During the first few minutes of the SuperBowl 2014 (www.nfl.com/superbowl/48), one cannot help notice that every error free second is critical in winning. A poorly executed snap count and the delivery of the ball can cost a game as the Broncos’ Peyton Manning found out. The football team that wins always makes the fewest mistakes and adjusts its strategy against its opponent. Every second counts. These same observations apply to startups and entrepreneurship, and explain why Crimson believes in “snap count” strategic advice that make a startup succeed and prosper.
In his 2012 article, “Why Angel Investors Don’t Make Money…And Advice for People who want to be Angels Anyway” (www.techcrunch.com), Andy Rachleff, Stanford Business School Professor, explains the low returns for Angel investors. He does point out interestingly that a small percentage of the investors, less than 3%, hit a higher percentage of returns than the other 97%. He claims that these successful players are investing in companies with higher technical risks with low market risk. Frankly, I think that that this observation is over-simplified and not quite correct.
For example, I knew of one Angel investment firm in Virginia that lost over $100 million dollars while investing in over 10 startup companies. Its founder had considerable experience and success as a senior executive in a telecom startup. I observed that, although the investments were following the macro-economic trends and seem logical at first, they had something defective – or not “error free”. One company had a multimedia platform that could be easily replicated anywhere else. Its so-called proprietary technology was not quite that proprietary. The company was way over-valued. Another company failed because the management team did not have the marketing expertise, even though its technology was unique and patented. It exhausted over $10 million of capital in pursuing the wrong customers. So that Virginian investment firm represents part of the 97% crowd. The investment firm’s strategic mistake? Successful startups need more than an idea to survive. And the lead investor did not consider the many variables that contribute to a startup’s survival.
In one California Angel group, I noted that its grading system for evaluating startup companies after their pitches had only 4 criteria. I myself thought that the form was not detailed enough. I consider 15 factors in the success of a startup, not 4. And each factor is the line item needed to write a business plan – from regulatory, to management team domain experience, ROI, etc. Going back to the Virginian firm, one company did not have a legally defensible technology. In the other startup, the company’s leader had no domain experience in marketing telecom technology. Both companies failed in less than 2 years and were not “error free”. Was there technology risk in one? No, just execution risk that could have been rectified in the beginning by appointing the right senior executives and marketing managers.
Therefore, the 3% successful investors, either from experience or foresight, are capable of identifying the right “error free” companies or quickly rectifying the problems for their consistent track record. One investor told me that one study indicated that once a company reached over $100 million in sales, the investment risk reduces substantially. The corollary would say that a startup has considerable risks and any execution error can be fatal. Andy explains that Angel investment is very risky and that industry is not meant for weak hearted. And that is true. On the other hand, that Angel/VC world will always exist. A major European Bank portfolio manager once told me that he invests 10% of the bank’s investable funds into VC funds. He is seeking higher than average returns, but, when he told me the names of those firms, they were firms with successful track records – or the 3% group. In other words, institutional investors always have appetite for risks, but only for smart ones.