Not Everyone Loves Startups

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This week, I met a prospective customer who was interested in our Apps, but had a real problem.  “What happens to me when you get acquired?” he demanded angrily.

It was a fair question. There are many cases where a young tech company gets acquired, the founders ride off into the sunset, and service goes to hell as the company is absorbed by a large acquiror.  Customers buy innovation from young companies, but worry that that innovation may evaporate post exit.  It has happened more than once in Fin Tech.

There is a real clash of interests here: entrepreneurs don’t reap many financial benefits until a company is sold, but customers may suffer in the aftermath.  And it doesn’t help that your customer visualizes you sailing away on your yacht while they are still in the trenches. (You are all reading this on your yachts, aren’t you?)

I told the prospect that while we definitely want an exit, we are hoping for an IPO that will let us manage the company indefinitely, and in any case, an exit is some years away.  I also reminded him that it’s a two way street–we have had customers get acquired as well.

That prospect taught me a two good lessons: 1) entrepreneurs need to be sensitive to the fact that their customers don’t always have good experiences post exit, and 2) a person in a long term career with a larger business might view an exit very differently than you do.  I’m going to try to show a little sensitivity and remember to look after my customers when I’m fortunate enough to get to an exit.

 

Counting Angels

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crowd

How many Angels do you want in your cap table?  Mark Suster wrote a great piece in July giving his answer: “If all else fails, angel-load away! If you can’t raise from a few strong angels, from seed funds or from a VC then raising from a ton (let’s say 20+) angels is a perfectly acceptable strategy. There. I said it. It’s not terrible, it’s just not ideal if you can avoid it. ”

Well said, Mark.  I often hear founders fretting about “too many Angels on the cap table.”  Everyone has a vision that one or two “Super Angels” will write million dollar checks and all will be well.  It’s good work if you can get it!

The reality is that many successful companies have more than 20 angels in the cap table.  MindBody (MB on Nasdaq), just went public with a $500mm market cap, and they had a significant number of Pasadena Angel as investors.  It hasn’t seemed to hurt them.

The key to managing your Angels?  A strong lead and experienced Angels help, as Mr. Suster noted.  Most reputable Angel groups can supply both.  I can’t imagine dealing with inexperienced investors–it’s hard enough with veterans.

One thing you can do is to communicate early and often.  You will create havoc if you fail to keep your Angels (or any other investor) informed.  Put yourself in their shoes–they are busy and have multiple investments.  They don’t live in your world.  In other words, they have no idea whether you are succeeding wildly or about to crater.  And yet they’ve committed their hard-earned cash and periodically wonder what is going on.  Take the time to shoot them a “what’s up” email monthly, and serious financial reports quarterly.  You will rarely hear from them.

One CEO I know did just that, and then got an irate call from one of his larger Angels.  It turned out that reality didn’t quite match the forecast, and the Angel wanted to know what the heck was going on.  Needless to say, he was initially annoyed and didn’t particularly want to deal with the issue, given that he has a complex business to run.  I reminded him that once you cash their check they have a right to call.

As we talked it over, he realized that he’d been working so hard that he hadn’t communicated for months and things had changed.  There actually was a tremendous amount of good news, but unless you heard it in context it could be easily misconstrued.  It will all get sorted out in a brief phone call, but the lesson was clear: no surprises.  Send that email.

And if you’re still thinking it would be easier with just a few larger investors, let me share a story.  The company I work for, Malauzai Software, was initially funded by a small group of industry insiders, and later rounds were all done with strategic investors.  No VCs, no flocks of Angels.  Sounds great, right?  It is great to have a small, knowledgeable pool of experienced industry veterans as investors.  The bad news?  They ask hard questions. REALLY HARD questions.  They know all the details and all the metrics because they are industry experts.  It’s a different kind of challenge, but it’s still a challenge to communicate business complexities to investors, regardless of their sophistication.

The answer is the same regardless of who funds you: keep your investors informed and close to you.  You took their money and you may need them again.

True Believers and Hired Guns

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Entrepreneurs / Sales

The Professionals

There is a conflict in many startups that no one seems to write about–the clash that can occur between the founder and the professionals they bring in to help build their companies.  It was highlighted for me by a conversation with a friend this week who had just joined a young company in the Bay Area as as a CFO.  He remarked that with just a few tweaks in the business model, he thought the team could get to an exit in 18-24 months.   If it didn’t work out in that time frame, he would be off to find the next opportunity.  It sounded pretty mercenary, but it was an honest reflection of his world.

