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 being a “grinder”
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, but he was disheartened. It took countless phone calls to set up an appointment, then he had to drive to the vet’s office, wait in the waiting room, and get a couple precious minutes of the vet’s distracted attention. Once he got to that point, the sales were pretty reliable.
However, a typical sale would be for $30 worth of product, followed by a subscription to reorder every month at $30-100 per month.
This was a huge amount of work for such small sales. He was tired of the grind. He wanted a savior.
When I talked to the entrepreneur, he was looking for an investment that would purchase a series of posts from a nationally-recognized influencer. The influencer had millions of followers and a very big bullhorn for getting the word out.
The entrepreneur had all but given up on the business because of the long, torturous grind to make a $30 sale.
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. This endorsement was *very* expensive, too.
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. Being an entrepreneur is a long, brutally hard grind. They can be suckers for anyone who promises to make that process easier. They hire an outside marketing company, a giant social media influencer, or quite frankly anyone who promises success.
There is no savior who is going to wipe away the slog of entrepreneurship.
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 that terrify us.
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.
Entrepreneurs know in their heart of hearts where the problems lie in their business plan, but they do not want to face them. Rather than attacking those problems – does anyone want to buy this product? – they distract themselves by building endless prototypes and other busy work.
What is the biggest fear of an entrepreneurs? Nobody wants their product. They were wrong. There is no market.
I am a big fan of facing this fear up front. Do the marketing first, figure out if there are customers and what they are willing to pay. If – and only if – there is a real market, enjoy the fun part of building prototypes, making those first sales, and starting the company.