David Rose is the founder and CEO of Gust, the entrepreneurial finance industry’s infrastructure platform; author of the New York Times bestseller Angel Investing: The Gust Guide to Making Money & Having Fun Investing in Startups; founder and Chairman Emeritus of New York Angels, one of the leading angel groups on the East Coast; Managing Principal of Rose Tech Ventures, an early-stage “super angel” fund specializing in Internet-based business; and a partner in True Global Ventures (an international super-angel venture capital fund).
Q: When you are talking to folks who are just getting started thinking about angel investing, what is the thing that surprises you most in these conversations?
A: That they have no conception of the real metrics involved, and no real understanding of the overall market. That is, a novice angel will see a slick presentation and immediately take at face value every claim being made. There’s a saying in the business that “a novice angel will love one out of the first ten deals he sees;, and one out of the first hundred; and out of the first thousand…” Similarly, unless you’ve been actively looking at a lot of companies, one doesn’t realize just how many companies there are with similar ideas doing similar things. For example, there are over 300,000 companies with profiles on Gust. So ask yourself: are there really 300,000 different business models? Of course not. How about 30,000? Nope. 3,000? Probably not. 300? Yeah, there are at least 300 different types of businesses.
Q: What are some core beliefs you held early in your angel investing that after years experience you now think are hogwash?
A: That smart investors, with appropriate due diligence, could pick a large proportion of winners. I still believe that, only I’ve adjusted my math. In the early days, my assumption was that “large proportion” meant 60-80%. Having been doing it for a decade, I now realize that “large proportion” means 10-20%.
Q: Are there too many angel investors these days? Do you think there will be more or less 5 years from now and why?
A: There certainly are not “too many” angel investors these days, and if anything, we’ve only seen the beginning, In fact, the whole point of my book was to educate readers on how to be professional angels and to encourage those who qualify as Accredited Investors to seriously consider funding startups. Whether you look at the 7.5 million Accredited Investors (who are allowed to invest today) vs. the 200,000 (estimated) who are already investing, or the 700,000 companies started every year vs. the 70,000 who get funded by angels, there is clearly a long way to go before we’re anywhere close to saturation.
Q: What type of data should a startup use when pitching an angel investor?
A: Market Size Data: The point of this is to show that you are legitimately aiming at a market that has enough potential customers with enough money and enough pain to help you grow very, very big. Extra points if the market itself is growing significantly because of outside forces.
Adoption Data: This is the core of the “T” word: traction. Investors want to see that people are actually signing up for your product or service and that the rate of customer acquisition is increasing. With great traction and accelerating adoption, you’re golden, almost regardless of what you’re doing.
Engagement Data: It’s all well and good to get customers (or users) to sign up, but if they then don’t DO anything with your product, they don’t mean very much. For example, you could have a million downloads of an app, but if all your users then proceed to delete it from their phones, you haven’t advanced the game at all. On the other hand, if you show ‘stickiness’, and increasing use of the product or service from users once they come on board, you will find yourself to be a very hot date.
Profitability Data: While for an early-stage startup, Adoption and Engagement actually trump profitability, you would ideally like to show those two plus a business model that turns those customers into dollars, since at the end of the day, that’s where the money comes from.
Demographic/Customer Data: You should know (and be able to show) everything there is to know about the people who are using your product or paying you money. This is absolutely critical, of course, in any type of advertising-supported model, but it is also important in helping investors understand the Lifetime Customer Value (LCV) of each customer.
Exit-Related Data: In the real world of 2014 and beyond, most angel investments are infinitely more likely to exit by a trade sale to a larger company than they are to an IPO. As such, investors analyzing a deal (especially ones who have read Basil Peters’ excellent book, Early Exits) will be trying to figure out the likelihood and scale of their exit at some point down the road. You can help here by showing how many similar companies have been acquired in recent years, how much they were acquired for, the basis on which they were valued, and metrics they used to tell their story. The more you can map these to your story, the better off you’ll be.
Realistically, receiving this kind of data is uncommon in most startup pitches, which means that those companies who do come in with lots of accurate, detailed, well-presented data in the above categories stand a better than average chance of getting funded.