Hot Deals Emerging

BBC News’ Maggie Shiels reported that Silicon Valley is showing strong signs of life, citing such acquisitions as, “Mint.com by Intuit for [USD]$170m (£102m), Adobe buying Omniture for [USD]$1.8bn (£1.08bn), the sale of Skype to a private equity syndicate for [USD]$2bn (£1.2bn) and the purchase of SpringSource by VMware for [USD]$420m (£254m).”

While this activity in the industry is certainly showing positive signs of life, unemployment in the Valley is maintaining near its comfortable 11.9%. Still, U.S. Federal Reserve chairman, Ben Bernanke told a Washington think-tank that the recession is likely over. The combination of this promise and emerging opportunities are overshadowing the still-present challenges in the area, grabbing the attention of investors.

Valley Leaving California in the Dust?

This change in the landscape for Silicon Valley is in contrast to what is happening throughout the rest of the state of California. The state’s economic research team estimates California is likely to remain stuck in the recessionary sludge throughout 2010. Technology appears to be promising for growth, but not enough to carry the state to rapid recovery.

Such an outlook shouldn’t deter angel investors, however, as some of the most successful startups, such as Microsoft, Google and Cisco, emerged during a down economy. According to David Kralik who recently launched his own company at TechCrunch in San Francisco, the recession is a great opportunity for startups.

What’s Behind the Growth?

One of the key drivers for the re-emergence of Silicon Valley is valuations are more realistic and entrepreneurs are hungrier for sound partnerships with angels and venture capitalists (VCs) who may be asking for tighter terms than in the past. Even better, a number of VCs are considering deals that in the past may have been too small to fit their portfolios, providing additional choices for entrepreneurs.

Now that VCs are increasingly considering deals that were previously reserved for angels, what is the outlook for such investors in Silicon Valley? In truth, angels are responsible for much of the recent activity in this area, or at least the activity that kept the pulse. Such presence has better positioned angel investors to embrace the future, while securing their place – and importance – in this market.

Sound Takeaways

For those angels who may still be watching the activity in Silicon Valley without taking the plunge, consider these takeaways from the Y Combinator’s AngelConf Conference and reiterated by Venture Beat that apply in any market:

• Don’t worry if the idea seems crazy
• The lifeblood of angel investors is deal flow
• Don’t be afraid to throw a little dynamite into the status quo
• The Rule of 12 – statistical diversity only comes from investing in 12 companies
• One-third of your portfolio companies will go out of business
• If your goal is making money, get out now.

Sir Richard Branson of Virgin Group

If you’ve been on Twitter, or if you’ve been following Venture Hype on Twitter, you should’ve heard about The Perfect Pitch Competition with Sir Richard Branson. We’d been tweeting frantically about the competition and so did you. More than 1,000 entrepreneurs from all 50 states, plus an additional 8 countries, entered the contest for an opportunity to pitch directly to celebrity VCs and billionaire Richard Branson at The Perfect Pitch Conference, scheduled for Monday, October 26th, 2009 at the Ritz-Carlton in Marina del Rey, California.

To create the “Perfect Pitch,” entrepreneurs were instructed to pitch a one-minute short video or a short written description that would compel investors to take a closer look at their business. In their pitches, entrepreneurs were expected to explain –

• the business
• the customer needs it fulfills
• the market size
• the competitive edge
• the strengths of the entrepreneur and his or her team
• and anything else that matters

The entries were STRONG. Venture Hype, represented by our very own Joey Lo, and other judges from August Capital, Baroda Ventures, Cal Cap Partners, Draper Fisher Jurvetson, GRP Partners, Momentum Venture Management, Qualcomm Ventures, Rustic Canyon Partners, Santa Monica Capital Partners, Tech Coast Angels, PricewaterhouseCoopers, etc., were faced with tough choices but had finally narrowed selection down to 10 entrepreneurs, who were then interviewed by Dan Bliss, Founder and President of PerfectBusiness.

