ENTREPRENEURS, Know Your Investors!!!

There is a consistent problem that I see with supposed Investor Level presentations. I saw it again today and I can’t figure out how to, if not fix, dramatically improve the entrepreneurs understanding of the investors they are searching out. I looked back and found that my last set of rants on the subject was last November. So, maybe I just need to do a quarterly rant.

It just doesn’t make any sense for an entrepreneur to expend all the time and financial resources around getting in front of investors and then wasting the effort by not covering the things that we want to hear and describing in the presentation and supporting documents a story that meets our expectations.

It just doesn’t make sense to paint a rosy picture of a very opportunistic business, with large markets, unique products and then describe mediocre revenue projections and outlandish valuations. Oh yes, I love how many companies think that they will be acquired using multiples of companies like Double-Click, YouTube, Facebook, or MySpace. They overlook what kind of traction these companies had when acquired or got an investment.

OK, so what are we looking for: well we look for opportunities that have a believable story that looks like it will return 5X to 10X return on our investment in three to five years. If you present opportunities that in no way come close to this, then you are wasting your and our time.

As for valuations, this is always a touchy subject, but most Angel groups don’t want to invest in opportunities where the valuations at the seed stage are greater than $5m. So, what do you think happens when a company with no or few customers, unprofitable or miserable revenues, and a not so clear story has a $10M valuation. How did that happen?

If you want to use YouTube as an example, then show a company that with results similar to YouTube when they were acquired. I saw Chad Hurley interviewed a couple of months before Google’s acquisition where he stated that they still unclear about their business model. In case lots of entrepreneurs want to jump in and say “see there’s our justification for our valuation, we don’t completely understand our business model either”, he went on to describe that 110K new videos were being uploaded each day.

YouTube was launched in November 2005, experienced a meteoric rise in content and membership and were acquired by Google in 2006.

So, if you are going to be out raising money for your fledgling company please take the time to figure out what type of investor you think you will need and then what is important to them.

If you want a little help, I had an article published in the recent edition of Website Magazine on the subject. But don’t take my word on what is important, talk to the investors you are targeting and find out what they feel is important.

Hopefully, I won’t have to go over this again until May.

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2 Responses to “ENTREPRENEURS, Know Your Investors!!!”


  1. 1 Ben Kuo February 14, 2008 at 7:12 pm

    It’s amazing how this issue continually comes up with almost all the Southern California angel/VC investors I talk to, as well… Particularly the outlandish valuation issue and approaching angel investors.

  2. 2 socalbuzz February 14, 2008 at 8:32 pm

    Ben:

    Having just read your post yesterday on 5 good and 5 bad reasons for raising venture capital, I can see that you run into the similar issues. A couple of companies that I ran into in the last week fell right into the 5 Bad Reasons.

    On the other hand, I wonder what we would do if everyone had a great plan, believable story, solid financials and solid exit plan that gave us a clear idea of how they are thinking about how we get paid back with great multiples. We would probably have to change our vetting process to include somehow putting all the qualified companies into a hat and drawing out the ones we fund.

    Oh well, we are far, far away from that.

    Thanks for the comment Ben


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