Lean Start Up Methodology – the new litmus for investment capital

For the experienced angel investors who have cut their teeth on risky investment in ideas and visions, the popularity of the “Lean Start Up Methodology” as a way to start and grow a company may seem revolutionary and the latest craze.  For those business savvy men and women who believe in validating a product and market opportunity before spending R&D money or investing in capital infrastructure, the premise behind the “Lean Start UP Methodology is actually quite logical and practical.

For all those investors who ever thought angel investors were crazy for investing in companies whose only measure of success was how many clicks, or likes, or free users they could attract, there is a saner way to gain the benefits of investing in companies before they go public.  Early stage investors that hale from corporate America and understand the value of strategic planning now can venture into the world of early stage companies who still have relatively low valuations, but mitigate that risk because the company actually knows there is a market for their product and a demand for their product before they ever go to market.   Emerging Growth companies that have grown organically inherently utilize the market validation process of the Lean Start Up Methodology because revenues have been their source of growth capital.

In the Podcast “Business Strategies for Success – Attracting Capital & Customers” http://www.blogtalkradio.com/karen-rands/2014/09/23/business-strategies-for-success–attracting-capital-and-customers

Paul Hoyt and Karen Rands explore the importance and differences between a Business Plan and a Business Strategic Plan.   A business plan is more like a brochure to describe the business, where the strategic plan is a blueprint to be a road map for how the company will succeed in the marketplace.   When looking at a company to consider for investment, the executive summary introduces you to the opportunity at a high level, the business plan provides more detail about the direction and potential, but the strategic plan will show how they plan to actually get that point of success.   Often times the strategic plan is saved until due diligence starts.

Companies at different stages may have varying levels of completeness of a strategic plan.  Start ups simply don’t know enough information to have a great detail in their strategic plan whereas emerging growth companies with a history of performance leads to shifts or pivots in their strategy on how they need to adjust the plan to achieve the results they want and best utilize the capital they are raising.   Regardless of the stage, the company should have some form of a strategic plan that shows how they will use the funds to ramp up staff, implement marketing plans, enhance operations, and increase sales.

The Lean Start up Methodology in effect creates a corporate environment that is living the market responsive strategic plan.  Fundamentally it is an approach that embraces improvising, adapting and implementing – measure and repeat.

Check Out Entrepreneur Podcasts at Blog Talk Radio with Karen Rands on BlogTalkRadio

 

For more information about Paul Hoyt and his Beyond Business Services visit http://paulhoyt.com
For more information about Kugarand Capital Holdings and the educational programs for investors and the due diligence portal for emerging growth companies, visit http://kugarand.com

The “Freudian” perspective on Angel Investing

Becoming an “angel investor” is not for the faint of heart.   It isn’t quite as exciting as jumping out of plane at 40,000 feet or hang gliding off a cliff at 3000 feet, but when it comes to knowingly entering into an investment that by its very nature has the potential to lose every penny of your hard earned cash… that takes guts.   So here is what one needs to understand about the men and women who boldly go where mere real estate and stock market investor don’t dare to go.  Of Freud had been around during the Dot.Com bubble and the latest up/down of angel investment,  he may have applied his theories of the Id, Ego, and SuperEgo in this way.

The  motivation for sophisticated affluent men and women to become angel investors or as some might label them, early stage venture capitalist is driven fundamentally deep within to face the risk in pursuit of a perceived big reward.   The thrill seeker who jumps of a cliff to fly through the air, does so knowing there is risk, but the reward, the thrill, the adrenaline, the sense of accomplishment, the oohs and aahs of their peers that see their success….all triggers the desire to face known risk.   Becoming an Angel Investor can be compared when viewed through the Freudian theory of development.

  1. Investor Id:  What does the Id care about?  ME, ME, ME….so in the realm of money, that translates to greed—What is in it for ME. So these these folks will take the risk because it has the potential biggest return on investment and the only asset class that actually has potential to provide multiples on money within a decade of the investment.   And the bragging rights of being in some hot new thing doesn’t hurt.  Whether on the golf course or over cocktails talking about breakthrough in technology,  “Sure, about a year ago I invested in a little company that does Y” or is in a popular magazine for doing X….”Oh ya, I have some of the equity in that company…. got it for a song as an early investor.”
  2. Investor Ego:  This is where the pragmatic hat goes on and even though the investor wants to make all the money and negotiate all kind of terms to guarantee that, they realize that the CEOs need to be motivated, and there needs to be room for other investors to come on and follow on investors.   So instead of mitigating risk based on onerous terms, they will seek to invest in deals that inherently have some of the risk removed because the company has been validated.   This is where the real RISK vs REWARD trade off come.  “Without a more experienced management team to ensure you can execute, I will require a board seat.”
  3. Investor SUPEREgo:  This is where an investor become a “Compassionate Capitalist”.  Usually, only the most advanced investors reach this stage.   They have made so much money from their own entrepreneurial endeavors and from their past angel investments, that the can “afford” to be generous with their investment into entrepreneurs.   They know that many of their investments will fail and they go ahead because they really want to see that innovation get to market or to give that entrepreneur a chance to succeed because they can see the spark.   They have confidence that some percentage of their investment will hit payload and make up for everything they have lost previously.   They have pursued their professional hobby of investing with zeal by learning by doing and learning from others, so that their Financial IQ is top of the game.

Unfortunately, for those that jump in at the Id stage, they sometimes never get to the other stages of advancement because they make a poor investment, lose a lot of money, and decide to stick with the much more predictable stock market and real estate.   This is why education for investors at that very early stage of their exploring angel investing is so important.

