To me investing in early stage entrepreneurs is kind of like dating with the hopes of finding the girl you are going to marry. Like a marriage, there is no turning back once you put money into a deal and while it can be very rewarding, it also requires a long-term commitment of working with the person you invest in.
Like my dating philosophy (when I was younger of course) my goal is to 1) Take a quick look at as many options as manageable 2) Spend time with the options that catch my eye 3) Marry the investment that win my heart.
So how do you win mine and other angel investors’ hearts? Friday I closed a seed round, alongside Gabriel Weinberg and a handful of other investors, which clearly demonstrates what I and other angel investors are looking to marry.
The company is a modern Indian dating site called myZamana. It was founded by Ashish Kundra. I fell in love with myZamana because of the entrepreneur. What I saw in Ashish was 1) someone who was adaptable, 2) approached entrepreneurship in a very methodical and calculated manner, 3) had a clear understanding of the core assumptions the business model and 4) of the right time to raise money
Adaptability – Too often entrepreneurs fall in love with an idea and due
to human nature cannot let go of that idea. However, rarely is an idea
perfect from the start and sometimes it is just a bad idea. Ashish had
originally founded a company called Mobibolt, which was funded by
Launchbox Digital in 2008. After leaving Launchbox Digital he raised a
small amount of Angel funding. After several launches and multiple
iterations on Mobibolt, however, he saw for himself that there was no
path to success. Rather than running down a dead end, he chose to change
course entirely and, with the support of the original investors, used
the remainder of the money to build and test a new concept entirely.
This open-mindedness and willingness to change paths is critical for
successful entrepreneurs.
Methodology – More and more I am starting to see a difference in first
time entrepreneurs that come out of the accelerators versus other first
time entrepreneurs. These accelerators force entrepreneurs to focus and
attack entrepreneurship in a very methodical and unemotional way. In
addition because they are surrounded by a dozen or so other companies
that are doing the same thing, this process becomes human nature.
Over time it becomes like breathing. They do not even know they are doing it, but it is what is keeping them alive. 1) They test their ideas and look for customers and market feedback that is quantifiable. This allows entrepreneurs to remove themselves from their products and look at them objectively. This is a key ingredient to good decision-making. 2) They tend to better understand the importance of maximizing their limited resources. Simply put, they learn not to waste money because the accelerators do not give them much money. Ashish clearly was frugal. On top of his very modest personal standard of living, he prioritized his spending to effectively test his idea. To me this also shows commitment and a willingness to sacrifice in order to increase the likelihood of success.
Core Financial Assumptions – Ashish did not present a 20-page business plan. He had a small pitch deck and more importantly, had a financial model that clearly defined the core assumptions of the financial model. He had defined and understood each of these variables. Just as importantly, he understood where he was and where he needed to be regarding these variables. This provided me confidence that he was focused and knew what he needed to do to be successful. The alternative to this, which I usually get, is a P&L statement and hockey stick revenue forecast based on one or two customers (if any). More importantly, the key variables are usually buried in the model and I cannot tell what is important and what is not. Which means I assume the entrepreneur cannot tell what is important and not. With Ashish, I asked him, what if you only reach a conversion rate of X. With one keystroke he knew the impact.
Timing – Ashish did not go out and raise money as soon as he developed the idea. He waited. He validated his core assumptions—not completely—but with enough certainty that he reduced the risk of the business dramatically, which meant less risk for investors. Less risk for investors leads to high valuation, which leads to more ownership for the founders. Good entrepreneurs maximize their own returns by raising money at the right time. I respect this understanding and am more willing to invest when I see this in entrepreneurs.
Angel and Venture Capitalist often say they invest in entrepreneurs, not
ideas. This is confusing and little misleading to entrepreneurs. What
is really being said is that good entrepreneurs are adaptable, use a
methodology and financial modeling to develop and perfect ideas and
because of this process, these same entrepreneurs leave the bad ideas
behind. Coupling this process with the right time to raise money
maximizes the investors and entrepreneur’s returns.
That is what makes investors fall in love.
Steve Welch
Entrepreneur & Angel Investor
Check on my new book on Entrepreneurship
Author: Steve Welch
