The Great Startup Famine of 2015

Starting (if you’ll excuse the pun) with bad weather in the Spring of 1315, universal crop failures struck Europe creating what became know as The Great Famine. It lasted through 1316 and well into 1317 from Russia and Great Britain all the way down to Southern Italy.

Angels Bootcamp has just announced that it is to train over 1,000 new angel investors by 2015 starting this June in Berlin. We should all cheer the announcement of Angels Bootcamp, which aims to do what it says on the tin:

AngelsBootcamp is targeted at executives, entrepreneurs and finance professionals who have money in the bank to put into tech startups but who lack the knowledge about exactly what an angel investor should do.” (as TNW reports)

But Berlin, we have a problem.

While I heartily support anything which will accelerate Europe’s entrepreneurs (especially if it helps consolidate London’s position as Europe’s leading tech startup hub) where is the money going to come from so that all these newly invested startups can continue after their first $250,000 or $500,000 of investment?

It’s a metaphorical stretch, but there’s no point encouraging people to start a large family, if they won’t be able to feed themselves!

Europe and even London, Europe’s foremost tech cluster, already has a funding gap for adolescent startups. In actual fact, so does New York’s tech cluster.

“New York and London have more than 70 percent less risk capital available than Silicon Valley for Startups in the early, Pre-Product pre-Market Fit” Stages of the Startup Lifecycle.”  Startup Genome Report

And moreover even at the end of the rainbow, in the home of funding-food and plenty Silicon Valley, startups are experiencing an issue with follow on funding. Check out the graphs below, tracking the number of seed deals versus Series-A for U.S. startups: (courtesy Techcrunch, read the full article here)

 Capturegraph Capturevc2

“The “crunch” is perceived because of the boom in seed funding, which has brought a greater quantity of startups to the table looking for Series A funding…” (from the article Mining The Crunch)

Europe must find a way not to end up with a worse funding famine that of Silicon Valley now, which is that hundreds of startups funded by Xoogler’s and X-Facebooker’s are going bust -or becoming startup zombies– because they are either not worthy of further funding or because the market cannot sustain so many startups.

At a macro level, many of the much larger funds – the grandfathers of the tech VC in the U.S. and Europe – don’t perceive a problem. Possibly because they invest later stage and have extremely large funds (so are somewhat detached from the mass of earlier stage startups) or perhaps because those famous names get the very top pick of deals.

I was lucky enough to get Felda Hardymon from BVP on my panel at the recent Innotech Summit, along with Steve Schlenker from DN, plus others from Silicon Valley and L.A. to discuss this very topic (we even managed to co-opt Boris Johnson, the Mayor of London).

Boris gets to grips with a transatlantic Google Hangout

Boris gets to grips with a transatlantic Google Hangout

Perhaps not surprisingly (given that Felda has been at BVP since 1981 a full 16 years before I did my first startup) I agreed with almost every word Felda said. All of which was extremely insightful except that there isn’t a funding gap for startups in Europe.

There’s not a lack of capital for sure, but capital which people are prepared to risk at that critical, very high risk, very early stage of the startup life cycle? For sure there’s a dearth.

Perhaps the Series-A problem is that the whole approach to funding at that stage of a startups lifecycle needs to change, as one or two people I spoke to afterwards suggested.

After all, seed funding and angel funding has evolved immensely even in the last 5 years. But until that mid-stage funding environment does change, or until we teach our startups how to make a whole lot of revenue very very early on, it means that we need to educate our new European Angels not to make un-fundworthy investment decisions(!).

At the same time as a community we must find ways to open up the $1m to $4m investment bracket to more startups, by lobbying those with capital and the government for favourable incentives, alongside championing the value of technology startups both to society as a whole and as a vehicle for investment.

