This blog post kicks off a series of reviews exploring the fundamentals of early-stage investing. The starting point to these discussions is David Amis and Howard Stevenson’s book Winning Angels: The 7 Fundamentals of Early Stage Investing (2001). For entrepreneurs, this will be a sort of reverse engineering experience, since the book was written specifically for angel investors, yet it is extremely useful to others in the entrepreneurial journey.
Amis and Stevenson fittingly start the discussion by examining how angel investors source or identify entrepreneurial projects of merit. In the context of upcoming discussions, the authors broadly define angels as “investor[s] who provide capital and support (through advice, contacts, or hands-on work) to an early-stage company” (Amis & Stevenson, 2001, p. 355). Concurrent with this definition, Alejandro Cremades, author of The Art of Startup Fundraising (2016) and contributor to Forbes, goes a step further adding ‘high net worth’ to the definition of angel investors and describing typical investments in the range of $150,000 to $2,000,000 (Forbes, 2018). These definitions and parameters can help non-angels better contextualize the materials ahead. While Amis and Stevenson extensively explore 18 activities associated with sourcing, there is a striking emphasis on three overarching themes: the value of networks, failure, and turning away non-fitting deals.
It is no secret that networking is a primary pillar of entrepreneurship; hence, its recurrent appearance throughout the sourcing chapters. The authors point to numerous activities and instances in which angel investors reach to their networks as a means to source investment deals. This trend is prevalent through higher levels of investment. According to an article from the Journal of Private Equity, approximately 45% of possible deals coming to private equity and venture capital funds originate from professional relationships (Teten & Farmer, 2010). This information further highlights the importance of networks and networking for both investors and entrepreneurs. Also, it underscores the role that networking can play in later rounds of funding as a venture grows and pursues larger amounts of financial capital investments.
While Amis and Stevenson focus extensively on activities leading to sourcing successful investment deals, failure has a glaring presence throughout their discussions. Their inclusion of failure and unflattering results paint a realistic picture that helps investors and entrepreneurs remain grounded and aware of potential outcomes. After all, postmortem examinations of ‘Losers’ make some of the best learning opportunities.
One of the most valuable takeaways from the sourcing chapters is learning to turn away non-fitting deals. It is extremely easy to fall prey to attractive opportunities that might be out of your target scope. This line of thinking applies to several facets of entrepreneurship. Joan Magretta makes a similar argument in her book Understanding Michael Porter: The Essential Guide to Competition and Strategy (2012), when she writes, “No strategy is meaningful unless it makes clear what the organization will not do” (p.184). In other words, identifying parameter and establishing limits help to focus on achieving primary objectives. An important principle that is often overlooked.
As the discussion transitions from sourcing onto other fundamentals of early investing, it is important to consider other points of view. The discussions surrounding sourcing certainly lived up to those expectations. Stay tuned for the upcoming analysis on evaluating investment deals. In the meantime, look at the themes examined above and see how they fit in your own entrepreneurial picture.
References
Amis, D. & Stevenson, H. (2001). Winning angels: the 7 fundamentals of early stage investing. London: Financial Times Prentice Hall.
Cremades, A. (2018, September 25). How angel investors and angel groups work. Forbes. Retrieved from https://www.forbes.com/sites/alejandrocremades/2018/09/25/how-angel-investors-and-angel-groups-work/#2f99251a76dc
Magretta, J. (2012). Understanding michael porter: the essential guide to competition and strategy. Boston, MA: Harvard Business Review Press.
Teten, D & Farmer C. (2010). Where are the deals? private equity and venture capital funds’ best practices in sourcing new investments. The Journal of Private Equity. 14(1) 32-52. Retrieved from https://www.jstor.org.
Jose,
Great review of the first chapter. I am in agreement, networking is key to being both the investor as well as the entrepreneur. The number of options available for sourcing is quite daunting. Networking would be valuable even navigating the options.
I also found it healthy that they give guidance around being critical of opportunities. It is concerning that there would be investor groups and brokers providing less than transparent and honest information. While I am not surprised, it is still disappointing.
Thanks for the review.
Tony,
Referrals and networking go hand in hand and are even more important to newcomers to investing or entrepreneurs. Just as with learning communities, other can look at the same information and bring up or notice different concerns.
Best regards,
-Jose
Jose,
You highlighted some important aspects pertaining to the angel investor formula. Networking is HUGE. Almost anyone you talk to says, “it’s not what you know, it’s who you know.” According to Business News Daily (2017), a strong professional network can help you achieve things that you’d never accomplish on your own, from solutions to seemingly impossible problems, to word-of-mouth recommendations that grow your customer base. It is important for those in business to consider the powers of networking, and to understand they are not a part of a “one-man band.” Thank you for your insights this week!
