Startup Investment – How do you get good deal flow?

Investors are all looking for a startup investment they believe will be successful. That much is self-evident. Of course, some investors will be looking to invest in companies in which they are interested or experienced. But ultimately, everyone is linked by the shared ambition to back winners.

So that begs the question – How do you pick a winner?

Pick an investment winner

The answer to this comes in three parts: the first is to do with Deal Flow and will be discussed in this post; the second concerns Deal Evaluation which was discussed in a previous post; and the third part is to do with Due Diligence, which will be covered at a later date.

Deal Flow:

One of the most important factors in successfully picking a winner is to have a large and varied number of deals to choose from. Naturally, the more deals you can get eyes on, the more astute you will be when it comes to picking good ones to invest in. That statement comes with a slight caveat – the deals you view have to be of a reasonable quality for you to learn anything valuable.

So where can you find a constant stream of deals of reasonable to high quality?

Network, Contacts & Friends:

The traditional way to do this is through your contacts. If you’re acquainted with people in the startup/investment community, whether they be entrepreneurs or investors, it’s highly likely that they’ll send deals your way. Especially if you ask them. (Silicon Valley in the US is basically fuelled by referrals).

The more you get involved in conversations the more you’ll be included in further conversations. For instance, if a friend or investment broker, sends you a deal, even if you know you’re not going to invest this time around (for whatever reason), it’s still worth responding to them and thereby keep the conversation open by demonstrating your continued interest and engagement.

Many of our investors on Angel Investment Network say that carrying out Due Diligence on companies vastly increased their networks by the simple virtue of having conversations with the right people (even if most were via email!); and as a result, they all started coming across increasingly better opportunities.

In other words, the more you build and nurture your network within this sector, the more you will be exposed to better investment opportunities.

Angel Investment Sites:

Using your network, as set out above, is the traditional way, but it still holds just as true. However, since the digital networking boom with the rise of sites like LinkedIn, it has become easier to broaden your professional network in less ‘organic’ ways. You no longer have to know someone to know them.

It is now easier than ever to expose yourself to quality investment deals and startup contacts online, and in so doing expand your personal network as never before. And you are, no doubt, aware of this as you browse this content on a site called Angel Investment Network!

Further to this, when you actually invest in a startup not only are you casting yourself in a very positive light to the company you invest in, but also to whoever was involved in brokering the deal, other investors you spoke to during your Due Diligence and to friends of the company you invested in. Once you’ve done this, you can guarantee that an increasing number of deals will come your way a) from the fact that you’ve expanded your network in the right way and b) from the fact that people know your serious and not a time waster.

Paul Graham says the following in support of this in a talk he gave at AngelConf in 2009 called ‘How to be an Angel Investor’;

“The best way to get lots of referrals is to invest in startups. No matter how smart and nice you seem, insiders will be reluctant to send you referrals until you’ve proven yourself by doing a couple investments. Some smart, nice guys turn out to be flaky, high-maintenance investors. But once you prove yourself as a good investor, the deal flow, as they call it, will increase rapidly in both quality and quantity.”

(Paul Graham is the guy who founded Viaweb (the first SaaS company) which was acquired by Yahoo in 1998 for a reported $49million. He then founded Y Combinator which has funded over 1000 startups since 2005, including Dropbox, Airbnb, Stripe, and Reddit. So he knows a thing or two about this.)

Startup Pitching & Networking Events:

The final string to your bow when it comes to receiving good deal flow is, of course, networking and pitching events. At these events, you’ll be able to both see deals pitched directly to you and to discuss them and network with other investors and entrepreneurs. You can learn a great deal and expand your network over complimentary drinks and nibbles.

There are tonnes of these events especially in startup-focused cities. We hold a pitching and networking event biannually. For information please send a quick email to info@angelinvestmentnetwork.co.uk.

Summary:

Ultimately, it all comes down to expanding your network and maintaining positive conversations with people in the industry. To recap the best ways to do this are:

– Startup events

– Angel Networking sites

– Investing

And in all cases, it’s the value of the interactions you make that will dictate the positive influence on your network and concomitantly, the standard and consistency of deal flow that gets referred to you.