After yet another judging round, the Top 3 Finalists have been named, and each are given two VIP tickets to the conference, airfare to Los Angeles for the event, a 2-night stay at The Ritz-Carlton, and an opportunity to present their startups live at the event:

Drum roll …

• Didrick Medical Inc., offering patented, prosthetic fingers
• ICON Aircraft, offering the next Powersport — personal aircraft
• Vubiq Inc., presenting Gigabit per second speeds at consumer price points

Tagged as the “Entrepreneur & Investor Event of the Year,” the Perfect Pitch conference will bring together hundreds of influential entrepreneurs and investors for a day of learning and deal making. Conference judges represent more than US$10 billion in funds. And the conference will feature a number of presenters and breakout sessions designed to appeal to entrepreneurs and investors alike. Whether you are seeking to make connections, gather fresh ideas, or learn from those who have already traveled the path, this conference offers a little bit of everything.

How do you ensure the next pitch you hear will be the perfect pitch? Attending The Perfect Pitch 2009 Entrepreneur & Investor Conference sounds promising.

Angel investing

Risky Business

“The metrics of angel investing are sobering – it is not a game for the faint of heart,” according to David S. Rose, managing principal of the Rose Tech Ventures Team and a member of the New York Angels, in the NuWire Investor. “Of every 10 deals you make, 5 crash, 2 return even money, and 2 give you 2 to 3 times your money.” [1]

This risk is not news to angel groups, a main reason why these strategic investors pool their resources instead of venturing alone. By spreading the risk, angels can more widely diversify their investments in hopes of increasing their chance of a strong return. Such groups also allow for a pooling of knowledge and experience to make more informed decisions on investments.

Types of Angels

While it is true that angels invest to make money, it is not the only benefit these individuals are after when they make an investing decision. Many of these investors are seeking to expand their own knowledge, to get better at identifying good opportunities. There are also a number of angels out there who invest in startups because they love the rush of a new adventure. [1]

When it comes to angel groups, not all angels join a group simply to increase their chances of higher returns. When an angel joins an experienced angel group, they can take advantage of research capabilities and industry connections, as well as the group’s expertise in selecting the best of breed deals. Aside from the benefit of potentially higher returns and spreading the risk, angels learn invaluable tools.

Things You Should Consider Before Wearing the Halo

There is a wealth of advice available in the market to show you the steps to take to begin investing. With so much information, how do you determine the right path? The first and most important step is to determine just how much risk you can handle. If you are risk adverse, perhaps angel investing is not for you. On the other hand, if you like adventure and get excited by new ideas, you can consider moving to the next phase:

• First, do you have enough net worth to make the desired investment? The money you use to invest should be no more than 10% of your net worth to ensure viability.
• Second, you should have relevant experience in the field you are considering for investment. A lack of experience can lead to bad decisions.
• Third, you should hire a lawyer experienced in angel investing. Their expertise and due diligence is invaluable.
• Fourth, you should understand the business strategy and exit for the company. If you don’t understand where you are going or how to receive your potential profits, you’re in over your heads.

Ask the Important Questions

NuWire Investor offers a list of questions potential angels like you should be able to answer before making a decision to move forward with any type of angel investing. [1] You should ask yourself the following:

• Do I have enough capital?
• Can I devote time to this company?
• Can I leave my money invested for a long time?
• Can I afford to lose the entire investment?

If you can answer to the affirmative on all of these questions, you just might be ready to move forward as an angel investor. It really can be a great ride; you just need to be ready for the twist and turns that can easily surprise along the way.

Credit: James Cridland

A recent clean-up of my inbox had me erasing invitations to nearly half a dozen social media sites, all promising that I could connect with friends and alumni in a thrilling environment or manage my online identity. (They also all had weird names as if the founders have been naming businesses based on only seven letter tiles they pulled from the Scrabble letter tile bag – but that’s another article for another time.)

The problem with the sites that I deleted without signing up is that they are identical to sites I’m already part of. I’m not interested in yet another LinkedIn clone when I’m already on LinkedIn. Realtors have this problem too — you’ve probably noticed that when you’ve interacted with one to buy or sell your home.

