The corrolory of this, of course, is that starting up a successful business has to become more science and less art.

This view was admirably expressed by Nic Brisbourne in his recent blog ‘its is getting easier to startup’.

He lists Steve Blank and Eric Ries as key contributors to this as well as quotes from Marc Andreesen’s interview in the WSJ where he said

“I think entrepreneurs are getting better and better,” he said, “better educated, better trained, better informed, better networked”

So, is the same happening to the Business Angel sector?

Yes!

In the Business Angel sector, angels who like to be involved in startups are engaging with accelerator programmes or setting up and running one themselves.

This has a few advantages

• the business angels get to know the teams over 10 or so weeks – to see if they can resolve problems and challenges and keep moving forward
• the idea gets formed by real market experience (hopefully) and therefore becomes established or de-risked. Of course, if this doesn’t happen, then the idea – no matter how good – doesn’t get backed
• the business angel build relationships with the management teams so that the entrepreneurs themselves understand what the angel brings

This method of engaging de-risks the investment for both parties – the entrepreneurs swapping equity for cash – and the business angel swapping cash for equity.

And, an investment process which is de-risked is easier to understand and therefore has a greater chance of going through.

Hence, the more intelligent business angel strategy is actually very simple – get to know your investment and the entrepreneur team, it is the best way to de-risk and deliver a paper ‘lite’ due diligence process.

So follow your exec team for a bit – before you hand over your money. A startup accelerator programme is a great way to do this….

Legislation is moving in the USA and the UK to make business angels of us all – and that is, to allow crowd funding.

We want to help the USA and UK governments decide about crowd funding – so please take our short survey below.

Your answers will remain confidential and we will only contact you if you have requested it.

Charting the value of VC investments vs number of companies passing through the original and best business accelerator – Y Combinators – provides a graphic illustration of decline vs growth.

However, don’t forget that the Y Combinator alumni are also receiving early stage funding and seek to raise more money later. You could also argue that the informal Business Angel industry is not truly measured in this data either.

Hence, an even more intriging view would be to show the volume of companies recieving VC and Business Angel funding vs Y Combinator graduates.

I’d expect that this measure would show the two are climbing more evenly.

Hence, whilst the VC industry has less money, it is also making more investments (volume rather than value). So, the value of the average investment has fallen.

This may be for two reasons.

Firstly, the value of early stage digital or tech investments has fallen sharply. Steve Blank says $0.5m is now enough to start a US company, whereas, before $10m was needed.

Secondly, the ecosystem for investing in early stage companies and make more repeated investments is improving.

In other words, whilst the over all sum of VC money has declined – and that is a worry – this is also forcing structural changes to the venture capital industry – which is a good thing.

Is there a decline in the value of Business Angel funding? Anecdotal evidence would suggest that yes, there has been. However, as business angels link up more closing to business accelerators, then we can also expect the investment decisions to be more often although of a smaller amount.

Nevertheless, this is a clear sign of the business angel sector maturing and growing up. 

All net new jobs in the US, since 2006, are the result of startup companies less than five years old.

They created 44 million US jobs over the past 30 years.

Thanks to all the business angels, entrepreneurs, and venture capitalists that made this possible.

Welcome to this months round up of business angel news and ideas. We’ve got three pieces each of which has significant consequences…

We start this month’s business angel newsround we’ve got a fascinating report on angel investing strategies from China’s Lei Jun. He says…

“he invests only in markets and people that he’s familiar with. This might seem obvious — why would you invest in a person or business you don’t understand? — but Lei takes it to the next level, saying that once he’s chosen to invest in someone, he might follow them through multiple failed projects, so long as his faith in the person remains intact. “

Any entrepreneur who still thinks investors only care about the product or idea should take note.

Also, a highly significant event didn’t happen. As reported by Nic Brisbourne, Hulu’s sale fell through.

Why? Brisbourne says because far greater value lies in the content not the audience! That means startups hoping to build an advertising revenue model are likely to fail. It is original content (or brands) that count.

Does that kill half of all internet related business angel plans? I think so…

Our third favourite piece for the month says that freelancers make the best startup business partners.

Quoting from Luke Johnson, successful entrepreneur, venture capitalist and FT columnist, the article says that

“What often kills an early-stage business is excessive personal drawing of money by the owner, draining the company of vital working capital.

“If you moonlight [or we might add, freelance] the downsides are reduced. Even if it means 100-hour weeks, it’s likely that your employer’s salary will be the least demanding investment capital you’ll ever receive.”

