Today I would like to address the question someone asked me on social media. It’s also the title of this article; Have I done anything besides raising money for WhoAPI and when will my investors get their returns?
I’ll start my answer by quoting David Rose. He is a prominent angel investor and the founder and CEO of Gust. He has personally invested in over 70 early-stage companies and Gust is a global platform for the sourcing and management of early-stage investments. The platform is endorsed by the world’s leading business angel and venture capital associations, and powers over 1,000 investment organizations in 80+ countries. More than 200,000 startups have already used the platform to connect and collaborate with over 45,000 investors. So you could say that David Rose knows a thing or two about angel investing. He hasn’t invested in my company, I interviewed him, and that’s how I met him. In his blog post “The reality of returns on angel investment“, David Rose wrote that “A majority of all new, angel-backed companies fail completely, the odds are that you will LOSE ALL YOUR MONEY, not just “not make a profit”.“. That’s the sad reality of angel investing. WhoAPI is profitable and has Wikipedia, King.com, Sendgrid, Tellapart, and hundreds of users around the world. Just yesterday former CTO of Obama for America started paying $199 per month to use WhoAPI. To quote his Tweet – “He is using the shit out of WhoAPI”.
Another example that David Rose shared is that: “average holding period for an angel investment in the United States is NINE YEARS, after only five years it is quite likely that the value of the syndicate’s portfolio will still be underwater”. Compared to that metric, WhoAPI had its first angel investment and incorporation in Croatia in December 2011 and second angel investment and incorporation in US in December 2012. Since the majority of investors in WhoAPI (including me) are Croatian, I still consider WhoAPI a Croatian startup, not a US startup. Also, it’s not even three years when we first started working. So I would conclude we still have a long way to go.
The return for investors is not in question at all. So far the only thing that matters is that the company is providing value to the marketplace, and it’s growing in customer base, usage and revenue. Key metrics in my opinion. The return will come for investors if the company goes IPO, a VC fund enters with a huge investment or if the company is sold (most likely to happen in today’s economy). All these are unfortunately rare events and won’t happen soon. That’s the deal that the majority of angel investors today do. I explain this very nicely in my new ebook “26 Fundraising Questions for Startups“.
I can’t really obsess about investor returns at this point, I am not Apple Inc. or Google Inc. I have to obsess about: online marketing, sales, infrastructure cost, bookkeeping, taxes, hiring, firing, R&D, customer support, the list goes on and on. It goes on when it’s 6 AM, and I have clients in India, it goes on when it’s 1 PM and I have users in Europe, it goes on when it’s 11 PM when I have users in the US.
Just because I wrote a book about fundraising it doesn’t mean I think it’s the most important thing. If you buy the book, you will see at the very beginning I explain that fundraising is only the first step.
This time I’d like to share with you 4 dirty little secrets that will get you funded. This topic is good both for fledgling entrepreneurs, and for investor wannabes. When I first started out, I couldn’t tell a difference from a real angel, and an angel investor, and there was a lot of trial and error on my behalf. I did manage to raise $240.000 ($100.000 from American investors) from 6 angel investors, and government grants, which is a lot for a startup coming from Eastern Europe. Hopefully this post saves you a few hours, a couple hundred bucks or some embarrassment. I know there are more than a few entrepreneurs coming into Shark Tank that don’t know this.
1. If you have preorders (lots of them) or orders, you have a proof that the market is craving for your product. Five thousand dollars worth of orders won’t get anyone’s attention. You really have to have a lot of money coming in, or proven potential. If your product/service is low cost, you have to have a ton of them.
Like everything else in the Universe, if you are not growing, you are dying.
It doesn’t matter if it’s a one-time purchase, or a monthly subscription, high LTV or low LTV as long as there are a lot of them to hint that the company is worth over a million dollars. If the valuation of the company is lower than $1M, it’s hard for an investor to imagine further growth, and a return on the investment. There has to be growth! Growth first, investment second, not the other way around.
2. If the team is complementary (technical + business) or (design + business) or a third combination for your particular type of project, and has a good enough track record you have a good chance of attracting investors. Someone has to pull this idea off, and by someone, that means the founder.
Investors can help, accelerate and connect, but the founders are the ones that have to pull it off.
You have to build it, and sell it. Peter Drucker said that business (this includes startups) is two things: innovation and marketing. As founder(s) you are responsible for both.