And it’s a real problem in startups, which Martin Zwillings, CEO & Founder of Startup Professionals, has found. In one of his posts, he rants about the maturity of the online dating industry and requests entrepreneurs to NOT pitch him on any more. [1]

From social media to Realtors to dating sites, these aren’t the only industries where sameness is a problem. The problem is, when one business does well as a popular first mover, there are many more that rush in. This was brilliantly parodied in Slate’s video about a service called “Flutter”:

Click here to view the embedded video.

What’s needed among startups is not a cloned service. And, as Zwillings points out, what’s needed is not a small twist on the same old story. What is needed is a game changer; innovation; brand new thinking.

Of course, you can start by demanding innovation from the entrepreneurs who pitch to you. Like Zwillings, you can politely request not to receive pitches in industry spaces that are mature or declining.

Or, if you’re an innovator yourself – and are as willing to roll up your sleeves and retool the business as you are putting some money into it – you can also see each opportunity as a base from which you can help the entrepreneur innovate.

Start by breaking the common thought pattern that follows first movers: “If they can do it, we can do it just a little better… and monetize it!” Instead, start by looking at the problems that exist in the marketplace and solving those. So an angel who is pitched yet another clone might consider how (or if) that startup can be modified to solve new problems in the market rather than replicate current solutions.

Playing “follow the leader” may have worked for children on the playground, but it has no place in your portfolio because it has no place in the market. Those emails get deleted from my inbox.

Note:

[1] Startups: Your Online Dating Site Will Fail

To best identify the type of entrepreneur you should be funding, do a little research and determine what kind of advice these entrepreneurs are following. Not all advice is good and not all advice comes from those who are actually making the funding decisions. But gaining this knowledge will give you keen insight into easily recognizable signs that indicate whether or not the entrepreneur and his or her pitch are even worth your time. [3]

CNNMoney.com Small Business recently posted a piece that guides entrepreneurs on their quest for landing startup funding by providing 10 steps to catching VC cash. Let’s take a look at this advice and how it incorporates into other areas of the industry and your approach to investing to determine if you have the information you need to weed out the big talkers to get to the real gems. [1]

• Show your passion – entrepreneurs that are passionate about their startup speak from the heart and can quickly draw you in. Just be sure their passion does not camouflage a lack of due diligence.
• Be a cheap date – you know that in order for your money to grow, it can’t be used for frivolous extravagances or bloated salaries. Those who respect these guidelines are more worthy of your time and investment.
• Time is money – of course it is. But this fact works both ways. Entrepreneurs need to be able to show you that they can deliver profits within the specified time period; but if that period is too short, that is a red flag.
• Show you’re worth it – you know that you are investing in the person as much as the company, so make them earn it. If you don’t feel it in your gut that they are worth the investment, it is time to move on to the next opportunity.
• Build a great team – the entrepreneur is an important player, but his team is who will make it happen – or won’t. Look for a strong team that blends expertise and knowledge with proven ability and performance.
• Think big – but not too big. Modesty generally has no place in the meeting as you want to see the possibilities for the opportunity laid out in black and white. Keep in mind that as exciting as big thoughts are, they also have to be realistic.
• Nail your audience – if the entrepreneur doesn’t know for sure who is going to buy their product or service: meeting over. Understanding the target audience and why they will propel the company to profitability is essential for every startup.
• Schmooze hard – okay, admit it, you like to be schmoozed. But at the same time, you don’t like the hard sell. Keep your ears open and your wallet closed while networking and you will most likely find some great tips on who should get your attention.
• But don’t over sell it – an extension of the previous tip, entrepreneurs who don’t understand that you are not the average customer are likely to kill the deal before you have even heard their pitch.
• Be right on the money – entrepreneurs who are seeking startup funds in order to protect their own equity stake are not interested in making you money. Run from these startups as they are sure to be a money pit.

