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.

Business angels and business angel networks are changing … and it is for the benefit of both the angel investors and the entrepreneurs!

Further evidence this week is that business angels that truely enjoy mentoring their companies are getting involved in business accelerators at NW England’s super business angel David Atherton has committed his time to Manchester’s new business accelerator – run by Idea Alive .

At the same time, this month saw Ian Merricks of White Horse Capital commit his time and business to launching and education, funding and development programme – the accelerator academy. Again, the list of mentors for this programme reads like a who’s who of London based business angels with Michael Blakey and Maria Dramalioti-Taylor leading the business angel roster.

Regardless of the business angel, Atherton in Manchester or Blakey and Dramalioti-Taylor in London, they all share a history of starting, leading and mentoring companies.

These business angels are not bankers or financiers by trade – they have built companies and want to help others (with their money) do the same again, and again, and again.

Hence, the mentoring business angels – that is, those that enjoy being involved in their startups, are focusing on the accelerators for two key reasons.

Firstly, they recognise that starting up businesses is a skill that can be developed through practical education (ie doing it – in a supportive and reflective environment) and second, the success rates rise exponentially when investors and angels take this more enlightened route.

Of course, success breds success, so expect more business angels to make more money by working with their local or regional programmes, whilst the traditional business angel networks shrink and focus on less knowledge and more asset based investments such as clean tech or, in the UK, wind farms.

Shock! Horror! Then why are the business angel and entrepreneur pitch events all about the product?

The number one concern of all startups – in all phases (from discovery through to massive growth) is customer acquisition.

Its not product.

So, next time we see a proposal talk about the product or the invention, stop the entrepreneur and ask

“how will you attract customers”

then

“how will you attract more customers”

then

“why would a customer pay your price/ buy your product instead of this or that product”

… and keep asking this question until you either get a great answer or resolve to move onto the next deal.

This also suggests that the hours and hours of entrepreneur presentation are wasted unless they talk about customer acquisition and how they will do it and why they are qualified to achieve their goals.

Of course, these last two questions – how and why – will quickly lead you to ask questions about their management team – and that’s where the discussion should focus.

As William Draper III said “you have to make sure that you have the right entrepreneur team. Nothing is more important. In fact, nothing is even a close second.”

Which is another way of saying that customer acquisition depends on the future performance of your team.

Due Diligence is often seen as not possible or relevant for an early-stage investment. Yet most business angels lose money on the majority of their investments

So, can due diligence help?

Many business angels comment that “they are taking a punt”, comforted that they are only risking a small proportion of their own capital, and encouraged by the tax credits they will receive, so do they have to do due diligence?

Equally, many business angels have also enjoyed significant success and trust their own gut feel as the barometer of an investment. Yet Nesta tells us (in their 2009 report on business angels) that “even a small amount of due diligence significantly reduces failure”.

Okay, it is true that Angel Investors are often investing money they can afford to lose – but will still experience any combination of anger, disappointment and remorse when that loss is incurred. Is that worth it? 

And there are plenty of examples of Angel Investors following their “gut feel” without exploring and rationalising the causes of these feelings – something that can be an illuminating process for both the angel and the potential investee business.

Whilst Angel Investment will always be a high risk activity, there are due diligence steps that can be taken to significantly increase the chances of success.

How to increase chance of success for early-stage investments

Due Diligence can (and should) be performed on an early-stage investment, focussing on the following areas:

1. The Market Opportunity:
   Market size, product position and pricing
   What is the value to the customer?

 

2. The Management Team:
   What are their competencies?
   What are their strengths?
   What are their personal expectations?
   Where are the gaps – and how easily can these be filled?

 

3. What is the structure for delivering the Business Plan?
   Are the best sales channels being used?
   What are the key risks in the supply chain?

 

4. What are the expectations of investors?
   How may value be realised for investors?

 

Working through these four questions provides structure, balance and focus to the investment process.

It also provides a much greater likelihood that the expectations of the Management Team and the investors are realistic – and aligned.  This means that the relationship between the investors and the executive team are much more likely to be friendly and to work in a cooperative and successful manner.

In my experience, the above process works best if it is seen as a collaborative, rather than confrontational, exercise.

So, bite the bullet, do the due diligence. you know it makes sense.

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Chilcomb helps investors and early-stage businesses through this due diligence process. Chilcomb’s Investor Checklist provides a robust structure to increase the chances of a successful investment.  To find out more, go to our website (www.chilcomb.com) or contact Matthew Dreaper.
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Why does this matter?

Firstly, the new Startup Genome report (from which the research below was gathered) makes the ability to learn the key ingredient of a startup that is likely to succeed.