3. If you know something “they” don’t, a.k.a. have a secret weapon, a.k.a. an unfair advantage like a proprietary system. That’s right, if you have the power the pull the Houdini trick on your competition, it will definitely attract some investor interest. Sometimes that scrappy guy/underdog look can help you stay below the radar, but you need to have that special sauce.
Barcelona has Messi, Chicago Bulls had Jordan, who do you have?
When you are good at something and making money, there are so many companies entering your field you have to have a secret weapon. IPhone – Galaxy, Mac – PC, MySpace – Facebook, the examples are limitless. I bet that for every product on your table right now, there’s a competing product.
4. If you have the No Matter What. Some entrepreneurs have that “no matter what” attitude, and investors love that. Do you want to know why? Clients also love that attitude. The opposite sex loves that attitude. Business partners love that attitude. No matter what, wins every day, every week, every month, every year. No matter what is called resourcefulness. It’s when you don’t have money for a marketing budget so you take out your magic hat and your guerilla-marketing ad goes viral and brings sales.
No matter what is called “against all odds”
It’s when you have mononucleosis, your company is running out of money, and the service isn’t ready to ship, but you raise another $50.000 to survive through the winter. No matter what is called tenacity. It’s saying no to your old friends (“let’s go grab a beer”), and getting no’s from clients and investors.
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It was 2004, and nobody gave me any chances of succeeding. I was an unemployed high-school dropout, and due to a series of unfortunate events, I had to move with my family 40km from my hometown. We moved into an old house that barely had a decent toilet. Life was very hard.
During one particularly snowy night, I’ve had enough. I moved into a rented place, and started doing my own thing with my best friend. We were going to be a game development studio. Long story short, we ended up building a web hosting business. In 2011 we sold it for $30k, we had bigger fish to fry.
During 2012/2013 I went on to raise an additional $250k for my new startup – WhoAPI. We also received over $100k in server infrastructure (from Google, Microsoft, Amazon and others), office under a subsidized price at the Science and technology park $50k sponsorship from PayPal and a host of other goodies! We graduated from 500 startups, one of the best startup accelerators in the world. We had a dream start but that quickly turned into a very turbulent flight. More on that in another book. As for WhoAPI, it is still working and servicing clients from around the world, just not as a $10 million dollar startup.
Anyway, as far as the ebook goes, back in 2011, I wrote an article “26 questions you have to answer correctly to get funding for your startup“. In just 10 hours, the article received 10 000 hits, by people from over 100 countries. It was translated in 6 languages, and I decided to write a book on that topic.
The book answers 3 questions.
1. How to get motivated, inspired and self-disciplined to pull through the hard times, like fundraising?
2. What are the questions potential investors ask you?
3. How do I create a pitch that will get me that investment, if I have absolutely no experience?
You can read more about the book, and order it here.
Difference between angel investing and venture capital
Angel investing has nothing to do with venture capital investing. It’s like bringing a fishing rod to the forest for hunting bears. So far I talked with about 100 senior partners from various venture capital fonds from continents around the world. I also talked with around 100 angel investors (also from around the world). I also talked to probably more than 100 startup founders about their fundraising strategies, and how they saw angels and VC’s. There are distinctive differences that I would like to share.
Angels invest in passionate entrepreneurs
VC’s look for passion. However, if you don’t have other ingredients they are looking for, you will get a «negative answer». (I will explain this later). Why passion? Passion and burning desire to solve a certain problem are critical at the start of the project. Passion starts the process of turning the idea into company. I’ve talked with a lot of people who had ideas but it always remains in that stage.
When you have your regular dose of “catastrophic multi engine failure” passion gets you up from the floor. How to grow passion? Well you don’t, you find it. Usually it has to do with something that you love. You can understand this through a thinking process. For example my passion is getting other people to profit from using the power of the Internet. It’s a combination of altruism, technology and economy. I am also passionate about entrepreneurship, domains, hosting, and web sites.
Angels invest in people, VC’s say they invest in people
Angels were entrepreneurs at some point, and they understand founder’s pain. There’s a genuine wish to help the entrepreneur. There’s a big difference in investing $20k or $1M. When an angel invests $20k he doesn’t necessarily expect a 5X or a 10X return. A VC on the other hand invests for the sole purpose of getting that 5X or 10X return. It’s all about X returns and revenue to them. In many cases a VC invest with an expectation that 9 out of 10 will fail, and the 10 will give them a «home run».
