Does anyone else see how programs like these can negatively affect an Angel's reputation?

For a very long time now we have been hearing both, that $500k is the new $5m and that there are a lot of opportunities out there. So where are all the exits? Where are all the VCs? Where are all the Angels? Identifying savings has nothing to do with identifying a new product or service that people will pay for.

Frank made the point that it is better for Angels to invest after the venture has been validated by its cash flow. Joshua countered that Twitter was one of those very successful companies that changed its original product/service.

Looking at the amount of venture money Twitter raised shows that using Twitter as an example proves Frank's point and not Joshua's. Twitter is said to have raised over $57million with somewhere between $1m and $5m of that in its seed round before its product was validated. These levels are said to be beyond most Angel Investors for an invalidated product.

The best advice from Joshua is the same thing we hear from other guests on this show who talked about their successes. They said the thing the successful investments all have in common is defining the market very well. Joshua says not to be enamored with the product, but with the problem/need of the customer. Be ready to change the product to better satisfy the customer�s need and be ready to have a better understanding of what the customer needs.

Saying that $500k is the new $5million says nothing about the market. So just as there are those who say to not be enamored with the product/invention/idea, I say don�t be enamored with cost cutting either. It has nothing to do with understanding the needs of the market. If you can cut costs so can your competitor. It is not a competitive advantage.

At the end of the show Frank talked about Capital Factory as if it is an alternative to investing larger amounts, but actually it is only a stepping stone to the larger amounts that are still needed; a change in the investment process. Mentors are supposed to open up their networks to the ventures and help them get the needed funding.

So what�s the difference? Is it just an additional step in the fast pitch process or is real analysis being done? What influence does the mentor have on his network for raising funds? Won�t the network be interested in the mentor�s track record for picking good investments?

The reason programs like Capital Factory and Tech Stars have a waiting list of mentors is that they have to limit the number of mentors out of necessity. More people taking 5% for giving advice is not what the ventures need. You can�t have everyone in the investor network playing the role of advisor and nobody playing the role of investor.

Frank began the show by asking listeners to think if there is an opportunity to start something like Capital Factory in their community. The answer depends on if the community has mentors with the clout to attract investment and if the community has ready willing and able investors who respond to those mentors. We see from the necessity to limit the number of mentors that if someone does not want to be left out as a mentor they should probably be the first one to start their local program rather than try to join after someone else starts it.

This is quite simply Angels acting like a fund manager without having a fund. We�ve heard of Angels looking for the serial entrepreneur. To function like these programs, entrepreneurs need to look for the serial Angel Director who other Angel Investors respond to.

The 5% is steep in that there is no guaranty of raising the needed funding. Entrepreneurs are typically given conditional milestones that if not met requires them to forfeit shares in the venture. It seems reasonable to require the same from programs like these. If the mentor does not have the clout or his network does not have the funds or is not interested, the 5% should be reduced. Joshua himself admits that it is not for the $20k but for the other benefits. Therefore if the other promised benefits don�t materialize it is only fair to reduce the shares to the mentors.

For the same reason these programs have to limit the number of mentors they also have to limit the number of entrepreneurs. Their networks of potential investors cannot support an unlimited number of opportunities.

How do they determine the number of opportunities to enroll in the program? Normally the amount of an existing fund would set the limit. Without a fund, is the limit set according to the capability of the network or do they enroll a higher number of opportunities because the network is not expected to respond favorably to all of them?

If the program is playing the numbers game, the 5% is a raw deal for participants who do not achieve funding. It could be that from the start it is known that some of them will not achieve funding from the network, yet they all must pay the 5%.

Tech Stars claims to take on about 30 companies a year but their website shows 19 companies added to their portfolio last year. Does that mean 11 companies gave away 6% with no funding to show for it? There website shows 2 acquisitions out of a total of 37 portfolio companies. Is that enough to make this system worth it? Tech Stars is in three different cities. Does having only two acquisitions mean that one or more local chapters are without any acquisitions to speak of?

It�s a raw deal to take 5% from more companies than what the network of investors can support. TCA use to talk about getting to the point where they would attract the best opportunities. I don�t think they�ve gotten their yet and I don�t see the best opportunities paying 5% for a raffle ticket.

At the very least the mentors should have a deadline by which their network must produce the needed funding and or have the mentors� shares dependant on the amount raised from the mentors� network or efforts. All high paying sales jobs are based on commission. Angels have now figured out how to collect a fee that is not based on results; just as VCs collect a management fee upfront from their fund regardless of results. Angels want the same deal from entrepreneurs that VCs get from their limited partners.