Indeed. So, if you are asked to invest in a startup, find out if they founders already have an income from a job, part-time work or freelancing. If they do, then your angel investment will have greater flexibility around time-scales and be far less at risk of the founder needing to take money out or leave for a better income.

Launching the first phase of a startup business – or for a business angel, preparing to invest in one – requires an assessment of three things – product, market and team.

Equally, it is well understood that the first stage of product development is a prototype, a beta version, or more recently, a minimum viable product.

But, does the same apply to the market and the team too?

Well, yes, it does…

So what would a minimum viable market look like?

Steve Blank is the person who came up with the concept of ‘customer development’. This was because he used tech developer concepts of agile development to argue that the product needs to be developed rapid and quickly and that equally customers need to be developed too – quickly and rapidly.

In effect, Steve Blank argues that customers are developed through a series of contacts or product developments or iterations.

So, what would count as a minimum viable market (customer) or minimum viable team?

Let’s start with the minimum viable market. Steve Blank says that this is not a focus group. In other words, it is not about collecting desires or wants from potential customers. Instead, it is about selling a product.

The best description I’ve heard is; one product sold, one happy customer, one referral.

… and the happy customer can’t be your mum (or dad). Instead, it has to be a real / non-family / customer without vested interests who pays and is willing to provide a referral (ie a lead to another potential customer).

The referal bit is critical, as it confirms that the customer is still happy after they’ve bought the product. Hence, slick marketing and a poor product won’t deliver a happy customer after the event.

Minimum viable team

So, moving to our third test – minimum viable team – what might that look like?

Again, business angels and early stage venture capitalists understand that the team will not be complete in the early stages of a startup business.

So, what is the minimum viable team? Most business accelerators have settled on the view that the team must consist of at least two partners. So, solo entrepreneurs don’t count. This is based on empirical experience of seeing teams succeed far more often than solo entrepreneurs.

To this, we would add that the two partners must bring different startup abilities. For instance, a tech developer who brings in another tech developer partner does not count as a minimum viable team. Instead, there must be both the ability to invent and create along with the ability to sell and market fit.

Other abilities – such as the ability to work with investors, might be missing, but this would be the absolute minimum.

Minimum viable product

Lastly, a minimum viable product is described as an operating prototype. However, be warned, this can not be a low quality product. So, if a fashion item, it must be made with the material that you intend the final product to be created in, not a cheap imitation.

The consequence of the ‘minimum viable’ concept is that we have temporarily suspended profitability. This is not being tested at this stage. Instead, we want to know whether our product will sell and impress customers and that the team can deliver this basic element.

The question of profitability follows next – as it is tied up with scale and falling production costs, but this is typically the stage where a high potential business will require (or seek) funding. And it is a great stage at which an angel investor – with a small size investment – can have a significant impact.

Summary

So, to sum up, a viable business angel investment must consist of a minimum viable product, team and market.

The purpose at that stage of the investment is to prove the scalability of the product(s) and the potential profit margins.

For a more info, check out the 4 tips at Arena’s blog on Minimum viable product

Business Angel news round up

We’ve got another piece on why company boards don’t work and what to do about it (read the our previous piece on company and startup boards here).

I kind of get the feeling that this just isn’t going to go away – about like executive pay.

Likewise, the question of signing NDAs has created a great deal of heat. If you missed the NDA article, you can check it out here.

A new crowdfunding platform has launched – this one is called Civilised Money- although I’m not sure I want to know what uncivilised money is? I guess this is pointing to the fact that when there are lots and lots of investors it is very hard for anyone investor to control the board or direction of the enterprise? If so, bad news for business angels and venture capitalist.

Any business angel or entrepreneur looking to build a startup team might want to consider an ex-freelancer – here are some good reasons and follow this advice on choosing a business partner.

Ever wanted to know what anti-dilution means – check out Nic Brisbourne’s excellent blog.

As predicted here on i Business Angel, the number of new business accelerators is exploding, whilst also offering different flavours.

This month we’ve had news of a new accelerator in Moscow, Russia called TexDrive using the platform of the TechStars network along with Jon Bradford’s Springboard Cambridge and London based accelerator.

Also launching this month in London is Accelerator Accademy which combines an educational / training format with venture capital cash available at the end.