– Paul
Source:
Fallon, Nicole. “Networking for Entrepreneurs: 7 Ways to Make a Connection.” Business News Daily, 8 Feb. 2017, http://www.businessnewsdaily.com/6420-entrepreneur-networking-tips.html.
Paul,
We have been on this journey every step of the way (almost a year), and everything I read or hear has a connection to networking. Its role and value cannot be overstated.
Best regards,
-Jose
Hi Jose,
You present some great takeaways from the sourcing discussion of Amis and Stevenson. What caught my eye was the quote from Joan Magretta, “No strategy is meaningful unless it makes clear what the organization will not do.” I have never heard it from that perspective. Usually, when people strategize, they concern themselves of what their goals are and how to achieve them, not what they will not do. From that perspective, I guess a strategy is not complete unless all angels are analyzed.
Kari,
I agree with you on your take on strategy, and actually Magretta makes the same argument. However, she takes a step further when she writes about parameters. I have heard it from several SMEs already and it makes sense; one must know our own limits.
Best regards,
-Jose
Jose,
Wow, I love reading your writing because it is so intellectual yet also very clear. It takes me a moment to process your sentences (which rarely happens), but it challenges me which I certainly appreciate.
I can definitely agree – from personal experience – that failing is just an opportunity to learn from. I honestly learned so very much from my founding team’s failure in 2016 so I will surely do it better with more appropriately fit individuals next time…
I also appreciate that you referenced our past assigned readings in addition to expanded resources. I just don’t have the time frame capacity to go back and look at what I took notes on. I’m not saying that you don’t not have time either, but no one really *has* time. It’s all about *making* time.
Thanks so much for your thoughtful perspective,
AK
Alana,
Thank you for your comments. I think success proves we are doing something right, while failure teaches us “what not to do next time.” I am glad to hear you were able to turn around your experience and make it a learning opportunity.
Best regards,
-Jose
Hi Jose,
I really like how you reflected on the fact that Winning Angels: The 7 Fundamentals of Early Stage Investing is not only about when to invest, but also when not to invest. Although some deals may seem enticing, if not in your lane they probably won’t make sense. I also like how you researched the dollar amount in which a typical angel investor gives. This really puts into perspective how important it is to invest properly and in the right deal that will grow your money. It’s amazing how you mentioned “45% of possible deals coming to private equity and venture capital funds originate from professional relationships (Teten & Farmer, 2010)” and how that emphasizes just how important networking truly is. Without the network itself deals would not be known and therefore not be possible. Just like in life, networking opens doors that are otherwise closed. Great post, and I look forward to reading more of your blogs in the future.
Carter Jones
Carter,
Thanks for your comments. The idea of exclusion and being selective stood up to me when I was reading these chapters. Many times there are messages that are byproducts of a given analysis. These messages are just as important as the main argument.
Stay tuned for upcoming blog posts!
Best regards,
-Jose
I did not say it the same way but you responded the same way to this book as I did when you said “For entrepreneurs, this will be a sort of reverse engineering experience, since the book was written specifically for angel investors, yet it is extremely useful to others in the entrepreneurial journey.”. I was thinking in similar terms when I realized that this book would teach a budding entrepreneur on how to think AS an angel investor. If you know what they are thinking, perhaps an entrepreneur has a better chance at making a deal. Now, if only I could find $150,000 to invest on a new start up. If you see an Google on the horizon let me know and I will mortgage the house.
Michael,
It took me just a few minutes to realize this was a different type of book. I think it fosters an mindset of preparation and antidote to the unexpected; in other words it helps entrepreneurs know what is expected of them and their business projects.
Best regards,
-Jose
Jose,
I think that networking is a primary pillar of all business. Its hard to try and think of business that doesn’t rely on referrals or word of mouth. This is probably the strongest marketing tool any business has and it can be hard or impossible even to control what people are saying about you.
I think that failure is the best way to learn. We fail at things everyday and the next day fail a little less until one day it seems like we aren’t failing anymore, although in someways we always will be!
Thank you,
Tom
You noted, “Amis and Stevenson fittingly start the discussion by examining how angel investors source or identify entrepreneurial projects of merit.” Projects of “merit” are determined by what the angel investors are looking for. It is the responsibility of the entrepreneur to make sure they have done their homework and that their new venture is of “merit,” otherwise they may not get the funding they are looking for.
Jose,
From a sourcing standpoint, the authors give great advice about how finding your niche is the key, and knowing how to network within your area of expertise is the smart plan of action. I’m sure considering deals that appear to be lucrative but not in your wheelhouse is tempting. The wherewithal to stick to what you know has to be rule number one.
Devon