That is, a startup will evolve through discrete stages of development and that learning is the fundamental unit of progress from one stage to another.

Therefore, the faster the startup learns – the faster it will evolve into a functioning and profitable business (ie success!), and, without learning, it will stay stuck in the discovery phase.

Secondly, the Startup Genome report says that companies that track metrics (ie. can learn from their market and customers) achieve a growth rate that is 7x greater than those that don’t track (and we assume, don’t learn from the market).

Third, and finally, the company must act on the feedback, otherwise it is at risk of growing quickly only to find that its products are not wanted.

The four stages of startup growth

The four stages that the report outlines are (and the typical duration of the stage);

Discovery: 7 months; validating whether the founders are solving a meaningful problem and whether anybody would hypothetically be interested in their solution

Validation: 11 months; converting the customer interest into an exchange of either money or attention (or both)

Efficiency: 17 months; refining the business model and the efficiency of customer acquisition.

Scale: 25 month; time to hit the accelerator and drive growth very quickly.
The time to pass through each stage will typically increase if the founder is a ‘sole’ founder and if the business is attempting to integrate markets or challenge exisiting ones. The time reduces for a google type automation or a business like Twitter which aims to change the way that people do things.

The startups do all need mentors, as the report found that those companies without mentors nearly always failed to raise funding.

The report also found that during the initial discovery phase, money raised is typically in the range of 10 to 50k, the second stage will raise 100k to 1.5m (depending on type of business) and then, at stage 3, where efficiency kicks in, no fund raising is required, until stage 4 when the business achieves a massive boost by going for growth and raising 1.5m to 7m (depending on the type of business).

However, at all stages, the key challenge is customer acquisition which rises from being the number one priorty in 35 to 40% of the first three stages to 70% in the final (scale stage).

Significantly, barely anyone considered product to be the greatest challenge at any of the four stages.

Therefore, Business Angels and Enterpreneurs, do you have a balanced team and can it learn? Solve this, in each of the different stages, and you will raise funds and build a successful business.

Lastly, at our next business angel and VC meetings shall we stop talking about products and talk about the customer and the team only?

Isn’t it time?

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Can your startup team learn? We can tell you…
http://www.eTeamTool.com
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It costs money to get money.

So, should we worry about the vulnerable entrepreneur who might pay his money to pitch to business angels even though his chances of raising funds are slim?

This simple trueism that it costs money to get money is a constant problem for entreprenuers who are usually desperate to raise funds and therefore resent spending a penny on the way to raise the funds they need.

However, within the Business Angel community there is a disagreement about whether ‘no hope’ proposals should be allowed to pay their money to the business angel network or business consultant in the hope of winning funding.

In one corner we have those who say ‘no, we must filter out the no hopers’ and in the other corner we have the ‘who are you to say this proposal is a no hoper?’

The first group – let’s call them the ‘no no hopers’ believe that they can look at a proposal and quickly decide which gets through and which doesn’t.

They are doing this on the basis that the type of business which gets funding normally meets some standard criteria, such as, it

• a) has a clear product with a clear market need and an ability to protect that product
• b) has a team of shareholder who have raised funds and sold businesses before
• c) shows an understanding of the language and needs of the investor

Okay, the consequence of this appraoch is that some entrepreneurs won’t ever get the chance to pitch. The significance of this is that not only will we miss the occasional diamond among the rubbish, but more importantly we deny many entrepreneurs to learn about the pitching process so that they have a chance of coming back a second time with a stronger proposition.

In defence of the ‘no to no hopers’, is the argument that if anyone can set up in business and take money from unsuspecting entrepreneurs then there is a risk that they will be fleeced or perhaps exploited.

However, we are not talking about your average person here, but someone who has decided to step outside a conventional life (jobs) and go it alone. We are not talking about old aged pensioners losing their meagre life savings, even though, it is quite true that many entrepreneurs lose their shirts.

It is also true that middle men – business angel networks and consultants – make a living out of doing deals just as estate agents live on the commission of selling houses. Should we deny them access to a living?

Let’s also consider the huge cost of entrepreneur training too. An MBA might cost £20,000, a government sponsored course to set up new entrepreneurs might cost the governement £000s. Why not just let them learn on the job, so to speak?

So, if the process of pitching for angel funds doesn’t succeed but results in a valuable lesson for the would-be entrepreneur, then has the process really failed the entrepreneur at all?

After all, isn’t most of our best business learning the result of failures? Julie Meyer of Ariadne Capital once described failure as a “faster way to learn”.

Of course, with the popularity of business reality TV shows like the apprentice their is a greater risk of malpractice as the volume of wanna-be entrepreneurs increases.