While it is true that specific industries may catch your attention more so than others and that fact alone can influence your decision, understanding what to look for in an entrepreneur can be just as important as the idea itself. After all, he or she is the company at that point and a lack of promise generally equals a lack of profitability. [2]

Notes:

[1] 10 Steps to Catch VC Cash
[2] The Truth About Venture Capital
[3] Getting Funded with Venture Capital

One new angel network has emerged to do just that. Cleantech was launched by 3 investor groups to enable global deal collaboration. The network consists of Kuwait Petroleum Energy Ventures, the CalCEF Clean Energy Angel Fund and Keiretsu Forum’s Cleantech Investment Committee. This cleantech angel investing group is a strategic partnership dubbed Cleantech Angel Network-of-Networks. [1]

The current economy and the falling price of oil appear to be scaring venture capitalists away from cleantech investing, making it more difficult for these startups to find seed money. The Cleantech Angel Network of Networks hopes to close the gap created by the exodus of VCs from this space. The group offers as much as US$40 million in investment capital and will provide a central location for much-needed early-stage funds. [2]

The market has come a long way since the first Earth Day was established in 1970. In fact, how many contemporaries believe that this event came about as a result of the recent focus on Global Warming? The complementing media attention has certainly helped and this continued focus will expand the demands put on developers. First-to-markets will likely grab market leadership, but their vision has to be sustainable.

While clean technology startups have significant opportunity for sustainability, anything “Green” is liable to grab at least some attention. At the Zino Society Green Investment Forum, companies with visions of saving the planet – or at least capitalizing on those consumers that hope to – presented their plans for getting rich in a greener world. 5 companies in particular made waves with their approach to more efficient and earth-friendly products. [3]

These ideas included energy production units, recycled carpet, mosquito control technologies that use 99% less pesticide, consumer kits that monitor home appliances for energy consumption, and a media company that is establishing a “Green” magazine and seeking funds to expand its online offerings. The winner of the Zino Society funds is not nearly as interesting as those startups that recognize opportunity with their ideas. [3]

As the “Green” movement continues toward saturation of the market, you might find that the fad will begin to lose its hold and something else will take its place. Sure, a focus on the environment will likely continue, especially as the concept of Global Warming continues to be taken as truth, but positioning and growth will greatly depend on where this market is going. Technology developments will be important, but what is most sustainable in a world of finicky consumers?

As for the cleantech area, Dan Adler, president of CalCEF, believes the market is prime for the new Cleantech Angel Network of Networks and that it represents a chance to “press reset and create this network with global reach to invest in these innovative technologies.” [1]

Will it work? We’ll have to wait and see.

Notes:

[1] Cleantech ‘Angel Network of Networks’ Goes Global
[2] Cleantech Angel Investors Form A Network For Finding Deals
[3] Five Intriguing Green Startups Seek Angel Bucks on Earth Day

So, what is driving this thriving industry? After all, as quickly as consumer tastes change and the new becomes stale and boring, how do you know if this is really an area of good return on your investment?

The Projections

Consider a report by PricewaterhouseCoopers (PwC) which projects growth in the video game industry to reach as high as 19 percent. Global sales are projected to grow from US$41.9 billion in 2007 to US$68.3 billion in 2012. Online and wireless games are showing the most promise at 16.9 percent and 19 percent, respectively.

More specifically, the Asia-Pac region offers significant promise in online gaming. Broadband penetration is on the rise, which will help to drive online gaming in general, especially in China. Throughout the region, PwC expects that online games will grow at a 13.3 percent CAGR to reach $5.6 billion in 2012. [2]

Why So Promising?

Now that you know the projections, it’s time to look at why these numbers are so strong. Much of the opportunity lies in casual gaming, which is readily available through broadband connections and wireless mobile from a variety of sources. These games are designed to appeal to a general and wide audience and they are easy to learn and play. [1]

The video game market has long been dominated by the enthusiast-focused games that draw in very dedicated players willing to spend a lot of money. But, from a developer’s standpoint, this area is harder to break into as it requires significant investments of time and capital. The opposite is true for casual games, creating the opportunity for high profit margins. This eliminates certain barriers to entry, opening up the market for new developers, such as those in Hong Kong.

Hong Kong Opportunity

Hong Kong offers an exciting and rapidly growing video game market. While demand is strong and growing, there are still only about 20 active video game developers in the region. [1] With the right investments, this number could easily grow to accommodate demand and generate a strong return.