Venture investment (realistically, Series-A and above) create jobs. Fact. As crusades go, that's a good a reason as any. (Read Nic Brisbournes full post)

Venture investment (realistically, Series-A and above) create jobs. Fact. As crusades go, that’s a good a reason as any. (Read Nic Brisbournes full post on his excellent blog, which is where I stole this graph from)

In summary, Angel Bootcamp will go head and I wish it every success, but something needs to happen in the Series A world too, and there is much less chatter about solutions for this, or even talk of the problem, unless of course you’re a Founder trying to raise a Series-A round in Europe, and then you talk of nothing else..!

Europe did not fully recover until 1322 from the Great Famine of 1315, and while medieval starvation on a grotesque scale is more a human tragedy than any future mass deadpooling of startups, however severe, we should ask what can be done to ensure the tens of thousands of potential European jobs and startup Founder’s dreams, are not wasted away for lack of follow-on funding or Series A.

While supply and demand and market forces are one answer, I’m not sure a pure Friedman-esque approach to this growing problem is the only solution we should rely on.

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A New Type of Tech Blog

The infamous wordsmith Milo Yiannopoulous has invited me to contribute a column to his new digital publication The Kernel.

Aside from it sporting an excellent name @Nero is intending his new venture to raise the game in Europe amongst the blogs and online publications covering the digital entrepreneurship sector.

My first column is a self flagellation on being too-early-to-market. Titled “Timing Is Everything” it is a brief cronical of two fairly visionary ideas, ultimately neither of which I executed on successfully.

The responsibility of course remains entirely mine for these failures. While mitigating circumstances certainly apply (for example, building forward thinking free-to-use direct-to-consumer services in Europe is almost impossible) the one who steers the ship is still responsible for it sinking in a storm.

You can read more here or if you’ve had enough of me already I highly recommend the other contributors, all of whom have made excellent launch contributions.

Beginners Guide: How To Approach An Angel Investor

Over the last year fives years for two startups I’ve raised a little under $1 million dollars from 30 angel investors. I’ve probably spoken or pitched ten times that many. It’s a dark art and here is my two penneth which may help you along your way to do the same or better…

This is intentionally quick fire and inexhaustible, so if there are any questions I’m happy to field them in the comments.

Deck or Presentation

This is an excellent outline of a deck, from one of the kings of Silicon Valley VC, Sequoia.

Most angels will want to see an exec summary if not a deck as above; make sure this exec summary is STRICTLY one page. Work at it until it is. There is lots of content out there on this. Here was mine from 2009 for Rummble; Imperfect, but not too bad either.

You could also use a strip down deck if its hard (as Rummble was) to explain the product because it’s completely new or a different concept. So, maybe 5-7 slides as accompaniment. I’d advise sending as a PDF — and you’ll need a presentation deck (few words for when you pitch with it) and one WITH words to explain, for when you send it.

So you need two decks – one to pitch with in person and one to email for reading with out your explanation, which includes notes for each slide explaining.

Great book on writing powerpoints / presentations is Lifes a Pitch; you can read it in 1-2 hrs, but well worth the money.  .. in fact  I was so impressed by the book I wrote a blog post about Lifes a Pitch here.

Amount of Money

Angel investors are less sensitive (on the whole) to being flexible on amount of money invested. By this I mean that if you go to a VC and say “1.5m” then it suddenly drops to 1.1m, many will have pause in their confidence of your projections. An angel may be more understanding – often because it is an earlier stage of the company’s development – that the burn rate (the amount you spend each month) is a movable target. This said, be sure about your numbers and don’t get bullied in to saying the investment is too much or too little. Be confident.

Ask an Angel up front some basic questions. Don’t be shy. You need to know:

  • Do they have the money?
  • What is the typical size of the investment they do
  • What was the size of the last 3 investments and in to which companies

You are investing in them as they in you – this is a two-way street and not a one-way interview process.


How To Find Angel Investors

There are lots of brokers out there. People who will help you find money. Avoid most if not all of them. Definitely avoid anyone asking for an up-front fee or retainer, except in the most exceptional of circumstances if there is a small fee to pitch or something at a really excellent event – however I’d argue if it IS a really excellent event then it won’t be charging.