How do investors evaluate startup pitches?

An angel investor’s task is to predict the potential of a company based on early indications and very little else. There is no infallible process for doing this. This is the risk investors face; and the fear they must overcome to invest. Only then can they give themselves a shot at the returns available from a shrewd investment.

Your task as an entrepreneur seeking finance is to mitigate and alleviate that sense of fear and so lower each investor’s risk threshold. The two basic ways of doing this are:

1 – Demonstrate that the perceived risks are smaller or more easily overcome that they initially appear.

2 – Set out a credible vision for the success of the business such that the returns outweigh the risk.

This, you might argue, is easier said than done. And you’d be right.

In my experience, entrepreneurs who understand how investors assess deals, find it easiest to raise money. It’s part of the reason why people who’ve raised money before find it easier to do it again.

SO THIS BEGS THE QUESTION, HOW DO INVESTORS EVALUATE STARTUP DEALS?

As I touch on above, this is a hard thing to get right for investors – a company may tick all the boxes, but still fail down the line. But this is often a matter of luck and down to factors beyond the investors’ control.

In their evaluation steps, investors can take measures to ensure that the companies they do go into have the best chances of success.

So here’s a simple evaluation framework that we recommend to investors on Angel Investment Network. We base this on our own experience from 12 years’ hand-selecting startups for our brokerage division. Companies we’ve worked on include: SuperAwesome, SimbaSleep, Novastone, What3Words, Opun and Cornerstone.

Two of these were just named in the Independent’s Top 10 startups 2017.

A SIMPLE EVALUATION FRAMEWORK:

1. TEAM

A team for inestors

We interviewed Jos Evans who has made a number of successful investments through us. Jos gave the following advice:

“Everything comes down to the quality of the founders. If the people are excellent they will succeed regardless of whether the initial business idea works. Meet as many people as possible and cross check your network for people who might know the founders of a company you are considering investing in.”

This is sound advice from someone who is making a career from angel investing.

It is the people behind a company led by the founders and validated by their advisory board that will optimise its chances of success. If the founders are relentlessly resourceful they will find the iteration that makes the company a winner.

In their due diligence, investors spend a long time researching the founders’ backgrounds. They also often try to spend time with them on the phone and, if possible, in person. The qualities that come across go a long way to giving investors confidence and lowering their risk threshold.

Similarly, the strength of the company’s advisory board can be a very strong index of potential:

1 – It reflects well on the founders if they have managed to persuade impressive people to back them.

2 – The fact that impressive advisers have backed the idea lends credibility and validation to it.

3 – The financial and social clout of high- profile board members means that the idea will struggle to fail. propelled on by a strong support network, companies tend to find a way.

2. MARKET

Which is the more significant indicator of success – the team or the idea/market? This is an ongoing debate between investors.

Renowned US investor, Ron Conway, believes, like Jos, that the team are the foundation. The idea is liable to change, but the team’s motivation, talent and competence will remain to drive the project to success.

Other investors argue that great founders in a bad market are far less likely to succeed than bad founders in a great market.

But to polarise these two points of view misses the point a bit. Good founders will find good markets – otherwise they are not really good founders.

So, in your pitching docs you need to make sure you give clear details on the market opportunity. Are you pitching a scalable opportunity in a market of sufficient size and growth trajectory? And are you doing it at the right time?

Here is the advice we give to investors when they evaluate the market section of a pitch:

“…you want to research the market to ensure the opportunity is or will be as large as the founders claim. If your findings confirm theirs then you can feel comfortable that a) there is a significant market and b) the founders know what they’re on about!”

Remember, your pitch/business is as representative of you as you are of it. In trying to sell your pitch to investors you need to sell yourself and vice versa.

3. TRACTION

Investors want a startup investment to have as much real world proof of concept as possible.

What better way to give confidence? If you can exhibit positive feedback, high user retention, growing revenues, etc at an early stage, it proves the venture (as far as possible!).

