The biggest question for angel investors – and hardest to answer question – is ‘what am I actually investing in’?
However, if we ask the question another way, it does become easier.
If we take the approach that the task of the investor is first and foremost not to lose his money, then the first question that comes to mind will be this:
‘if the business plan as presented fails and the business assets are liquidated, will I get any or all of my money back’?
The answer to this question will tell you whether or not you are investing in anything tangible or whether you are well and truely taking a punt.
Let me give you an example – a business developing a piece of technology to reduce fuel usage – if the business plan goes up in smoke you are left with the patents. It may be that the business size or level of marketing funding wasn’t sufficient to manufacture and deliver the product at a profit – but that doesn’t mean another firm – probably a large auto parts firm – can’t add your patent or product to his range and turn a profit right away.
Hence, what you are really investing in is the patent and the technology. This is the tangible and sellable business asset and what is left once you’ve paid for someone to come and take the spare desks and tatty old notebook computers away.
Another example, if you are investing in a website, what is left if the business fails? The domain name perhaps? You are unlikely to get anything for the web technology for two reasons; firstly, anything clever done today will be copied and available free tomorrow – so there is no lasting value in we technological innovation other than the opportunity to exploit it which falls only to the business that created (and hence can’t be sold on); or, the web development is so clever that no one else can quite understand it (ie they can’t copy it) hence it will be impossible to sell it.
Therefore, web businesses – without a real business behind them – are likely to be worthless in a firesale situation – with one exception – the brand!
Let me give you a final example; I am often asked ‘can you give me a list of buyers willing to buy my product’ to which I can answer ‘yes and no’. This means that I can give you a list of any group you like – it is relatively easy to build such lists – just start a group on facebook or twitter – but, I can not guarantee that they will either read anything I write (or any sales pitch that I pitch) and I have even less confidence that if you do read my marketing copy that they will act on it.
Okay, so how do you increase your email marketing open rates? Easy. you send it from a branded email address where that brand has built a reputation of intelligent and useful ideas and information.
Therefore, the thing of value here is the brand not the list. Oddly, the list of customers is probably the least valuable thing – but buyers of distressed assets don’t always recognise this, so the customer list may still be the asset that generates most cash.
So, getting back to the question – ‘what am I investing in’ the answer will be
a) the creation and development of assets
b) the development of a business model to exploit the value of those assets
If the value of the assets developed will always be greater than your initial investment, then you can see the investment is low risk.
On the other hand if 95% of investment money is going to fund purely a marketing effort (that will either succeed or fail but either way, end quite shortly) then your money is at huge risk.
That is why the way to resolve investment risk is to ask ‘What am I investing in’?
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