So, clearly, entrepreneurs should be on the lookout for bad deals from the business angel networks and before parting with any cash should be very clear about the likelihood of meeting suitable investors.

But, does any have the right to deny anyone this opportunity?

Many are successful, some very successful.

However, does that mean that they will always pick a good investment? No…

A shocking fact buried deep in the Nesta report about business angel investors (Siding with the angels, 2009) declared that the number of successful exits reduced when business angels became active investors.

Yes, that’s right, the conclusion is that angel investors and entrepreneurs do better when the business angels remain the investors who look after and care for their investment – as a non-exec director or with an observer role. They do less well when they become an executive with day to day responsibilities.

How can this be true?

Surely, you might think, a talented team with a talented Business Angel investor who is involved day to day, is more likely to succeed than a team in which the investor takes a back seat?

Indeed. It is possible of course, that the investments in which the Business Angel typically gets involved are weaker – and that is why he feels the need to jump in.

But, regardless, the business failure is largely due to the T-problem – that is the Team.

You see, it isn’t enough to have talented individuals (as anyone who witnesses England at the football World Cup will know), you must have a team that fits together.

And, the temptation of the Business Angel to ‘get involved’ in the team should be avoided. The statistics tell us that he would be better to find a better investment or send back the entrepreneurs to build a stronger team themselves.

So how do you assess the team?

Which begs the question, how do you build a better team? In fact, how do you assess the team you’ve already got to know whether or not it is a strong team?

This is a very tough question. If it was a matter of potential market share – we could look to a specialist who can assess market potential, or establish IP or Patent rights. If it were a matter of money, we would go to a corporate finance expert and ask their opinion. But team? Who do we ask and where do we go?

My gut feeling

Beyond a few ‘after the event’ actions – such as credit checks and references, most investors rely on their gut feeling. Beyond, ‘met the guy(s), like them’, what more do we do?

Well, over the years, very experienced and successful VCs have built up an instinct, a gut feeling.

However, if you are not a very experienced VC (perhaps just a business angel of a few years experience or a successful entrepreneur rather than a 30 year experienced expert in early stage business) then what do you do? Well, you could rely on other people’s experience, but apart from that?

That’s why the new Executive Team Tool (eTeamTool) offers an interesting and sensible alternative to guessing about the management team. (The eTeamTool has is a MediaModo LLP product, who also own www.iBusinessAngel.com).

This tool uses 6 attributes to test each executive team manager and then allows the user to plot each executives results on the same map to show overlap, duplication or the degree to which the team is complementary.

And, the interesting thing is that it doesn’t depend on the skills, but rather it assesses the key attributes that VCs look for. This means that your executive team shouldn’t be built based on skill bases – such as an IT person, a marketer or finance person. For early stage and fast growth companies, these skills can be bought in.

Instead, the composition of the team should ensure that all the key attributes are present – that is, an ability to focus and understand the core market plus the willingness to be open to ideas, advice and react to market behaviour. Lastly, the team needs to be led by someone with charisma and the ability to set a vision and persuade others to work to that vision – even though they might be be paid better by other companies.

The critical thing here, is to put skills to one side and ask yourself the question, can this team bring in what ever skills are (or may become) necessary to make the business a success?

Remember also, that the current hot product won’t always be. Instead, the business needs to develop a constant stream of invention and new product development. Can this team do it?

In otherwords, we are asking, does the executive team have the necessary leadership to see the business to profit and success?

This is the most important question for angel investors and entrepreneurs too. This is the big T or team problem that successful angel investors need to resolve for each and every investment.

The partnership hopes to double the number of top notch investors in angel groups across the country and increase annual investing by $1 billion. The Startup America Partnership is a movement – by entrepreneurs, for entrepreneurs – to help inspire and celebrate entrepreneurs, their firms and the people that join them.

The partnership was launched in January at the White House in response to President Obama’s call to celebrate, inspire, and accelerate high-growth entrepreneurship in the US. The Partnership is bringing together an alliance of major corporations, funders, service providers, mentors and advisors working to dramatically increase the prevalence and success of high-growth enterprises in the U.S.

Unless you’re lucky enough to have free premises courtesy of your business angel, then it’s often a case of
spending long hours trawling around potential properties looking for the right location and space to occupy.

The main office space locations in the UK for renting are office space in London, Manchester, Birmingham, Leeds and Glasgow.

However if you are looking for a really cost effective office space and are not fussed about or would prefer not to be in one of the big cities then there are some great options throughout the UK.

The internet search

Thankfully the internet makes the chore of searching for space much easier – you can now look for vacant office space to rent using a comparison website such as www.OfficeGenie.co.uk. This works in much the same way as you’d look for a broadband deal or mobile phone package.