The more traction a company has, the more ‘proven’ it appears and thus the less likely it seems that it will fail. When we remember that persuading investors is about lowering their risk threshold, it’s clear how important traction points are. Traction points instil confidence in the vision and its execution.

They are as close to evidence as an early-stage startup is likely to get.

An obvious concern for early-stage companies is that they feel they may lack traction. They are especially likely to feel this way if they are not generating revenue.

So what constitutes traction?

Traction is anything that validates your business. This will depend on the business: sometimes it will be revenue; sometimes it will be downloads or subscribers; sometimes it will be page views or awards.

In their efforts to provide traction points for their startup, entrepreneurs often make the mistake of relying on ‘vanity metrics’. For instance, an app may have had 100,000 downloads in its first month. But if 97% of those users never use the app again, the initial metric flatters to deceive. Most investors will work this out very quickly.

So the traction points you choose must actually prove the value of your business or they will undermine your pitch.

The best way to think about this, I have found, is to work out what your North Star Metric is. North Star Metric is a term coined by Growth Hackers to describe the one authentic value which shows that the business is doing what it set out to do.

4. IDEA

The points above help qualify the idea itself as valid. But we should not underestimate the effect of gut feeling when it comes to an investor’s initial assessment of an idea.

The timeless human fondness for the ego means that an initial gut feeling can have a powerful effect on the ultimate evaluation of the investor.

If an investor feels that an idea is good, they want to be proved right.idea for investors

So when an investor first reads about an idea, if they think it is a real solution to a real problem in a real market, they are likely to pursue the opportunity. They want to vindicate their instinct.

This is a classic example of cognitive bias. This is the term used in psychology to describe when it is hard to undo your initial judgment because your brain will keep finding evidence to support that judgement.

It’s why the hotel industry focuses so hard on the initial impression it creates in the lobby. If the atmosphere and décor feel high-end and luxurious and you are handed a complimentary glass of champagne, your whole stay will be filtered through the lens of this initial assessment. If the lobby is grubby, your bias will lean in the opposite direction.

This can be capitalised on by entrepreneurs. When you set out what your business actually does, do so in such a way that plays up to this bias. Make a clear and powerful first impression.

How?

The visual impression of the design of your pitch deck is very important. But so is the clear articulation of your value proposition.

We tell investors to assess whether the business is offering a real solution to a real problem. So, entrepreneurs should set out their idea using this ‘Problem/Solution framework’.

Here’s a quick example of what I could write for Angel Investment Network:

Problem: The startup industry is huge, but access to finance and investors remains difficult for entrepreneurs…

Solution: Angel Investment Network’s platform connects entrepreneurs with 130,000+ angel investors from around the world so that they can realise their potential and grow a lucrative and successful company….

The principal value of the service comes across clearly and concisely.

5. WHAT DO OTHER INVESTORS SAY?

We have seen how the advisory board can be considered a metric of sorts for future success. It follows from this that other investors can be invaluable sources of insight.

Many investors say it takes away a lot of the stress if you can share the experience. That’s why syndicates, both official ones and groups of like-minded friends, are so popular. Others may have spotted some key index of potential (success or failure) that one investor on their own may have missed.

If you already have investors on board, it is, therefore, a good idea to ask them if you can share their contact details with prospective investors.

This transparency is likely to give investors confidence in you. And allow them to allay any fears they may have by talking to people who have already invested. One caveat to this is that a prospective investor may point out a flaw that the existing investor may have overlooked!

Summary

There are many factors that any individual investor may take into account when they evaluate an opportunity. This article has aimed to cover the most general and universally useful for entrepreneurs.

But you should expect each new conversation to be different. Every prospective investor wants to see whether you are a good fit for their personal investment agenda.

On that note, it is worth saying that you should never take it personally when someone decides not to invest. It is a) a huge waste of emotional energy and b) pointless. There are so many reasons why someone may choose not to invest. One of our entrepreneurs once became despondent because a good investor had withdrawn. Little did they know it was because of a divorce!

