47. Entrepreneur-Investor Fit (Peter Wilkins)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Peter Wilkins of Hyde Park Angels joins Nick to cover Entrepreneur-Investor Fit. We will address questions including:

  • Wilkins Entrepreneur-Investor FitDid you consider raising a venture fund as opposed to leading an angel group?
  • What should entrepreneurs think about when targeting investors?
  • How do you parse which businesses need Venture Capital vs. Angel Capital vs. those that don’t need outside capital?
  • Do you think entrepreneurs should take professional capital from non-strategic investors that provide limited value beyond the capital?
  • What are the differences in the fundraising process between angels vs. VC?
  • What does the interaction process look like between your group and founders, post-investment?
  • What are the down-stream implications of taking capital from different sources?
  • How does collaboration work most-often for you with regards to angels and VCs co-inveting and working together?
  • Any final thoughts for entrepreneurs on finding the right investors for their business?

Itunes:  http://apple.co/1GYXNh3

Direct-audio:  http://bit.ly/1NtcW7e

SoundCloud:  http://bit.ly/1LcfCEx

Guest Links:

Key Takeaways:

 

1-The Early Raise Process

The first question every entrepreneur should ask is do I need venture capital to grow the business?

If the answer is yes… from Peter’s standpoint, the first step is to put together some friends and family money and validate the product in the market and will help you command the best terms from professional capital.
Second, he discussed finding a super angel with domain expertise and some deep market experience that can help the business beyond just the capital. If the entrepreneur is just looking for a check early on, they will miss out on the strategic insight, market knowledge and network of knowledgeable investor. And recall Pete’s comments about how a trusted authority in a market can substantiate the opportunity, if it is pre-launch or pre-traction. Traction is always great to see early-on, but not every type of business can bootstrap it’s way to a million users.

It’s only after the friends-and-family and this pre-seed super-angel money that one should pursue groups and funds for investment… and at this point the strength of the business, it’s allies and traction will give the startup the best opportunity for a successful raise.

 

2- Investment as a Transaction

Pete talked about how he’s never met a successful entrepreneur that looks at this like a transaction. We’ve cited in the past how this is akin to a marriage in that you will be going through a number of ups and downs over many years… and there are no easy exits in this relationship. Most experienced angels will not treat this like a transaction and will not cut a check the first time they meet you. Excuse the analogy but there may be a few dates before this partnership begins and that should be the expectation on both sides.

 

3- Key Elements Evaluated

1. Member expertise matching
2. What’s the value proposition
3. Traction to substantiate the value proposition
4. Can the management team take the business to where it needs to be for the next round of capital
5. Likelihood of getting the next round of capital?

 

Tip of the Week:   The Post-Seed Plan

 

FULL TRANSCRIPT

 
   

   
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  • Seph

    Really great episode. Thank you. It is so very interesting to hear the p.o.v. of an organization like HPA. Some transcribed notes below to help expand on your Key Takeaways.

    (Anything not brackets is Peter Wilkins.)
    —————————

    [1- The Early Raise Process]

    Do I need a capital partner? The longer you can take it without, the more ownership and control you have. Equity and control.

    Founders get caught up in fundraising as validation of the model and that’s misguided. In reality, the market validates the model.

    The more you can structure the deal now, as you gain success in the market, you’re going to want sophisticated investors to follow on, and if you have a convoluted term sheet and the structure of your deal is completely off base, you’re going to start from ground zero.

    [2- Investment as Transaction]

    I have never met a successful entrepreneur who sees this as purely a transaction, rather they treat it as a partnership and a long term one for the venture to be successful.

    One thing I always hear VCs talking about is team-team-team. You know, like location-location-location. To entrepreneurs, it’s who is my partner-partner-partner… Do they bring the right network, do they bring the right experience, and do the bring the right temperament. I cannot emphasize that enough.

    [3- Key Elements Evaluated]

    [@16mins] Let me talk about how HPA’s processes work.

    [5 steps, sounds like each serves as a gate to the next]

    1) Member expertise connecting to the startup, look for a match, build a team around the domain expertise and develop a relationship with the entrepreneur. We get to a “no” very quickly.

    ***HPA will not invest in a deal unless a member has domain expertise and believe that they can really move the needle.***

    2) Value Prop. What is the value proposition that you are bringing into the market? What is so disruptive about your product or service that somebody is going to change their current behavior to start using your product/service and then develop a recurring pattern. That recurring pattern could be once per year, five times per year, five times per day. We can figure that out, but it allows us to see, “Wow, people are changing their behavior because you have something that is so powerful it really makes a difference”.

    3) Traction. Pre-revenue validation is approval of domain experts, “this will disrupt this market”… We can figure out what stage is the company and then evaluate if there is enough evidence to validate that the value proposition is accurate… If you tell me what is your value proposition, what people should be doing, then we should find some evidence that they are doing it. And if we find that match… and we see complementary markets for expansion, where a pivot might occur. We’re checking out the entrepreneur’s logic, making sure it is sound.

    4) Team. What HPA is looking for is somebody who can grow the company from the day we invest in them until the next significant phase… usually a funding round. It allows us to say that this person is capable and competent and the team they are with can get it far enough along in the market to validate the market and get that next round of capital. At that point in time we then evaluate if they can get it to the next phase. As an investor, switching out the management team from pre-Series A to Series B is crazy.

    [***HPA wants to see a team that will successfully take the company from pre-Series A, through Series A, to Series B.***]

    Let’s narrow the time frame of how we’re going to evaluate that company. So what we get really focused on is: if I invest in the Series A will we be able to get the Series B investment?

    5) What is the likelihood that we will get that next round of capital [Series B]?

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