Regardless of whether you are a new or existing business, there are significant benefits in checking that you are in the most cost effective location. Using a quick online comparison service, it’s now easier to find more competitively priced office space for rent in your current or an alternative location.

Desk space rental

Starting at the bottom, with businesses that are run by individuals, then the recent growth in ‘desk space rental’ options has been huge. This works in wonderfully simple fashion in that an existing businesses will advertise its spare desk space on the free comparison website and potential renters can locate it using a simple search.

The obvious benefit for people who work for themselves is that it means they can enjoy a proper office environment, and often in a city centre or prime business park location. There is no fuss and bother as the building still belongs
to someone else. You’ll get a desk, basic utilities and generally things like broadband internet too. Better still, it instantly gives your business a respectable looking address and postcode.

Greater needs

Moving up the scale and you’re soon into shared offices, services offices and whole offices for rent. Again, the comparison route is the way to find office space that is ideally suited to your needs as you can search for this using a location, the amount of people or desks you need to accomdate, along with costs.

A shared office can be ideal for smaller businesses as it offers no long-term commitment and contracts are often rolling, that is – they operate on a month by month basis and not a 2 to 3 year fixed term. You can often move in straightaway too, and the administration is very simple too. One monthly bill is often the way
forward.

Serviced offices, on the other hand, differ from a conventional rented office in that you deal with a management company that takes care of all of the day to day running and provides all of the services. This can often include things like broadband, IT support, heating, lighting and ventilation, plus there are generally post and receptionists on offer too.

Again, this is a quick and convenient way of getting office space, it often highly flexible meaning you can add or subtract desks as you need them, while flexible rolling contracts and no commercial lease negotiations reduce the admin headaches.

Traditional option?

Of course, you may just want to rent a regular office in the traditional manner, but thanks to the internet, you can review your options within the space of just a few mouse clicks. You’ll not only save on shoe leather and hassle but it could be hugely cost effective for your business too.

This article was written on behalf of www.officegenie.co.uk, the UK’s first proper online marketplace for desk space and shared office space.

Crowdfunding - Will all the pieces fit together?

Crowdfunding, a model that raises funding for start-ups by harnessing the power of the Internet investor crowd has grown from similar models that already exist in the US, but Crowdcube is the first website of its kind to be launched with UK businesses in mind – will it provide all the answers for entrepreneurs who need investment?

“There is something very attractive about the concept and we at Angels Den applaud anything that makes funding more available to the masses”, said Angels Den founder,  Bill Morrow, when I asked him about crowdfunding, the Internet innovation which threatens to shake up the world of start-up financing.

However there are rumblings in some quarters that crowd sourcing for business investment may not provide the answer in all cases. There are already some business angels and entrepreneurs who have expressed doubts about having large numbers of investors involved in a single business idea.

“Making the BIG assumption that making a financial promotion to a large number of “unsophisticated” and inexperienced investors can be said to be legal [and I remain unconvinced about this, just wait for the first widow or orphan to complain that they did not understand what they were getting into] means I do wonder if having a multiplicity of investors serves the entrepreneur in the medium term.”

There are concerns that the crowdfunding concept may have its limitations for both business angels and entrepreneurs particularly where they need to be in agreement on the investor investee arrangement from the outset to make sure things run smoothly. “We have 6 investors and they often pull us in a different direction to that which we feel is right. That is their right, but in common with most start-ups this is confusing and time consuming.” explained Bill, “Having 1,000 investors, each with their own agenda is going to be a nightmare, no matter how it is dressed up.

One of the benefits of having a business angel invest, is not just about their money … they bring their experience and little black books of contacts. They want to share these and I wonder if much sense of ownership can really be had, by investing £10. Will this be enough to motivate the investor to share their experience? And even if it does, coordinating 1,000 “good ideas” will take a lot of energy.

He added “I also wonder if an entrepreneur feels comfortable telling the world about his business. There are a lot of unscrupulous people out there. Our deals can only be seen by those who have complied with FSA guidelines, even then, confidentiality is THE number ONE question entrepreneurs ask us about.”

Despite highlighting these concerns, Bill welcomes the opportunity Crowdcube could provide entrepreneurs starved of growth capital. “We wish the concept well. Given the death of the banks and the lack of Friends and Family monies it is extraordinarily difficult to find growth funding these days …. We have over 4,300 certified angels and we find it hard, even though we are amazingly selective about those we take on. Currently we reject 13 companies for every one we take on and we find that even then we still only fund about 40% of those.

Against this, should the first deal actually get funded, the social media PR that this generates will be substantial and attract professional angels to take a deeper look at it …. Maybe 1,000 people all cannot be wrong?