Rejection is also a good opportunity to get candid and constructive feedback from people with real expertise – sometimes what hurts the most is the most useful in the long run.

I originally wrote this article for Toucan.co blog. It was well received so I thought I would share it again.

Is Growth the Best Measure of Startup Success?

Startup Growth & Traction
Growth gets a lot of attention in the startup world. A lot of attention. If you Google “startup growth“, you’ll find a plethora of articles, blog posts and tools all suggesting that growth is the most important measure of your startup.

Paul Graham, the founder of Y Combinator, asserts that “The only essential thing is growth“.

In some sense, this attention is well-deserved. But it is often misunderstood and taken out of context.

Growth is, of course, important. Growth is a telling measure of your product/service’s popularity; and, as such, strong growth metrics are invaluable when you’re trying to raise money from investors.

But growth can, and often does, flatter to deceive. And this is something both entrepreneurs and investors should be wary of.

Entrepreneurs need to be careful because “…many founders hurt their companies by focusing on growth too soon“. This is what Sam Altman, the founder of Loopt and President of Y Combinator, wrote in a recent article on the topic of growth.

His reasoning is simple: if you focus too much on early growth and not on actually building a product people love, then at some stage you will encounter the leaky bucket problem where the customers you worked hard to onboard, leave in droves ne’er to return!

But, if you focus on building a great product then you will have better customer retention and, as a result, growth should become increasingly easy as word-of-mouth spreads.

Consider the example of AirBnB who worked and iterated for years before they got the product just right; and then it spread like wildfire because people loved it.

Equally, investors need to be careful because there are often more telling metrics indicating the potential for success of a particular company. An app, for example, may have achieved 100,000 downloads in its first week, but if 95,000 of those users had stopped using the app by the second week, then the impressive early growth suddenly appears deceptive.

So there we have it. Growth should always be important, but it is also important that entrepreneurs and investors espouse a more nuanced attitude to it than believing it to be the ultimate measure of potential and success.

Proposal Tip of the Week

Some very exciting news in this morning about one of the companies we raised money for last year. BIG news! Unfortunately, I’m not allowed to disclose anything yet, so will have to announce when permitted in a later post…so watch this space.

Anyway, I’m sure you’ve all been on tenterhooks waiting for the second in my series of 52 quick proposal tips. The wait is over…

Tip #2 “What Itch do you Scratch?”

Last week’s tip recommended grabbing investors’ attention by starting your pitch/proposal with your company’s most impressive achievement or traction metric to date. But what next?

You’ve hit them first with some proof and validation, but now you need to make the explanation of your concept as concise as possible. Remember, you no doubt understand your business extremely well, but you cannot expect prospective investors to have the same level of understanding. So what’s the best way to articulate your concept clearly?

Generally, we encourage entrepreneurs submitting a proposal on Angel Investment Network to start with the problem. What real world problem do you solve? What itch do you scratch? What pain do you alleviate?

If I were the Founder of Uber when starting out, my proposal would start by setting out the problems that people who want a taxi face e.g. long waits, high fares, needing to have cash etc…

If you do this well, you will get investors nodding along as they begin to see the value of your concept as they relate it to their own lives.
That’s all for now. I’ll cover the next step next week…

Proposal Tip of the Week

For no other reason than today is the first day of a new leap year cycle, I’ve decided to add a new feature to this blog. Each week I’m going to write a short post offering easy-to-implement advice on writing a fundraising proposal to investors. There will be a slight steer to benefit those entering proposals on , but I promise that the advice will be easily applied wherever you’re submitting a proposal.

I read hundreds of proposals a day. Literally hundreds of the things in the form of: pitch decks, executive summaries, investment site templates, incubator/accelerator templates, you name it. There’s always more to learn, but by now I’ve got a pretty good idea of what investors love and what they loathe when it comes to fundraising proposals.

So here’s Tip #1 “Never leave the best till last”

Put your most impressive information FIRST.

