Angel investing requires analyzing the ability of the entrepreneur to make their business happen. Entrepreneurs who bet everything on a single home run are very poor investments. It is much better to find the “grinder” startup who is willing to do the hard work.
Betting on the home run – instead of doing the heavy lifting
An entrepreneur called with a pet-related invention. He had a clever, relatively low-cost product that veterinarians would use daily in their practice. He had visited a couple dozen local veterinarian practices and sold a few items. However, the entrepreneur was betting everything on one deal where a nationally-recognized influencer would promote the invention.
The entrepreneur was disappointed that his visits to the veterinarian practices were not very fruitful. He would spend a lot of time trying to get an appointment, show up at the practice, and maybe sell $30 worth of product. The product would be reordered every month, but at $30-100 per month, he was disappointed by the amount of effort it cost to acquire the customer.
The entrepreneur had 50,000 units in a warehouse, but he was fundamentally unwilling to hustle up business by shlepping the product from one vet clinic to the next. He wanted a savior who would sell the product for him. He thought his savior was a social media influencer.
When I asked if he had talked to a pet supplies distributor, he said that they take too much margin, and he did not want his product lost among the thousands of products a distributor carried.
The more I poked and prodded on his go to market strategy, the more he became defensive and insisted that the only way to success was a paid endorsement by a social influencer.
What I wanted: assurance that there was a market for the product. I loved the simplicity of the product, the ease of use, and the low cost to manufacture. For the product to be a success, it would need very high volume of sales because it only generated $5-10 of margin per sale.
Even though the idea was easy to understand and had immediate value to the veterinarian or pet owner, the industry needed to be made aware of the product so they could understand how it would improve their pet’s lives.
Many entrepreneurs want to outsource the heavy lifting. They hire an outside marketing company, a giant social media influencer, or quite frankly anyone who promises success. It is an ancient that they are not experiencing.
As an entrepreneur myself, I have immense respect for entrepreneurs who find creative ways to get their product into the hands of users. Giveaways, clever promotions, or just drive around to customers with a trunk load of product – all of it shows hustle and determination. A track history of sales is the single most convincing evidence of a product’s potential. Everything else is pure speculation. It only matters when a customer pays.
As an angel investor, I need the entrepreneur to do the heavy lifting. As much as I appreciate the long, painful slog of selling a $30/mo product one at a time, there is a huge multiplying effect for those early sales.
The “Idea Stage” is the riskiest stage
The “idea stage” is the highest risk stage of a business. Many entrepreneurs are (justifiably) proud that they have seen the opportunity that nobody else has seen.
Patents at this stage are very high risk because there is very little data to support the idea.
There are countless tools, such as the Business Model Canvas, that help entrepreneurs identify the risk factors, then put plans in place to reduce those risks.
Sadly, many entrepreneurs (myself included) like to skim through these tools and focus on the parts we enjoy. Like most people, we skip the painful parts and do the parts we enjoy. We can envision the success of our ideas, but conveniently gloss over the parts.
When I hear an entrepreneur minimize the work to be done, I know there is trouble brewing. An entrepreneur who uses language that minimizes the problem, like saying “when we just have so-and-so as a customer,” they are avoiding the heavy lifting of doing the marketing and sales.
Companies at the “idea stage” often try to skip ahead or minimize the heavy lifting required to get a product to market. They have talked to all their friends about their business model, and nobody has the heart to tell the entrepreneur the truth. It is just like asking your mom if she likes your artwork.