You wouldn�t agree to pay your real estate broker this way. Pay him upfront for his advice and the attempt to sell your house even if his efforts do not lead to a sell. No, he only gets paid if his efforts lead to results and his pay is a percentage of the results. But Angels expect entrepreneurs to pay upfront and with the fee having no relationship to the results. Are the minds that create the best opportunities choosing this route? It�s your reputation Angels, do with it what you will.

Joshua claims if one is building a tech startup today that they should be able to build a working prototype without any money and take some of the risk out of it first before taking on investment money. Tech is a broad term and what Joshua must be really talking about is internet companies. But he uses broad examples that confuse his meaning.

For example he talks about free or cheap software the founders can use to build the product, but then he also talks about outsourcing and having things built more cheaply overseas in order to reduce costs. Overseas production has more to do with hardware than software and web based services. It also implies that the founders are not building it themselves and therefore need money which is contrary to Joshua�s statement.

The two examples of successes that Joshua used were both internet companies that have no barriers to prevent competition. A website that helps people find storage in their area can never charge more than what it takes the storage providers association to provide the service themselves. Pets MD is not going to have any proprietary information. The space is already filled with competition. The first page of a Google search is filled with other sources of the same information including non-profits and the federal government.

Joshua�s examples of success could be labeled as execution dependant. They have to constantly outperform the other guy, and that cost never goes away. Neither of these successes is going to lead to a homerun exit. Guests on past shows would have called these lifestyle investments.

If we are to use the term �tech startup� correctly, it encompasses a lot more than website companies that sell ads. My startup can�t do anything with the $20k offered by Capital Factory or the $18k offered by Tech Stars. If you include the cost of doing a patent search properly, those amounts are not enough to pay for a single patent.

Tech has long been the buzzword because it refers to Intellectual Property / Patents, barriers to keep competition out. But that�s not what we see in the portfolios of these programs. Without patents the risk remains high. That�s probably the reason we see only two acquisitions out of 37 investments, and lifestyle companies touted as successes, and an emphasis on young entrepreneurs. Youth is needed because the investments are dependant on outworking the competitors. What if someone gets sick or a family member develops a serious illness or injury? Not exactly the risk averse situation. These portfolios are bets on the jockey and not the horse.

Look at the markets that these portfolios have invested in. Many of them are small markets that will never support the types of exits Angels seek. Many don�t provide barriers to competitors.

Frank asked if there is an opportunity in the listener�s community to support such a program. Perhaps the first question should be if such a program presents an opportunity to the listener�s community. Is two acquisitions out of 37 investments the opportunity that Angels are seeking? Look at the portfolio companies of these programs and see if you agree with what these programs are able to attract.

Frank, don�t kick yourself for not seeing these facts and points that I am making. You�ve got too much on your mind, and that prevents anyone from seeing the forest from the tree. You�re thinking about lining up guests, conducting the interview, editing, and a host of other things. In order to execute efficiently one must have focus and not be open minded.

This is the source of the debate of inventor vs. entrepreneur. We need the entrepreneur with his focus and efficient execution, the man with the hammer to whom everything is a nail, that�s great for keeping an eye on the cash flow, but in meeting the needs of customers we also need the open mindedness of the inventor. The person who can be both focused on a task and open minded at the same time does not exist.

Note that in this episode the needs of Angels were never discussed. What do Angels need to get out of it? Do these programs deliver that? Not a word on that.

The local Angel group can only make a set number of investments and that�s it. Naturally they would want those to be the best investments. This type of program hasn�t been shown to be the best approach.

I could see myself giving up a percentage to an Angel/Mentor/Director, but it would be results based.

This episode sounds positive and upbeat about two negative things for Angels. Getting excited about $500k being the new $5million is getting excited about:
1. The fact that it is cheap for competitors to enter your market, and
2. a low exit value. You can't sell it for much more than what it would cost a buyer to develop it themselves.

It might costs you less money to start a website business, but driving up traffic still takes time and money and then servicing that traffic costs money as well.

Without barriers to keep competitors out, the name of the game is money and lots of it to allow you to be faster than the next guy.

It seems Mike Maples is being quoted to support an investment strategy that he wouldn't support.

http://techcrunch.com/2010/02/21/mike-maples-talks-venture-capital-and-thunder-lizards/

Above is a link to a video of Mike Maples giving a talk last week at the Future of Funding event.

He does say $500k is the new $5million which he is quoted as saying in this episode. But in the video he discusses his investment parameters. The examples of successes given by Joshua is the opposite of what Maples says he would invest in.

Maples says to look for ideas that are "non-consensus", "not yet conventional wisdom", "be different not better", and he gives examples.