When it comes to startup advice for tech entrepreneurs, twitterati StartupPro (a.k.a. Martin Zwilling) will probably pop up your mind.
Over the past 30 years, Zwilling has led technical business transformations, held a wide range of tech management roles, as well as done due diligence and funding analysis for investors. Though he does little investing, Zwilling has a world of knowledge to share with new and aspiring angel investors.
Zwilling is a member of the Arizona Angels Venture Group, managing partner of Southwest Software Ventures & Consulting, CEO & founder of Startup Professionals, and advisory board member for several startups.
* Edited interview
VH: You started your career as an executive in software engineering. What’s your story?
MZ: My initial career was with IBM, where I held many positions over the years in sales, technical support, services, and software development. I was part of the early IBM PC Development team in the early 1980s that worked with Bill Gates, and many other industry executives. I managed software development for early versions of PC DOS, and later software test tools, compilers, and applications.
I left IBM in the 1990s to work for a couple of startups in Silicon Valley and learned many things about software development, investing, and startup operations. About 4 years ago, I moved to Phoenix, AZ, and decided to focus on the business side of startups, including joining the local angel investment group.
VH: How do you identify promising opportunities? What are the characteristics?
MZ: Opportunities come to me through the angel group, through my blog, and other personal contacts. Like most investors, I look for a solid business plan, and give high priority to the qualification of the startup executives.
Investors invest more in the people, than the ideas. Also, I’d only invest in local opportunities, because I like to “touch and feel” the company and key people.
VH: When investing in startups, what terms would you insist on, if any?
MZ: There are no magic terms. Every case is different. Like most investors, I tend to focus on the percent of the company offered (valuation), and like to see traction — some revenue and customers to show a proven business model before investing.
VH: How would you explain the due diligence process and funding analysis to Kevin, a new angel investor?
MZ: Due diligence is just independent verification of as many facts as possible, and validation of the startup executive backgrounds.
The process involves talking to all the key players in the startup, calling their references, talking to industry experts and customers to validate their claims, and logically analyzing their business plan and financial model. It’s hard work, but doesn’t really require any special skills.
VH: How would you explain “proof-of-concept” to Kevin? How does he know whether a startup’s idea has passed proof-of-concept?
MZ: “Proof-of-concept” for the product means at least one of the products has been built, tested and works.
“Proof-of-concept” for the business model means that at least one has been sold for the normal price (give-aways don’t count), and has the expected profit margin.
Both of these are important and easily verified.
VH: Kevin is presented with the opportunity to become a member of the board; what can you tell him about the formalities, if any?
MZ: The biggest concern these days is liability of board members for company problems. He should make sure he’s indemnified and insured against liability. All else is like a normal employment agreement.
VH: Kevin is planning to make a small investment of US$10,000 and he wants to know how big a slice he should get. What should he do?
MZ: With a small investment like $10,000, he’ll be a minor player. As such, he should follow the lead of the major investor to get a proportionate share. Major players will absorb the cost of valuation validation.
VH: Kevin wants to learn more about various deal structures. What can you tell him?
MZ: All investors expect preferred stock, to get first shot at any proceeds if the company is dissolved or sold.
Convertible notes are a good alternative in early-stage investments if the valuation is unknown now or very low.
VH: He also wants to know which structure you prefer. Why?
MZ: Preferred stock – for reasons listed above.
VH: Kevin is now going to invest US$100,000. He’s worried about dilution and would like to know if there’s anything he’d do to prevent it.
MZ: Nobody can prevent dilution, if the company gets into trouble and needs more money than planned. The alternative is to watch the company die. Would you rather have a larger percent of nothing, or a smaller percent of something?
* Martin was recommended as an interviewee by Clynton Caines.
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* For series, references are published in the last installment of the series.
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