Rates for commission on investments vary of course depending on size and whatever the person thinks they can get away with(!) but something from 2.5 to 12.5% isn’t unreasonable, 12.5% being on the smaller amounts of money. I’ve taken one or two investments from personal introductions via  a business contact which included a 5% commission paid in stock, which was for around £60,000 ($100,000) if I remember correctly.

There are many people who can do an intro, just plug yourself into your local entrepreneur community. Don’t know where it is or who they are? That is what Google is for my dear reader!

You will need to press the flesh and attend all manner of events to find Angel Investors and to meet those who can introduce you. Using a filtering process when talking to someone at an event will help you work out if they are worthwhile investing time in. Questions like:

  • What sort of space do you invest in? (angel investors tend to invest in things which excite them or which they understand)
  • Are you actively investing at the moment? (then you can move on to the questions above – politely of course!)
  • Do you know any other angel investors who might be interested?

There are angel networks out there. Some are better than others. The Cambridge Angels in my experience are not hugely active – but I do know people who have had money from them. Equally, the re-energised London www.keiretsuforum.com has some great people associated with it and is also now being run from the West Coast I believe, rather than as a completely independent satellite here in the UK as it was before.

Super Angels

The Super Angels are those higher-profile more prolific angels who either:

  • invest a small amount in many companies
  • invest larger amounts (in total investment size – e.g. $100 to $1m+ )
  • or have just created a very good PR vehicle for themselves!

Genuine Super Angels who are both prolific, have great PR and genuinely know what they’re talking about include Dave McClure and Ron Conway are two big names; but these are just two of very many, most West Coast hailing.

Venture Capital as an Angel Round

This can be good provided you get huge added value – i.e. a real top-tier investor such as Fred Wilson & co OR the person leading the round can add vast industry experience. Otherwise, you may be simply dancing with the devils sooner than you’d need.

To talk about the way VC’s operate is another post entirely and not to be covered here. Have a browse of www.TheFunded.com if you’re not aware of the ups and downs of taking Venture Capital;  it’s a mine field and more often than not ends in tears for one if not both parties.

Due Diligence

Get your paperwork in order. I have been far more succesful in this with Angel Investors than I was with VC’s, largely because at the earlier stage of businesses I was the one doing the accounts & paperwork and so I wasn’t relying on anyone else who might get things wrong. On that basis, it is worth paying for a qualified good accountant, or book-keeper, if you can’t do it yourself and ensure it is right, to make sure your DD is in order. At one point I had a shareholder doing it but he turned out not to be competent in this field.

There is nothing more worrying for an investor, large or small if your accounts are a mess or share paperwork is not in good order. It’s a pain, it’s annoying but make sure it is done. Otherwise at worse you may lose the investment, at best they will haggle for a better pricing of the round (in their favour) on account of there being a higher risk because your admin is in a mess.

  • Accounts
  • Shares paperwork (and Companies House or your country equivalent)
  • IP / ownership
  • Contracts (employment and suppliers)
  • Tech documentation
  • NDAs & legals

…all need doing. I put copies as PDFs in a DropBox and share them that way.

Keep In Contact

I used to send out quarterly emails to shareholders. That meant that when then I had a problem, or wanted help, they knew what was going on and could respond. Yes it is tiresome to take 3 hours out to write a long-winded update of what is going on and plans, problems, failings, successes and wins; but it really keeps them in the loop and those who take an interest (if you don’t have a monthly board meeting with all your angels on one board) will then be well versed when you run out of cash or have a problem.

I used www.streamsend.com so I could monitor not only how many and who read the emails (I had over 30 shareholders!) but also ensure that the emails go to them and didn’t end in spam.

Pricing

Make sure you understand pre-money, post-money and the terms around what your company is worth and what you want to give away. Plenty on Google about this too 😉

I am sure there are many more things, but as a beginners guide, that should suffice!