Investors like the rest of the world read from beginning to end. Well, not quite, often they never reach the end because they get bored. If this happens and you’ve left your most impressive piece of traction till the end, they’ll never know how great your company is. If you want to end on a positive note, simply repeat the positive note with which you started your proposal!

Grab their attention from the start. If you’re using or planning on using Angel Investment Network’s proposal form to showcase your business to prospective investors, this is why they recommend including attention-grabbing details in the ‘Short Summary’ section.

Take it to heart, learn it, stick it to your fridge, apply it…

How Funding Works – Infographic Timeline

For many entrepreneurs, no matter what stage they are at in their fundraising journey, it can be difficult to see the wood for the trees and hold a sense of the bigger picture in mind. This helpful infographic, courtesy of Funders and Founders, gives a clear picture of the funding process from Day 1 to IPO.

To read the full article which gives a detailed analysis of all the stages follow this link

How to write a pitch deck for your startup investors


This week I wanted to share a resource with you that we normally only give to our customers on Angel Investment Network

It’s a short e-book that sets out in as simple as possible terms what should be included in the pitch deck that you send or present to prospective investors. An important point to be noted here is that ‘what should be included’ is, more often than not, ALL that should be included. In your pitch deck you’re trying to engage and persuade – to blow minds not to numb them. So the details you give should be the ‘minimum effective dose’ to get investors thinking and wanting to find out more.

The purpose of our site is to connect entrepreneurs and investors, so you might say that teaching people about pitching falls beyond our remit; but you’d be wrong.

1. We like to make sure our entrepreneurs are as well prepared as possible for the result of any connections made through our site (or elsewhere), so that down the line they can write to tell us how successful they’ve become.

2. We see so many bad pitch decks and so many good’uns (literally thousands a week!) that we know what gets investors giddy…

It’s yours if you want it!

Download from here

A Pocket Guide to How Investors Think

Understanding how investors think is an essential tool for every entrepreneur. Only when their thinking processes have been demystified can you attempt to negotiate with confidence.

This infographic, visualised from investor Paul Graham’s famous essay “The Hacker’s Guide to Investors” by Anna Vital from Funders and Founders, is your pocket guide to getting inside their heads.

Selling Investors the Problem and the Solution

The most important aspect of writing a business plan or pitching to angels is selling the problem your solution solves. Nobody is going to buy a solution for a problem they don’t have, which obviously means you don’t have a viable business.

The most important thing when writing a business plan or pitching to angels is selling the problem your solution solves. Nobody is going to buy a solution for a problem they don’t have, which obviously means you don’t have a viable business.

I recently saw an entrepreneur pitching for funding, and it had all the right ingredients – a slick pitch, a good PowerPoint presentation and a nice-looking website. All very impressive, except for one thing… Her business solved a problem that didn’t exist. By the end of the evening, I think even she had realised that she was onto a loser.

The pitches that get the investors most excited offer a solution to a problem they have or a problem someone they know has. An avid golfer, for example, will get very excited about a new golfing invention. Or, if an investor is listening to you thinking “My mate Bob was complaining about this last week, and I think this guy’s onto something”, you’ve got them hooked.

The best businesses evolve from an entrepreneur who finds a problem in their life or business and figures out a product or service that fixes this problem for others. However, before you spend your valuable time and money figuring out the solution, you need to find out whether:

1) Other people have the same problem you do;

2) Enough people have the problem to make a successful business.

After selling them the problem, you then need to give a quick and compelling description of the solution. Time is limited and you don’t want to bore the investors, so don’t get bogged down in the technology and technical details behind your solution. Try to keep it as simple and concise as possible and explain what your solution is and what makes it better than the competition. Is it faster, cheaper, more eco-friendly? If the investors want to know more about what makes it is faster and how you can make it cheaper, they’ll ask later.

Your pitch is meant to give an introduction or overview and a pitch – and a short one at that – to capture the attention of a potential investor. If you manage to sell them the problem and then convince them you have a valid solution, you should have them hooked.  Then you’ll have their attention for the rest of your pitch, and hopefully you’ll manage to get some business cards and line up some meetings.