I recently found myself engaged in heated debates with a few of my friends and acquaintances about Angel Investors (the real and the wannabe), Venture Capitalists, Incubators, Bankers, etc.
One of the things said, which resonated with me, was the following: “An Angel Investor or VC is looking for companies like Facebook, Twitter and Google. Basically superstars.”
But if we look at most investors in the market, we would find NONE of them would have the vision to fund Google when they were getting started. Sergey and Larry even went to Yahoo, who reviewed the company and declined to purchase it or invest in it. Now ask yourself this: If Yahoo (who supposedly “understood” the Internet and were a major player) failed to see the vision in Google’s product, why should an Angel Investor? Or even worse, a VC? (who is really more like a banker).
Indeed – Sergey and Larry had to work hard and against all odds, to get their search engine up and running and make it useful for internet users. And what they created changed search engines forever, changing the perception and meaning of search, and big data along with it all. It was true innovation, and at the time it was introduced, NO INVESTOR UNDERSTOOD IT. Remember this when you start working on your idea.
I feel I need to expand a bit on what it means that they “did not understand it”. Sure, they saw the product demo, they heard the pitch, but they were unable to project the impact of the technology they saw on the market. The ability to look at a market and say, wow, this really changes everything, is a combination of skill and art reserved to a handful of people. In other words, don’t assume that Angel Investors have this magical ability to see into the future of your company, and understand whether or not it will succeed.
UPDATE: I found this report today by the awesome guys at CB Insights: Top NY Seed Investors ranked by Follow-on Investment Rate and while I am not saying you should ignore investors who are not on that list, I do strongly recommend you take a look at the ones on this list first. As a small company, you need to be even more careful how you spend your time.
Investors: Basically sheep, with strong herd instincts
“Fear is the path of the dark side…” — Yoda
The problem here is fear. Here is a list of problems caused by fear:
- Investors who invest in “packs” or a “herd”, look for a leader. You will quickly recognize them; you’ll be presenting to a room full of “investors” (sometimes ~30 people!). If there is no leader, this diminishes the chances of investment by many orders of magnitude (to basically none).
- Modern investors no longer invest with their hearts, they try to invest with their “brains” instead (which in theory should be a good thing, and while many of them are pretty smart, it takes time to really look into a technology, do a proper due diligence, and make an informed decision). So instead of performing a proper analysis, they look for something to make them feel “comfortable” that there will be an adequate ROI (Return On Investment). They no longer “connect” with the venture’s “spirit”, something that might give them the needed courage to make a leap of faith.
- VC’s are really more like bankers. Why? Because they are not investing their own money. They fear failure above anything else. When you invest your own money, and you make sure it’s money that you wouldn’t cry over it if you lost it, you tend to have way more courage with your money, and you put your money where your mouth is, without fear.
Now, Bankers operate according to the most basic fear principles: What if you are unable to repay your debt? What if this, what if that? This is why unless you can offer some assurances, banks will usually not lend you money. If you own a house, a banker will agree to use your house as security, and will give you a loan up to X% of the house’s value (taking into account depreciation, costs of handling, etc). Needless to say, the whole thing will be insured from here to the moon. All due to fear, and the need to perform. Or rather, the fear of not performing. We all know what happens to men who have performance anxiety: Impotence.
Mathematical formula to magically convert an investor into a sheep:
Anxiety Performance + Investor = Sheep (baaaaaaa!)
A fun exercise!
I decided to test this theory. The idea was to find a company that became extremely successful, improve on its products, but address the same market with a more or less similar technology. In other words, innovate enough to be different, but be similar enough to be able to replicate the same success.
The problem was that Facebook, Google and Twitter were started, and have succeeded in the US. I had to import something that the US had not seen yet, but that I knew the US needed. I chose the QIWI model. I added some innovative ingredients into the formula: Bitcoin currency support (sell Bitcoins, and accept Bitcoins for products), and a QR Code Scanner which doubles as a document scanner for KYC (the US is a heavily regulated business environment, and I knew better than to leave this feature out of the Kiosk).
QIWI is a highly successful, publicly traded company, but it is almost unknown in the US. It has nearly 200,000 cash payment kiosks in Russia, Ukraine, and a few other countries. I don’t think many people realize what a great company QIWI is, and how awesome its impact on humanity is.
I spent a year developing the technology as a hobby, and a few months ago I presented it at Ultralight Startups, and surprise surprise, it took second place in the startup competition. This earned me the “privilege” of being considered for investment by New York Angels.
To make a long story short, I presented the company, showed that the product works, explained that I already signed important agreements and explained that i’m about to deploy several machines in the market. Guess what? They didn’t get it. And they declined to invest. Their concern? That I won’t be able to sell it…
And now, just to prove them wrong, I am going to actually deploy this Kiosk in the US market, and it is going to work. Why? There are many reasons for this, one of them is of course my tenacity and determination. But also because America has at least 25% unbanked population (this morning at Finovate I heard a much more pessimistic figure, claiming that after 2008, almost 50% of the population is now living month to month, with very little access to advanced financial tools). And finally, because this model has been proven to work, and it will work. I will then also take it to North Africa, and other African countries in West Africa.
I found out that there are credit unions working very hard to address this population with innovative products. There’s even a foundation called The Ford Foundation, which invests money in innovative products that serve the un-banked and the under-banked. I’m also seeing huge excitement when I tell people I managed to build it so cheap, that I will be able to sell it at a street price of $2500. This is unheard of in the world of self-service Kiosks of this class and quality, and the people who live and work in this market know this, and respect it.
Anyway, Wish me luck!