One entrepreneur recognized the wealth of opportunity in Hong Kong and established the headquarters of his company there in 2003 while focusing on a global audience. Christian Heilesen, CEO of Funmobile Ltd., answered six questions on HKTDC regarding Hong Kong, the potential for the gaming market and why his company, which markets and distributes mobile and online entertainment products and services in 30 countries, hasn’t been impacted by the sliding global economy.

According to Heilesen, the quality of the talent in Hong Kong is strong and the pool offered is much bigger compared to other places in the Asia-Pac segment of the world. When you combine the wealth of available talent with the low cost of operation and the emerging gaming market in Hong Kong, Funmobile is in a prime location to ride the anticipated growth.

Small Investment – Big Return

But, aside from its location, the industry in which Funmobile competes offers significant protection against the rise and fall of the economy for a couple of reasons. For one, it markets small-ticket items that are affordable even in a recession. Second, it targets the under 30 crowd with disposable income – a steady stream of revenue.

Heilesen pointed out another promising aspect in this market. Getting started in mobile and online entertainment and gaming requires smaller capital investments than other ventures, offering opportunities for new angel investors who want to venture into this industry. And, because the business is done through broadband and mobile connections, it doesn’t have to rely on customers physically walking into a store. [3]

As broadband and mobile penetration continues to grow throughout the world, the number of consumers that can be reached with gaming options will only increase, offering significant growth for those companies that can appeal to this wide base. True, not every game will appeal to every consumer, but a good mix of options can trigger interest in nearly every market. With this kind of promise, what can you really lose?

Notes:

1. Games People Play

2. Global Entertainment and Media Outlook: 2008 2012

3. Ringing Up Business

What ensue are high-flying antics and much bloodletting–which in the parlance of multinationals is called “mergers and acquisitions.” If you have never seen the movie, or don’t remember the scene, it’s worth revisiting for its twisted take on hostile buyouts and takeovers–obviously, what else would you expect from Python.

Now you on the other hand, as an angel investor, might find the scene hilarious in a surreal sense. But when it comes to reality, your ideal depiction of the buyout would be a little less violent, much more joyous event. Try a wedding, with flowers and good food, a toast with brut, and you the bride’s father, handing her off to her suitor, who then promptly hands you a sack of cash.

Doesn’t Matter How, Just Get Out

That’s the symbolic happily-ever-after you’re looking for–the bride of course being the startup or entrepreneur who you’ve helped grow to become a successful enterprise, the suitor being a larger competitor in the same industry, the sack of cash your heady returns on investment.

That’s not to say a buyout is the only way for you to realize returns on investment. But it is perhaps one of the more common ways, and perhaps one of the soundest ways to ensure your returns. And a buyout doesn’t necessarily have to happen with a competitor. The possible suitor could also be a private-equity group, venture capital firm, or some other investment vehicle. The other primary way to collect on your investment, or exit strategy, is for the startup to go public, thereby loading up on equity from a market.

No matter how you do it, get out. There is some disagreement over how soon angel investors should plan their exit strategies. But the general rule of thumb for you should be exiting in three to seven years.

Evidence backs this up. A study [1] recently put out looked at nearly 100 U.S. angel investor groups and more than 500 single investors, and it found that, when investors exited their investment in 3.5 years, they scored returns of 2.6 times. And they didn’t even need a pirate ship!

But get this other finding from the study: when angel investors didn’t get out–and instead “double-downed” (or re-invested) in the startup–they lost more money the majority of the time. About 70 percent of the time to be exact.

Homework And More Homework

The way to succeed then is to ensure your startup gets bought out relatively soon after you help launch it. But how? One of the best ways is to do your homework–your due diligence–before ever handing over any capital to the entrepreneur.

Of course, there are more to the art of exit strategies than what I’ve mentioned in this post. So do additional homework by networking with other angel investors, tapping into the collective wisdom of such online communities as Venture Hype.

