Imagine if the TCA were around 30 years ago. A small group of scraggly looking late teens/early twenties programmers came to ask for funding for a "basic" programming compiler they were developing for the hobbyist computer market.

I'm guessing they'd be turned down. No existing market, no real work history or education (the CEO was a college dropout!), no examples of other successful entities in this line of business, etc. etc.

The group goes back to New Mexico, finishes the compiler later lies to IBM they have an operating system to license to them for a new personal computer (and buys an operating system in the interim to sell them). They move the operation to Seattle and later become one of the biggest software, if not business success stories in the history of American capitalism (Microsoft).

A lot of successful businesses end up being successful in a business that they never envisioned early on. It's the people, their tenacity, dumb luck and timing. We can try to apply qualitative and quantitative models to screen companies but a lot of this seems to come down to the individuals in the business and their flexibility.

Choosing these businesses seems more art than science to me. "Gut" feelings do matter and since we continually see businesses hit problems, change direction and regroup the flexibility and persistence of the principals seems more important than most other criteria.

I think everyone in the TCA is thrashing on this right now (as many other angels and VCs are also) because there have not been "exits". Without "exits" (IPO or M&A) it is tough to judge ultimately whether the model you are using is valid or broken.

The TCA might be spot on, or dead wrong, we'll only know in hindsight.

Great session with David - have a great time in Spain!

Tom T.,

It is not as mysterious as you make it sound when you cite "gut feeling" and "dumb luck". The example you make of Microsoft having no market for its compiler, can also be said of the light bulb, air plane, and a host of other inventions. No electricity in homes and no runways and airports.

"Gut feeling" is not the way to go. Simply look at the needs of the target consumer and the cost effectiveness of switching to the new product. That will give you an idea of the potential adoption rate. If your "gut feeling" is not based on the needs and the cost effectiveness of the consumer, your "gut feeling" will always be wrong.

You pointed out that Microsoft bought the operating system it sold to IBM. History shows us that there were also two other players (operating systems) already being marketed. That tells us that others were already looking at the writing on the wall. They weren't creating those operating systems for fun; one of them already had traction in market. It was not a gut feeling or a whim.

In documentaries, Microsoft acknowledges that the only role luck played was that they were willing to work with IBM who was trying to put them out of business while others were not. They said it was a decision they considered very carefully, weighing the pros and cons. Their decision to work with a company that was trying to put them out of business was not based on luck.

Would TCA members on Microsoft's board have agreed with the decision?

I just listened to your podcast that discussed the TCA's assessment process including the 9 page checklist, and the role of the devils advocate.

The podcast made me think of many things. I am a professional recruiter of technology people. I am also an entrepreneur and software designer and I am from a highly technical software engineering background.

It has occurred to me that there is a great deal of similarity between your organisation and mine. TCA receives many written applications (business plans) asking for money (investment). Recruiters receive many written applications (resumes) asking for money (salary). We must assess the merits of the applicants and choose to shortlist for further consideration or knock them out of the process. We progressively move the applicants through a process until eventually the applicant either wins through to the desired outcome, or they are rejected.

One thing I know is that even one negative comment can end the process for an applicant. And it's a strange thing about human nature that once others hear that negative comment, then they tend to be negative in their perception from that point on. I see this all the time. I find a job applicant who is really great - I send them to the client, where maybe five people need to assess that person. Once one of the assessors has made a negative assessment, it is then unlikely that anyone else will assess that person positively. I have to work very hard sometimes to turn around these situations.

When I heard about the TCA's nine page checklist I thought "wow, I'd be surprised if anyone gets through that". The problem is that a nine page checklist is in effect, nine pages of opportunities to find negatives. How can an entrepreneur possibly fight their way through nine pages of fault finding? If you are going to have a nine page checklist, then probably your first step should be to decide which of the questions on the nine page checklist are relevant to this application, reducing it to a one page checklist.

I wondered if the TCA might not want to look to Edward De Bono for some new ideas in this area. In particular, De Bono's "six thinking hats" concept (I recommend reading the book), in which six different types of thinking are applied when evaluating an idea. Such an approach ensures that the idea/business plan gets not only the negative thinking (black hat), but ensures that the idea is evaluated from a range of perspectives. This gives room and voice for positive assessment, negative assessment, emotional assessment (hunches and the like) and a range of other thought perspectives including the critically important blue sky assessment.

White hat - Facts & Information
Red hat - Feelings & Emotions
Black hat - Critical Judgement
Yellow hat - Positive Judgement
Green hat - Alternatives and creativity
Blue hat - The Big Picture

Perhaps the only people allowed to make negative comments are those who have expressed an interest in investing - what's the point in allowing the non-investors to heckle from the sidelines? Or perhaps anyone who wishes to make comment must do it from a six thinking hats perspective to ensure balance.

On the topic of valuations, in your podcasts I have heard the lament often that entrepreneurs present to the TCA and have their valuations wrong. It seems to me to be a waste of everyones time to have entrepreneurs present when such fundamental agreement has not already been locked into place. In my job as a recruiter I follow this process:

1: read the written applications that have been submitted
2: shortlist those that look like they might be interesting
3: call the candidate on the phone and do a 5 to 30 minute phone interview, asking a standardised set of questions, designed to clarify things that are of basic importance to me and the client
4: if the candidate passes the phone interview, I email the written application and the verbatim transcript of the phone interview to the client (in the case of TCA, the client is the TCA member angels)
5: if the employer likes what they have read in the written application and the phone interview, I then organise to interview the applicant in person
6: if the in person interview with me goes well, then I organise for the employer to meet the applicant in person

At step 3 I ask a range of basic stuff that makes sure we are all in the same ballpark. My first question is "do you have a legal work permit?" and my second question is "how much money do you want?". If the applicant is overpriced, I tell them that in factual, unemotional terms and terminate the process at that point. There's no point in continuing the assessment process if in the end the client does not want to pay the amount of money being asked for. I would have thought that TCA would be doing the same with its applicants.

