Ever wondered what goes through an investor’s mind when they scope out a company? Lesley Springall listened in at the annual Angel Association Summit to find out.
Marcel Van den Assum has seen a lot of companies in his time. The former CIO for Fonterra and managing principal of Unisys New Zealand has done due diligence on more than 20 Kiwi companies and invested in 10.
Half of these he invested in as an angel investor – an individual with a bit of cash, knowledge and often time to spend working with an entrepreneur, who gets together with other like-minded individuals to invest in early stage companies. It can be later stage companies too, but only when the founders of the company are planning a restart or a major strategy change to fast-track their company into the international arena for the first time, he says.
The other, earlier half, of van den Assum’s investment portfolio was on his own as part of the more traditional “family, friends and fools” first-stage investment category. “Probably more foolish than family,” he admits.
Today van den Assum is vice chairman of New Zealand’s rapidly growing Angel Association. Together with some of the other speakers, he was charged with sharing investment tips at the Association’s annual summit in an attempt to improve the angels’ traditional one-in-ten, success-to-failure rate.
For van den Assum there are several things he now looks for in a company before investing: the ability of the company to go global, a good founder who’s built a strong and complementary team around him, and someone in the company who knows how to sell.
“In New Zealand one of the skills most lacking is sales: someone who can close a deal and talk the value of a deal up. In one company I’m involved in the entrepreneur is very good at talking deals down because he’s so desperate to do a deal.”
Investors must get smarter about looking for that sales ability or at least recognising it’s lacking. Company founders too, need to recognise their limitations and seek to bridge those gaps before approaching investors, he says.
Another bugbear is when a company founder tells him his company is unique.
“When anyone tells me they are unique, they are clearly bullshitting; they either haven’t done their homework or it’s true and it’s going to take a helluva lot more money to create a new market.”
Market research or lack thereof, was a common grumble among angels. Too few companies do it properly, thoroughly or thoughtfully enough. Keynote speaker Nelson Gray, who’s invested personally in 26 companies, plus another 53 through two early stage funds he managed in Scotland, says sadly he’s often confronted by eager businesspeople who, when asked if they’ve done market research, ‘say, yeah, Google.’
That’s simply not good enough; businesses wouldn’t fail and investors wouldn’t lose their money half so often if they bothered to do some serious research on the market before building or investing in their ‘widget’. “You have to make sure the company is really committed to customer contact and driving the value proposition,” Nelson told delegates. “As for deals of a lifetime, well they only come round about, oh, once a fortnight!”
For Gray good management, good IP, a good business model and a good exit idea are just the basics; the prerequisites of any deal. “It’s like saying this car is really good because it’s got four wheels.” A real value proposition is a company with real prospects – it must have proven it has real customers who will pay for the product, he says.
Exits are another thorny subject for investors. Too often it’s something an entrepreneur hasn’t even thought about, says van den Assum. “There’s a bit of emotion around exit strategies. Some people think we’re only looking at investing to sell the company; where’s the long-term commitment to build a business?
“The emphasis should be less on the word ‘exit’ and more on ‘strategy’ because an exit strategy is really how do we create value from this venture and for this venture for stakeholders; it’s all about, at some point, generating decent returns.”
But the biggest mistake companies looking for investment make is underestimating the capability they need to achieve an aspirational outcome, says van den Assum. “They must take a global perspective instead of a local one. In the States if you are not aspirational, you’re underestimating your potential. But in New Zealand, because we’re pragmatic types, an aspirational pitch can be seen as a bullshit pitch, but companies need to be aspirational and build the capability to achieve that.”
If companies genuinely can show they have the capability to achieve their aspirations, they will attract a lot more than money, says van den Assum. “It’s not just a financial cheque we write out, it’s a commitment cheque. If you get it right, you’ll attract angels, who’ll get their networks into it, which will attract other shareholders, US-based directors, strategic partners, and then away you go.”
This article is the first of two drawn from the Angel Association Summit to help bridge the gap between investors and budding entrepreneurs looking for investment.
New Zealand’s angel groups
• AngelHQ – Wellington
• AngelLink – Waikato
• Enterprise Angels – Bay of Plenty
• ICE Angels – Auckland
• Manawatu Investment Group – Palmerston North
• Otago Angels (formerly Upstart Angels) -
Otago and Southland
• Powerhouse Ventures – Canterbury
• Venture Accelerator Ltd – Nelson, upper South Island