Note:

1. Angel Investors in Groups Achieve Investment Returns In Line with Other Types of Equity Deals

I could start by rattling off a dozen or so personality traits that you should look for: creativity, ambition, confidence, energy, adaption, intelligence, competitiveness, risk-taking, optimism, dedication, motivation, etc. etc. And then I could call it a day and say, “Good luck in finding your entrepreneur.” But I’d be doing you a disservice. Those qualities are good, but they’re also too generic for your interests. Heck, you’d look for those same qualities in a coach for your little kid’s football team.

So for an entrepreneur suitable for your money, time and hard work, you need to search for a combination of those qualities that suits your tastes. For instance, an entrepreneur could be brilliant and driven, everything he touches turns to gold. But it turns out he is an entrepreneur merely because he craves the lifestyle of the rich and famous. I don’t know if I’d call him a leader…

Whereas another entrepreneur, hard-working, dedicated, smart, detail-oriented, could come to you with a track record of launching successful startups. He creates businesses for a living it seems, growing them until they go public or get sold off, then repeating the process. Leader? Could be your man.

Part of leadership is knowing what you’re doing, right? Or at least being able to convince someone you know what you’re doing. So when you meet a would-be entrepreneur, he might not have to have a track record as long as the Indy 500, but he should be prepared enough, and eloquent enough, to answer your key questions, like: who his major competitors will be, who will be his targeted customers, what’s his marketing strategy to reach them, how much angel capital will he need to succeed, how long will that money last, what will be your stake and role as angel investor, etc.

And you should sniff out the b.s. when listening to the entrepreneur’s answers. Did I forget to mention that your leader will have to be honest, able to handle and actually grow from your feedback and constructive criticism, and open to new ideas? For as much as your leader must believe in himself, he must also know his own downsides–and be open about those and willing to receive help to overcome them.

So, short of you getting a clone of me, you will have to find a leader who brings to the table the right combination of some of the traits we mentioned above. Or you could wait. Cloning technology is coming along, I head.

Take a friend of mine, an entrepreneur who had a good idea to take advantage of a big-time fad in popular culture. I don’t want to give too many details … he still might be out there trawling the angel investor networks in desperate search of money to save his life. As you can start to guess, his adventure in entrepreneurship did not go well.

To make a long story short, his business plan failed to take into account the fact that fads fade, rather quickly sometimes. So by the time he got his operation up and running, he was hitting the tail end of the pop culture phenomenon. On top of that, a government regulation was created by the United States Congress that completely shut off his primary market. Ouch!

You might call that bad luck. I call that bad planning. Like I said, his idea was good, not great. He was a good entrepreneur, not an elite one. So what happened to his angel investors, as well as all his friends and family members who invested in his dream? They got a letter in the mail telling them his company was liquidated, for cents on the dollar. And the letter wasn’t even signed by him!

ATTRACTING THE BEST ONES

What are the lessons to be learned from my friend’s debacle? Well, for starters, I would suggest that you, the angel investor, get what you’re looking for. In other words, if you look for elite entrepreneurs, you will attract them. If you set the bar high at the outset, only the top startups, investors, brainiacs, and other entrepreneurs will make it.

For instance, only give time to entrepreneurs who come to you with a grasp of what sort of management team it’ll take to turn their idea into a company–and even better, they have that team in place before they put their hands out to you.

When it comes to their business plan, does it have what it takes to scale up as quickly as you’re looking for? The usual way to set the bar here is by a certain amount of revenue by a certain time frame, such as greater than $25 million or $30 million in five years or less. Are their financial projections of creating, sustaining, and growing a market based in reality? Or based on rosy assumptions?

Some veteran angel investors will even tell you that the best way to attract elite entrepreneurs is to stick in the geographical area you know best–in other words, your community and region.

After all, angel investing is partly about giving back to your community, right? So by looking for startups in your area, you satisfy that philanthropic goal. But you also have the ability to really get to know whether or not a local entrepreneur has the right stuff. How? By being close enough that you can drive to see him or her, face to face, whenever you want to.

Speaking of veteran angel investors, perhaps that’s one of the best ways to attract the best entrepreneurs. Learn from your elite peers. Plenty of opportunities exist at angel investing networks, both in person and on the Web, such as at Venture Hype in Asia and others elsewhere.