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.

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

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.

For starters, one esteemed source I’ve talked to suggested that 2009 is in fact the year of the Brown Cow. How so? In the theory of Chinese Astrology Five Element, brown represents Earth. And what is the major element in Cow? Earth as well. So we’re talking a year in which the Earth is of foremost importance. Before you put me down and discount me as a tree-hugging, ultra-environmentalist, hear me out!

As an angel investor, one of your primary purposes is to find energetic, capable entrepreneurs with great ideas, then provide the capital and guidance for them to turn those ideas into profitable businesses. By “great,” we can define the best ideas as those that tackle our society’s or economy’s greatest issues at hand. And what is one of these greatest issues? The environment! I’m glad you’re still following my logic here.

So angel investors, perhaps your path in this Year of Ox (or Brown Cow) is to find those entrepreneurs with the ideas that could save our planet. How about sustainable energy ideas? Whether they be solar panels, wind power, waterpower, agro-based, you name it–fund a startup that is tackling our world’s energy scarcity issues, and you could hit pay dirt (and help save the planet while you’re at it).

Interesting ideas are also coming out of ways to protect the environment from pollution and other forms of degradation. Take the carbon trading market in Europe (and the one that will soon be in President Obama’s America). Find an entrepreneur with an idea to facilitate that market. Or how about the notion out there to protect the rainforests through financial tools? Some entrepreneurs have set up companies that allow ordinary folks, corporations and the wealthy to buy chunks of pristine eco-systems in faraway lands, thereby protecting them from destruction by ranchers, farmers, and the like.

It will be this generation’s entrepreneurs who come up with the innovations to tackle climate change, resource scarcity and other “brown” issues. It should be you who is funding their success in the Year of Ox.

But it wasn’t. What happened in the following year made Val a poster child for all that can go wrong between an angel investor and his entrepreneur. In this case, the setup between the investor and Val went wrong for two very obvious, but seemingly opposing, reasons: the angel investor was too chummy with my friend, but not close enough in the business sense to know that Val was botching the whole business up.

Let me explain. Val’s business plan involved him moving to India. (I’m still under nondisclosure, so that’s as many details as I’ll give!). Fashioning himself an adventure capitalist, the angel investor decided he wanted to go to India for three months to provide mentorship and management oversight. Three months turned into six, then 12. Yet not for business reasons that made sense!

From what I gather, the angel investor was so in close with Val, Val didn’t even have the time to follow his business plan and develop the enterprise as planned.

Now onto the second problem. As Val and business went off track in India, the rest of the investment team back in the States were clueless. That’s because the angel investor from the get-go had not properly designed a way to measure, or benchmark, Val’s success. Like I said, I don’t know all of the details (and even if I did, I couldn’t share them).

But maybe it was that the angel investing team was measuring revenues and not profit margin enough. Or perhaps the angel investor team used a one-size-fits-all approach to their benchmarks–and being that Val’s business model was unique, shouldn’t his metrics have been unique to match them?

THE LESSONS?

For all you angel investors out there, perhaps the message is not to move to a foreign country with your entrepreneur. But I think the bigger morale of the story here isn’t to avoid direct supervision of your startup investment. I think the lesson to learn is all about how you supervise.

In other words, be smart about the benchmarks for your entrepreneur. Set them up right at the start of your deal, watch them, and change them if needs be as the business grows. Case in point–Val’s business never grew!

Metrics are all about each individual startup. They can vary by industry and by business plan. You need to know what will drive the success of this particular new business, and how you can measure to make sure that “what” is happening. That what could involve cash on hand, income, burn rate, customers, revenues … like I said, it can vary investment to investment.

Then there’s the question of how often to be measuring that what! Unlike Val’s investor, every day checkups might not be conducive to success. Weekly, monthly, perhaps even quarterly reporting systems might work in a given situation. Then guess what? You’ll also need to have a system in place for when those benchmarks are not met.

In Val’s case, after a year of failure, the angel investor in India finally was convinced by his team back home to take a hard stand with my friend. He did not handle it well. A blowup ensured, the angel investor flew back to the States, and Val’s business imploded not too long after.

Don’t want to turn out like Val’s investor? Without getting into too many details of their failure–which I can’t do, remember?–let me just say the best angel investors learn how to set up metrics and benchmarking. They learn from networking with other investors at sites like Venture Hype, from reading and doing their homework, from experience.

In the old days, adventure capitalists were rich investors who funded adventures. King Ferdinand and Queen Isabella were perhaps the greatest adventure capitalists of their time, of all time. They funded Christopher Columbus‘ remarkable adventure of 1492. Supposedly, Columbus was on his way to Asia via a quicker route. Well, we all know how that went. He hit land well before Asia.

Following were more adventurers funded by investors — they went by “conquistadores” back then — like Cortes, Pizarro, Ponce de Leon. Except that last one, who never met his benchmark of finding the fountain of youth, all other investments paid out. Few dividends are worth their weight in silver and gold, literally.