Similary, in Manchester, the idea based accelerator Idea Alive is beta launching. Idea Alive differs from current accelerator formats in that it will work with inventors and solo entrepreneurs whose first task is to build a team, whereas typically accelerators will turn down application from solo entrepreneurs.

Along a similar vein, Cambridge Business Angel Sherry Coutu has been driving the Silicon Valley Comes to the UK appathaon event in which developers will create a series of apps, in different UK cities during October, before choosing the best apps and the developers winning a trip to Silicon Valley.

Lastly, IBMs smartcamp – in November, is closing its doors to applications on Friday the 14th Oct.

Seems like business angels and entrepreneurs have an increasingly broad choice of camps, weekends, part-time and accelerators to join and support.

So, despite the economic gloom, tech looks ready to boom?

If you know of more relevant events or accelerators launching, please let us know or add a comment below…

Well, now we have it – the first and most effective business accelerator – Y Combinators – which began in 2005, recently valued the businesses that passed through its programme in the following 5 years at US$4.7 billion.

Clearly, that is a massive success and one that would surely beat even the best traditional business angel model.

For instance, the volume of businesses passing through is 210 – that is an average of 42 for the first 5 years.

Do even the best business angels get anywhere near these numbers?

Clearly, no – neither in terms of volumes of investments nor

Now, Y Combinator invested around 20,000 US$ in each of its 210 startups  – so that’s a total of around US$4m. Let’s just gestimate that the cost of running the programme was another US$4 for those 5 years. So, total costs US$8m.

Of course, the Y Combinator partners have also invested 5 years into helping these startups – but then active business angels would expect to do the same – so no real difference there.

Okay, so assuming an average 6% stake in each investment means that the value of Y Combinators share is US$282m.

That means US$8m has been turned into US$282 in 5 years and the partners have been paid an annual salary whilst building this cash pile. This equates to a 35 fold growth over the period.

So, let’s ask the question, how many business angels can beat this performance? Okay, a few venture capitalist who hit big home runs on Facebook etc might beat this – but, for business angels who have built up a portfolio of businesses, can you beat 210 companies and a 35 fold growth over a 5 year period?

Okay, business angels, time to join your local business accelerator?

The majority of startup enterprises begin with an idea conceived by two or more people working in partnerships or a group. The chances are, the founders of the business will know each other well, they may even be friends or family members collaborating on a great business idea, the problem is even the best of relationships can be tested to the limit by the inevitable day-to-day pressures that come with running a business.

Do you have a Tevez in your startup team?

As anyone who saw a certain Champions League game this week will know, teams can be affected badly by  disharmony in the ranks. If one member of the team suddenly refuses to play ball, this can have a dramatic affect on morale. Even the most promising teams could feature a Carlos Tevez type character harbouring underlying issues so it’s vitally important that everything is done to prevent problems in those early stages when a business is launched so no one feels aggrieved when changes happen.

The honeymoon period…

A startup is typically launched with a great deal of enthusiasm amongst its founding partners, the ideas are flowing and there is often the euphoria that accompanies that first big order, or securing that first big client which tells you that this business idea really does have legs. This is the exciting honeymoon phase of course, the foundations are being laid for future success and there really can’t be anything that would get in the way of reaching that first million. Or could there?

This honeymoon period is unlikely to last long as the influx of orders and signing up of new clients paves the way to late nights, seven-day weeks and the dreaded accounts. As a lack of cashflow can quickly kill a business in its early stages, a large proportion of time will be spent on maintaining it.

This can be a particularly challenging phase for startup founders and one fraught with danger.

There may be trouble ahead…

If we rewind to that early honeymoon phase this is the point where agreements are made and firm foundations for trust between the partners must be established.  If those foundations are weak, there may well be trouble ahead  because like any relationship, business relationships must be based on trust.

Startup founders who do their homework will establish this through written agreements but unfortunately this can be overlooked by inexperienced founders, often to the detriment of a business. Written agreements between the founders should include elements of what’s expected of each other and just as importantly how any cash the business generates is divided. Taking care of this early on will form the basis of that trust when the relationship is inevitably put to the test.

A fledgling business is often subject to growing pains, that might include changes of direction or evolving ideas that will test any partnership to the limits. To stand any chance of maintaining a successful business partnership both partners should be working from the same page when it comes to their aims and ambitions for the startup.

Sometimes these ambitions may be to grow the business or make adjustments to the service, either way compromises will need to be made and opinions heard. This is why team harmony is so important, without it a business will often buckle under the strain of conflicting aims and objectives.