Angel investing is the only type of asset class that the investor can’t get advice from their financial planner or wealth manager regarding.   SEC will fine that trusted adviser and potentially even pull their license if they find out they advised them on a private equity investment…..or so that adviser thinks.   It really only happens if they take a commission on the transaction and does not run it through their broker dealer.   Nonetheless, most often the case is that the investor can’t sign up for weekend class, has to drudge through book written like college text books or learn by doing which early on means learn by losing.

Fortunately, as the angel investor industry has gotten more and more successful and sophisticated, the industry has taken it upon themselves to begin offering education for investors.  We have seen large conferences being offered in Boston and San Francisco.  With the advent of Georgia passing their own Angel Investor Tax Credit to encourage sophisticated investors to put money into early stage private companies, there have been an uptick in education being offered in Atlanta. Other states offer tax credits and subsequently education.

We have long been a source for investor education through our email newsletter and our “Inside Secrets to Angel Investing”. Excerpts are available when you optin. Information is available about the book and the limited time offer with 6 bonuses at http://angelinvesting101.com

Mitigating Risk for Private Investors

With the turmoil of the stock market and the advent of large blue chip companies failing and event real estate faltering….risk vs reward takes on a whole new meaning.   Private Equity Investing in early stage companies has long been considered the most risky of asset classes to put money into.   However, it has proven historically, even in the market collapse of the dot-com era, to be the investment class that produces the greatest return on investment.   Angel investors historically get better returns than even VCs or the big Private Equity Funds you hear so much about.   Why is that?

Angel Investors tend to get better returns because they invest when the company has the lowest valuation.   The stock they buy may be less then $1 a share, and yes although you can purchase stocks on OTC BB or even the regular exchanges at less than $1 a share, that is usually becuase of some decline in value.   Early stage companies that are currently valued at less than $1 a share have all the promise of massive increase in valuation.   If they are starting out at 50 cents a share, and then get purchased at a modest valuation years from now at $5 a share, that is 1000% gain, or even if they do what most regular public companies go public at greater than $10 a share…presto big return.   Enough to make up for the 3 or 4 that went belly up….that is the risk part of the reward.

So how can you mitigate risk when making an investment in private companies?   There are 4 key areas:

  1. Intellectual Property Protection – patents, copyrights, trademark, trade secrets
  2. Management Team/Advisers – experienced management from within or recruited from outside
  3. Insurance – key man insurance, errors & omissions, other corporate insurance
  4. Strategic Planning – what will they exactly do once they have their funds
  5. Sales Validation – do they have the sales team/strategy that can achieve the expected results
  6. Terms of Investment – small terms may have big impact on the angel investor down the road
  7. Market Validation / Competition – having sold something or having market validation in a pipeline, joint venture, or in improving on the competition go a long way to validating the opportunity

Listen to Karen’s Podcast on  Mitigating Risk for Investors Now!

To get the full list of Free or Near Free resources, go to www.launchfn.com and click on the Information section.

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Check out these investment websites: www.kugarandholdings.com, www.nbai.net, www.kyrmedia.com, and www.entrepreneurblogspace.com

How does an Angel Investor Mitigate Risk?

Risk in private equity investing is inherent in the process.   Often the greater the Risk, as in early stage the company, the great the Reward…if the terms are right.   Lots of “ifs” involved in angel investing.   You get the greatest return when you invest and the company has a low valuation.   But that is often based on not accomplishing many milestones yet.   Without the milestones to show a company can execute, the risk is greatest.   So what are some key milestones a company should have at the major stages of development?

Start Up or Seed Stage:

  1. Has a working business plan that delves into key areas of the business so they know what they don’t know and what they will need to get help on.   For example:  Figuring out the actual cost of goods when manufacturing.  Or will they hire sales reps or outsource sales etc.
  2. Has protected the product and offering with patents, copyrights, or at the very least explored it and determined trade secrets are best.
  3. Fully understand who their target market is and why they want to buy that product or service and what are they willing to pay for it.
  4. Have assembled a good advisory board, even if they don’t have the funds for a management team.   They should be people that have relevant experience.
  5. Has been able to raise a “friend and family” founders type round to at least get the $100,000 to $200,000 needed to build the balance sheet, pay for the patents etc, allow the CEO to actually be a full time CEO, and ultimately do the things that validate the business.

Early Stage:

  1. Building upon the seed start up stage, as a company enters into Early Stage they should have a finished product and either customers already buying or at least have a serious pipeline of customers they have been courting and will be buying.
  2. The money that comes in at this round should get them to cash flow positive.  
  3. They should be expanding management to include “execs with checks” or at least management that believes enough in the project to share risk through compensation from shares.  No Hired Guns.
  4. They should have analysis on the exit….do companies such as theirs get bought or go public.  Who in their industry has done either?  Who has bought companies like theirs.   Because if they know what they are going to grow up to be, they can put a plan in place to get there.   This is where you get your return, so this is important.

Expansion Stage

Angel Investors really don’t play at the expansion stage, and at that point the risk is still greater than a public company borrowing money from a bank, but not near the risk associated with Early Stage or Seed Start up Stage companies.  

 At just about every stage, you can also mitigate risk though the use of key-man insurance to protect in case something happens to the inventor/founder etc.   Also you can mitigate risk in the structure of the deal so that if the company has to go to a firesale, you can get all or most of your investment back when the company is liquidated.  

Angel investing can be very rewarding if the risk is appropriately mitigated.