It’s a real culture clash-the founder who believes in his vision heart and soul, versus CFOs, Salesmen, and Operations pros who are there for adventure and profit.  The ultimate goal is shared–building a successful company.  The motivations, though, can be very different.

For the founder, the company is a reflection of them.  Successes or failures are very personal, and they have a deep conviction that they will succeed no mater what the odds.  For the teams they hire, it’s professional, not personal.  Many of those professionals love to build companies as much as founders, but at the end of the day, there’s always another opportunity waiting.   They see every flaw in a company along with the big dream. By definition, they are not “all in” like a founder, even if they get seduced by the dream once they join.

The attitude of the professional members of the team can be downright offensive to founders and their close associates.  Their views tend to be more analytical and less optimistic than the founding team.  I should know, as I’ve offended my fair share of founders with candid comments (and maybe a little arrogance).

So what’s a founder to do as they build out their team?

  • Accept that you will need to hire professionals as your company grows, and know that they see the world differently.
  • Be ready for the fact that they will tell you things that you don’t want to hear and point out uncomfortable realities.  Listen.  They might even be right.
  • Hire only the best–those with proven success.  Forget friends and family hires.  You are betting your company on their talent.
  • Take heart.  The good ones, over time, will start to become true believers.  They will never match your commitment, but they’ll give you long hours, high performance, and loyalty.

Oh, and the picture above–that’s Lee Marvin in “The Professionals”, 1966.

Community Banks Take the Lead with Apple Watch

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mobile apps / Uncategorized

Watch

Five community banks and credit unions will immediately launch Malauzai Apple Watch Apps, joined by some less notable financial institutions/platforms such as Citibank, Fidelity, and Mint.com.

Why are small institutions taking the lead with the Apple watch?  This is an opportunity to make a statement-we can not only keep up in technology, we can lead.  

Here’s what they have to say in their own words: http://bit.ly/1H7Hhdf.

There is a definite trend — Community FIs taking the lead in tech.  Community institutions took the lead in fraud controls by giving consumers the ability to turn cards on and off two years ago.  They are aggressively adopting P2P payments.  Now they are leading with the Apple Watch.  What’s next?

Stay tuned.  It should get interesting.

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2014 Was An Amazing Year for the Pasadena Angels

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Pasadena Angels / Raising Captial

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2014 Pasadena Angels Performance

• 4 Exits, including Bluebeam for $100mm
• $4.7mm in new funding for portfolio companies
• 17 Deals closed, 10 new and 7 follow-on rounds
• 20 New Angels joined

I have never seen such energy at the Pasadena Angels in my decade+ as a member. Deals are getting done, and the PA are more involved in the tech community than ever before.

Angels have been attending many outside events, both in Greater Pasadena and further afield in Silicon Beach. We’ve also been building relationships with incubators and other investors in the ecosystem. Our partnership with Andy Wilson and the Innovate Pasadena team has been enormously helpful, too. IP events have brought great focus to the area, and we’ve been glad to both attend and financially support their events. It’s hard to exaggerate the impact IP is having in Pasadena.

Members have also invested in Cross Campus, and are delighted with the progress on their new offices in Pasadena. Dan Dato, Ronen Olshansky, and the CC team will definitely add to the buzz in the Pasadena Tech community. Their efforts will build on the momentum IP is driving.

We’ve also focusing on speeding up our internal processes to get deals done faster. Entrepreneurs rightly pointed out we must move much more quickly in an age of SuperAngels, incubators, and other sources of funding. We’ve set an internal standard of 30 days from submission to funding decision, and we’ve funded some deals in 10 days or less. We’ve heard the market, and have taken action.

All in all, it’s been quite the year. I can’t wait to see what 2015 brings!

The Curse of a Modest Exit

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Angel Investing

SmallMoney

You hear about extreme outcomes all the time—the huge exit or a company shutting down. Recently, I got to observe a much more rare event: a company exiting at a modest valuation. The impact on both the team and investors was illuminating.