On the topic of valuations, I wonder if it might not make sense for TCA to package up the "typical deal profile" and let entrepreneurs know that this is a deal structure that works and is being funded at the moment. For example, TCA could openly advertise to the entrepreneurs "deals that are being funded by us at the moment are typically 20% equity stake for $250,000 cash paid for a post money valuation of $2,000,000 for a pre revenue company with three founders.". My core thought here is that entrepreneurs should be able to ask "what should the deal look like for TCA to fund me?".

On another topic, I have listened to a number of your podcasts in which there is discussion about the volume of applications, and how time consuming it is to sift through all the low quality applications, and how bozo filters might help to cut down on the low quality applications. Again this is precisely the same as technology recruitment. We get HUGE numbers of applications and the vast majority are not suitable. But sorting through these to find the gems is what the job is all about - it is necessary to read every single application to find the gold. If you resent the volume of low quality applications and don't want to carefully go through them to find the gold, then the chances are you will find little or no gold. There have to be entrepreneurs out there who are smart, passionate, driven and have good ideas, but do not have personal connections into the network - it doesn't make sense to only consider applicants who have come through the network. Only accepting people who managed to find a personal connection into an angels network is lazy - there's gold in the applications but investors but sift through every rock to find the twinkle of gold. Any investment organisation should carefully review all applicants and those that only accept applicants through their personal network are lazy.

Also on the topic of evaluating applications - first pass evaluation of applications is not work for juniors, for interns or for admin people. This is the strongest critcism many employers have of the recruitment industry - the recruiters doing the assessments of the applications are not experienced experts in the field, they are often juniors, interns and admin people working to checklists and looking for keywords. These people would have no idea of what gold looks like, especially since gold might be subtle, hidden, hard to understand or require a leap of faith to grasp. I like to think this is why my clients come to us for recruitment services - software engineers with more than 20 years experience are sifting through the applications and searching for gold, not relying on people who know nothing to filter out anything hat they don't understand. It seems logical to me that an angel group should be making a database of all applications available to the members, with every member required to participate in the review of the applications. If I submit an application I want an exert to evaluate it, not someone who has just left university, and not someone who rejects things that they do not understand. The problem with using juniors, admin people or interns to assess applications is that these people do not want to look stupid, so they will not shortlist applications that are in any way out of the ordinary - they filter out the gold.

On the topic of the duration of the process. I think it is simply polite and good business to run a tight, efficient evaluation process in which no-ones time is wasted. Some employers do put applicants through extended processes with many many meetings over weeks or (I hate to say it) months. Somewhat arrogantly, employers feel that if the applicant is not willing to endure such a torturous and extended process then surely they don't want the job enough. The correct thing to do is to get people assessed quickly, and if it known at some point in the process that there is no deal going to happen, then the process should be terminated. Anything else is a waste of everyone's time. TCA should have guidelines for all angels explaining to them their role in the assessment process - how long it should take, how they can express their interest in a deal, and how to withdraw interest in a deal. There should be a clear purpose to every meeting/presentation - requiring entrepreneurs to present simply because "that's the process" is pointless and costly in terms of time. The entrepreneur should probably reasonably expect that with every new meeting, they have moved to greater likelihood of getting to the finish line. It is not appropriate to go through a many step process and be told "no", unless there is good reason, or unless it was a very near thing. I would expect a VC to take months of time wasting meetings only to say "no thanks" - they whole point of angel investors is that they should be able to move quickly - why would it take more than four weeks in total to come to a yes or no decision about whether or not to invest in an early stage company?

Here's a link that i interesting and relevant:
http://www.techcrunch.com/2009/04/04/israeli-entrepreneurs-know-what-game-you-are-playing/

Anyway, just thoughts arising from listening to many of your podcasts. Love your work and love the podcast.

Regarding David's statement that the vast exposure of doing two road shows across the five networks actually decreases the chance of getting financed because all it takes is a couple of negative comments; a simple solution to this is requiring members to make investments.

It should be noted that the successful Angel groups Frank has recently interviewed have this debate that David is complaining about, but they don't have the long process that TCA has.

There is no point in letting non-investing members ruin the chances for those that are investing. There is also the problem of not enough members taking the lead on deals. If members are required to invest more of them would take the lead and the debate regarding specific opportunities would be more meaningful.

TCA could have a cut-off by when to invest. It could be quarterly, biannually, or annually. There can be a fee for not investing. The member would still choose what to invest in but would have a deadline to make that choice.

Hahahahaha, you're funny Frank! Saying you go by gut feeling, when you have the exact same criticism against inventors and entrepreneurs who do the same thing. Your gut check hurts you most in your leadership role, as you sew. I would think a gut reaction would lead to bad deals getting through the filter and adds to the pressure in your fire hose.

Helmuth von Moltke the Elder is the earliest person the quote "no battle plan survives contact with the enemy" is attributed to. Eisenhower would have studied him.
http://en.wikipedia.org/wiki/Helmuth_von_Moltke_the_Elder