooo…all of the above leads us into the following scenario: Mr. Typical Investor would like to get a somewhat higher total return from his investments than he would get by investing only in T-bills, and is therefore prepared to take some risk to get it. He decides to create a diversified portfolio with an overall annual target return of, say 5%. Since this is more than double the return of the average money market fund over the past five years, Mr. Investor’s safe (but low return) investments have to be balanced by some higher risk investments, such as small cap growth stocks, or international funds. But for investors who have an appetite for real risk, and the consequent ability to lose some of their investment if things go wrong, they can go even further up the risk/reward scale to…venture capital.
VC funds in general target a 20% or so annual return to their investors, which can certainly bring up the overall average return on Mr. Investor’s diversified portfolio. That sounds great, but with that high return comes equally high risk. Last year, a majority of US venture funds actually lost money and had negative returns, let alone not making their 20% IRR target!
Indeed, venture capital is only one part (the riskiest part) of an asset class called “alternative investments” that include things like private equity buyout funds, commodities, hedge funds, etc. And most institutional investors (the university endowments, pension funds and insurance companies who provide the majority of money to VC funds) nevertheless put only 2-3% of their capital into alternative investments as a whole…because they’re so risky.
Let’s look, therefore, at what it takes a VC fund to get that elusive 20% IRR. Well, it turns out (in case we didn’t already know) that investing in entrepreneurs is indeed a Risky Business. VC’s fund fewer than one in 400 deals they look at, but even with that discriminating judgment they are resigned to the fact that between 30% and 50% of their prized investments will crash and burn. Completely. And another 30% or so will end up being “walking dead”, that is, making just enough money to keep themselves alive, but not enough to provide any return on the investment. Indeed, statistics over many years have shown than virtually ALL of a VC fund’s returns will come from fewer than 10% of their investments. It’s the one home run with Google that makes up for all the WebVans, Pets.com and eToys.
Thus, continuing with our math lesson, and taking into account the facts that: one in ten companies in a VC portfolio need to come up with all the return for the portfolio; the average holding time for a VC investment is 5-7 years; and the return for the whole VC portfolio needs to be 20% or so, we can calculate at the end of the equation that ONE company needs to deliver an ROI after six years of something north of 20X! And therefore, since the VC doesn’t know WHICH of his investments is going to be The One (otherwise, of course, he wouldn’t invest in the other nine!), EVERY one of his investments must have the potential to hit a 20X return.
It’s because of all the forgoing realties, concepts and math that there is typically an enormous disconnect between entrepreneurs and investors. The former figure that ‘risk adjusted return’ means that an investor should be delighted if his/her/its investment brings back a 20 PERCENT profit (which is five to ten times the return from less risky asset clases), while the latter realize that if they don’t aim on each deal for a 20 TIMES profit (which is required on a deal basis to deliver the 20% return on a portfolio basis), they will be out of business.
The result? A two-order of magnitude misunderstanding.
As someone who has made over 500 angel investments, Ron Conway certainly knows a lot about angel investing and finding the right companies. I recently read a great interview of Ron on TheDeal.com. I never get tired of hearing and understanding the inner workings of expert angels like Ron. Read this interesting interview with Ron here:
The ACA chairman John Huston was recently interviewed by TheDeal.com. Of the many interesting data points in the article, the one point of particular interest is that Angel Groups are “baking out” risks for VC’s. By providing very small Series A rounds, angel groups help companies prove the business model and offer a much more compelling offering to VC’s when they are ready for an expansion round of financing.
At Angelsoft, we are seeing tremendous interest from angel groups and VC firms that want to work together more closely. As a collaborative platform with a secure shared back-end, Angelsoft is the perfect tool for VC’s and angel groups to not only process their own deal-flow, but also work together very easily.