Compare those adventure capitalists of old with today’s lot — capitalists who adore, rather than fund, adventures. On one hand, we have the Richard Branson‘s of the world who might consider themselves adventure capitalists. On the other, we have Bobby Genovese, a wild world-traveling Canadian capitalist who even has his own TV show named “Adventure Capitalist” — all about his globe-trotting ways in Aspen, Nicaragua, New York and the Islands.

So Which Lot Is Cooler?

The angel investing lot, if you asked me.

Adventure capitalists in the context of angel investing don’t deal with canoe rides down jungle rivers or sailing around the Cape of No Hope. Instead, they’re successful entrepreneurs-turned-angel investors who bless young ventures and promising entrepreneurs with capital, and then some. For clarity’s sake, let’s refer to this group as angel adventure capitalists, or angel AC’s.

Perhaps angel AC’s feel the tingle of nostalgia, harken back to the day when they were bright-eyed and capable of making 1,001 presentations a day; these investors always involve themselves in the project, such as asking for seats on the board once a company gets rolling, or getting their face and name all over the project’s PR campaign to leverage their previous success.

One of the practical benefits for being an angel AC is that you get to check out how well your investment is doing, quite directly and immediately. If things get shaky, you’re there to provide your wisdom and leadership to right the ship. When things go well, who else better than you, who were successful when your own first company went big time, to help the startup sail through the tricky waves in the beautiful yet dangerous ocean?

And as a seasoned capitalist, surely your rolodex isn’t too shabby — or I should say, your iPhone contact list. Just think of all the benefits your network of contacts could provide to the startup you invested in.

So you tell me, ain’t angel AC’s the coolest lot?

Want to become the Pizarro of private equity, the Cortes of capitalism? Perhaps your best way to go from a passive, entrepreneur-turned-angel to a hands-on investor is to learn how to become an effective angel AC.

Maybe you know Branson and have set up a quick meet-and-greet at his next Virgin Music Festival. If not, plenty of other opportunities to learn on angel investing networks like Venture Hype, among others.

What’s an angel investor? Let’s just say that this particular person, who shall remain nameless for the time being, provided me with real-deal seed funds to turn my brilliant idea — and it is brilliant! — into a reality. The meeting took all of an hour or two, and at the end, he shook my hand and said let’s do this.

“I don’t usually write checks after just one meeting,” I remember him saying. “But your idea has potential to become world-class,” he told me. “You might be small now, but when you take off with my help, you could have a big imprint on the industry, on the economy, on this world.”

“And that’s what I do,” he continued. “I invest in your promise of tomorrow because that tomorrow won’t happen without me.”

What’s more, this particular angel investor is experienced, having done this sort of thing for other entrepreneurs and “dreamers” like myself. So he and his well-heeled angel friends were chockfull of knowledge. And they share their expertise, like in the form of management advice and the names of the right contacts.

Now here I am, on my way to going big time. What’s my big idea, the innovations behind my company? Let’s just say you’ll know about me soon enough, and that it doesn’t involve me flipping burgers.

What Does It Mean to You?

You might be asking yourself at this point, “Sure, that’s a nice story and all, but what does this have to do with me?”

Well, just think that there are thousands of inventors, entrepreneurs, and go-getters out there, each with a scheme to revolutionize their particular industry. Sure, not all of them are the genuine article like me (it’s like me to be pretentious!). But there are plenty of them who are.

Angel investors are crucial for these burgeoning businesses. Heck, angel investors are critical for whole economies to thrive. Yes, angel investors are that important. They fuel innovation with seed capital. They stimulate markets and economies by growing companies that can compete on the local, then the global, stage.

But what do angel investors get out of it? Of course, besides the obvious financial returns from investing in the next blockbuster business, you also get immense personal satisfaction that comes with any form of do-gooder-ism. Heck, they don’t call them “angel” investors for nothing. You get to wear a halo because it makes you feel good!

Then there is also the opportunity to meet other angel investors like yourself, with the same passion for innovation, the same keen eye for investments that can deliver on the promise of tomorrow. Like my angel investor told me, he belongs to a network where he can bounce ideas off of knowledgeable peers, tap into a channel of advice and research, and even meet new friends and young investors in need of mentoring.

Heck, his stories almost make me want to become an angel investor. That is, if I wasn’t so busy trying to succeed with one’s help!

I guess my point, then, is to encourage any of you out there who have the inkling to invest in startup companies and early-stage entrepreneurs. Again, without my personal angel’s help, my dream would have sunk quicker than lead. And there are so many others like me out there who have a dream, an idea, a spark capable of shaking up the world … if only they get help at those crucial early stages when such assistance is at a premium.

So for our sake, become an angel investor! Find your place among them and learn how to get started at sites like Venture Hype. Join forces with others like you and don the halo to invest in the promises of tomorrow.