The “Magic 8-Ball” of Angel Investing

Entrepreneurs may sometimes think angel investors use a “Magic 8-Ball”[1] to come to investment decisions based on which companies are, or are not, ultimately subjects of investment. Angel investors may sometimes consider they might as well use a “Magic 8-Ball” to make investment decisions based on the high percentage of failures, versus successes, in early stage investing. Perspective is everything!

The following presentation uses the mythical “Magic 8-Ball of Angel Investing “ to answer common problems brought up in investor presentations and offers an “inside the ball” perspective to entrepreneurs to help resolve these problems.

[1]http://en.wikipedia.org/wiki/Magic_8-ball

“Magic 8-Ball” of Angel Investing©2010 Tech Coast Angels

SIGNS POINT

TO YES.

HAVEN’T WE SEEN 20

COMPANIES LIKE THIS?

SIGNS POINT TONO.

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

BALL LOGIC: If “trendy”, at least be “unique”.

Investors are looking for unique products or technology. If your product, service or technology is a “trendy investment”: explain your uniqueness versus competitive offerings. Expect lots of questions on competition when you have lots of competition. Detail your product’s differentiation.

MARKET IS NEW.

PROCEED WITH

CAUTION.

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

BALL LOGIC: “Field may be green for a reason.”

“Green field” or “Blue Ocean” opportunity? Why should investors expect a future “harvest” or “catch”? Never mind will “dogs eat dog food”, where are the dogs? Back claims with any available market data. Ideally: prototype and test market, to test thesis. Investors want to believe: help them with data.

THERE IS NO COMPETITION

-VERY

DOUBTFUL.

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

BALL LOGIC: “There’s ALWAYS competition!”

There is competition, you just may not know it yet! No competition: is there a “substitute” for product? If potential customer using a “substitute”, how do you change their behavior to use your product? Investors okay with competing product or “substitute”: it is market validation - customers exist.

HOCKEY STICK GROWTH

PROJECTIONS.DON’T COUNT

ON IT.

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

BALL LOGIC: “Hockey sticks break.”

“90 degree” changes in growth should have “90 degree” underlying growth assumptions: show the data. Be realistic about assumptions, be realistic with growth milestones. Remember gravity: what shoots straight up, eventually comes backs down. Investors want to see reasonable growth with reasonable underlying data assumptions.

VALUATION IS TOO HIGH.

TRYAGAIN.

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

BALL LOGIC: “Valuation is what it is, not what you want it to be.”

Again: back your assumptions with real data. If possible, show the “comps”: be industry or market specific. Use business growth projections to back business valuation projections. Investors see lots of deals, listen to their feedback and be reasonable.

INTERESTED IN INVESTING?MY SOURCES

SAY NO.

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels

BALL LOGIC: “Take feedback as feedback.”

Investors give feedback, it isn’t gospel. Incorporate good feedback into presentation and business planning. Most large successful businesses began with many “No’s”. Investors aren’t the definitive judge and jury: they are only data points.

Who are the Tech Coast Angels?

Tech Coast Angels, www.techcoastangels.com, the largest angel investor network in the United States, provides funding and guidance to more early‐stage, high‐growth companies in Southern California than any other investment group. Since its inception in 1997, TCA members have focused on building valuable companies, personally invested more than $100M, and helped portfolio companies attract more than $1B in additional capital, mostly from venture capital firms.

TCA members give companies more than just capital; they also provide counsel, mentoring and access to an extensive network of potential investors, customers, strategic partners and management talent.

TCA has more than 300 members, including its venture capital affiliates, in five networks in Los Angeles, Orange County, San Diego, Westlake/Santa Barbara and the Inland Empire.

“Magic 8-Ball” of Angel Investing© 2010 Tech Coast Angels