Home run means it will pay for the 9 failed startups, the yacht, couple new startups and who knows what not. When you talk to a VC, he wants to know if your company can be sold for $100M in 6 years. I’ve never heard an angel investor speak like that. This probably gives you a clue whether you should look for angel or venture capital.
There’s no negative answer from an investor. First of all, you have to have one thing in mind constantly. An investor is not some all knowing all powerful being. Just because he made some money, and now invests or managed to get other’s money to invest it doesn’t mean he is right.
Bessemer ventures had over 100 IPO’s, and here you can take a look at Bessemer anti portfolio. These guys missed Google, Apple and Paypal. If they didn’t see that coming… Sean Parker raised $33.5 million for Airtime and it never took off. Bill Nguyen raised $40 million for Color and it tanked. So to all you startup co-founders that have trouble getting the funded, and you read news about startups that get funded… It doesn’t mean anything.
Getting an investment is never a sign that one project is better than other. (OK, in some obvious cases it is, but the point remains). To sum it up. If an investor says your project sucks, get the hell out of my office. That’s OK. If an investor says, your project is awesome, here’s the money. That’s OK. If that’s all the same, then what does it come down to? Well aren’t you a schmuck if you have to ask that. It’s about solving someones problem and getting shit done. Read this last sentence 3 times because I have nothing else to add.
[EDIT 22nd, August, 2014] If you liked this blog post, perhaps you will like the ebook]
First of all, I should say that 50% out of nothing is still nothing. You shouldn’t be afraid of giving equity, however, you should be smart about how much you give and to whom. If an investor asks for 50% of equity he is probably inexperienced. Why?
1. If he has the majority of equity, you are actually not the owner of “your” company, ergo it’s not your company. If he is asking for 50% he is probably an angel investor, which means you “lose” a lot and you haven’t even started. In fact, you just had your first exit, and you can go on vacation. This will most likely kill the entrepreneur inside you and if the dark days come (and trust me, they will) you are probably more likely to raise hands, say that it’s not your project anyway, and leave.
2. If you are willing to give away 50% of something that’s so valuable and spectacular, why are you doing it? If it’s not that spectacular, why would I want to do it in the first place?
3. If the investor is experienced, he is probably testing you, your negotiating skills and your perception on value of the idea. But in this case, he will probably start with a much lower take in equity depending on the region, industry, market size, etc.
How much of equity should you give away to an angel investor? It depends on many factors, sadly your location is the first one that will influence this decision. In Silicon Valley, angel investors get below 10%, but in other parts of the world equity goes as high as 30%. You should also take into account if it’s „smart money“ or just money, that you are getting.
If your angel has a big contact list, or Rolodex, as they like to call it, perhaps it’s worth a consideration. Sometimes 30% equity means the success of your startup, and 6% means failing. This is something you will have to decide on the spot, since these decisions are really unique, custom and differ from case to case.
Giving away equity also depends on the amount of money you are getting. Also, this sets the current value of your company. But, company valuation isn’t something you should be concerned at this stage. Now your top priority is to launch early, launch often or as some say “fail fast”. Or as Guy Kawasaki would put it: „Don’t worry, be crapy“. So let’s take the 50% equity as an example and see how it would play out.
Angel investor: Your project looks interesting, and I am interested in taking a shot. I can give you $50.000 for return of 50% in equity.
You: Thank you very much, I am glad you like what we are doing. But, I am willing to give 10% at most. I want to leave room for first team developers, and VC fond.
Angel investor: Ok, even 10% sounds good, but than I am willing to give only $10.000.
The question now is, what are you going to do with only $10.000? Is this investor worth the bother? Are you going to answer his phone calls on Sunday when the project starts to go south? Is this investor going to scare away other bigger investors that want to be alone before the VC fond comes? What if you took 30000 for 15%? How much money do you need in order to get the startup moving and making first sales? How much money/time do you need until first sale? How much money/time do you need until break even?
I know I put up a lot questions, and not so much answers. However, asking the right questions will move you in a direction you want to go.
You have just read the 3rd question and answer of my book. Interested in reading more? Preorder my ebook, and support the good I am doing.
[EDIT 22nd, August, 2014] If you liked this blog post, perhaps you will like the ebook]