The company in question built mobile apps for a particular sport, and had 3 million downloads with nearly 2 million active users. I had been an advisor to the team on a periodic basis. We never did really figure out how to monetize the app itself, but the team kept up a weekly email dialogue with active users. They shared sports tips, the latest app updates, and feedback from other users. That eventually morphed into a valuable channel for highly focused ads targeting their sport. It became a real source of revenue for the company.

About 18 months after they had raised an initial seed round, a buyer materialized. They were focused on the same sport and saw real value in the ongoing relationship with 2 million hard core players. The team hammered out an agreement, and the deal was done.

The amount was modest. The team would make some money, but would have to work through an earnout with the acquiror. Investors would get their money back plus 25%. (I’ll spare you the financial gymnastics, but the team was more generous with investors that they were required to be.) No great fortunes were established, but it was nevertheless a substantial success, given the 95% failure rate for startups.

Everyone was depressed.

The team felt like failures even though they had beaten some ugly odds. Angel investors, some of whom I had personally witnessed calmly losing six figures on failed ventures, were seriously annoyed. Why?

The founders and investors were all mentally prepared for both the best and worst case outcomes, but no one had seriously considered what happened if there were a modest exit.

We all know that the odds of a dramatic success are downright terrible, but believe we’ll be one of the winners. If you didn’t believe that, you couldn’t be a founder or angel investor. Likewise, we all accept that there will be failures that return zero, but assume it won’t happen to us. At least not too often.

This experience led me to ask some questions:

Does every angel investment have to be a home run? For investors? For entrepreneurs?

Is swinging for a home run the only way impactful innovation happens or is there another path? DuWayne Peterson, founding chairman of the Pasadena Angels, told me we should be targeting companies that needed modest capital to hit a 3-5x outcome. He believed those opportunities were overlooked by other investors, and represented a chance for a fine return. I think he was right.

Likewise, if a founding team can record a win and make some money, they are perfectly positioned for their next company. The investors that backed the company I mentioned would cheerfully write checks to fund the team’s next venture. The impression they left was a good one—a positive return and honorable behavior. That’s not a bad place to be.

Is a team who takes a moderate outcome giving up too early?

Perhaps the option of a moderate outcome is simply market feedback that your idea is moderately good, but not a home run. Most startups never get that far. The traditional wisdom would say don’t take a moderate outcome, don’t bail early! Stay in and fight for something bigger! But there is a tough question here. Are you rolling the dice with other people’s money to boost egos or because you really think you can be the next Google? I think the team made the right call in this case.

This management team took a hard, realistic look at their business, and decided it was time to sell. It was a courageous move. We all could take a lesson from their disciplined approach.

Join the Connect Weekend with Innovate Pasadena

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Angel Investing / Entrepreneurs / Incubators and Accelerators / Innovate Pasadena / mobile apps / Pasadena Angels
Connect

Innovate Pasadena is, as usual, leading the charge to showcase the Tech Community in the Greater Pasadena area.  Their next event is a week long extravaganza of Pitchfests, Hackathons, Seminars, and more during the week of 3/10.  Check it out on their site at: Innovate Pasadena.

Many Pasadena Angels will join the events, and I’ll be judging apps at the Hackathon.

See you there!

New Pasadena Angels Site Launches

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Angel Investing / Bluebeam / Pasadena Angels / Raising Captial
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Pasadena Angels, Inc. 2013-09-10 08-34-03

The Pasadena Angels have redesigned our site with a new focus on Entrepreneurs and LA Basin tech resources.

We took a lesson from successful companies we have funded–we talked to the market first.  We started by surveying a group of local entrepreneurs and our own members to find out what they wanted in a site.  The message that came back was very clear–both groups wanted a site that showed that: 1) the PA are actively funding companies, 2) are engaged with the local tech community, and 3) made it easy to apply for funding.  We rebuilt the site with that in mind.

Check us out at PasadenaAngels.com–you’ll hear the voice of local entrepreneurs, talking about what it’s like to work with the PA.  You’ll see a long list of companies we’ve funded.  There are links to great community resources like Innovate Pasadena and others.  And “Apply Now” buttons everywhere.

We are grateful to Chris English of Chris English Design for his hard work and wise counsel as we rebuilt the site.

Let me know what you think!