Angel Investing 101

Every angel investor has to start somewhere, so with that in mind Jeanne Lee at Fortune Small Business offers a few tips for first time angel investing.
– Don’t go it alone.

…”[A] single investor or a small group of four or five can get too emotional about deals.”

Angle networks, which either informally or sometimes more formally join together a group of angel investors, have become quite common in cities across the US. These networks help the angels create more structure to their deals and allow them to invest smaller amounts in more deals, thus reducing their overall risk.
– Follow your passion

“When you combine investing with your passion, you get a great sense of satisfaction.”

Just because you are now on the other side of the table, it does not mean that you have to give up things that your are passionate about. If you care about fighting cancer because your personal experience, for example, you may want to focus some of your investment money in that market space. It does not mean that you throw caution to the wind and invest with your heart. You still need to search for the right deal. But having a focus may help limit the deals you want to look at.
Passion can also go along with your past experience from when you were an entrepreneur. If you believed in your industry as an entrepreneur, don’t give up that passion when you become an investor. That industry was good to you once, and it can be good to you again.
– Locate the exit

“Some entrepreneurs think that angels are banks, that the angel will give them the money, then wait around for years until the entrepreneur returns it to you with interest.”

Only invest in a deal that has a clear exit plan in mind. Your should not plan to park your money in a deal for more than three to seven years. Some deals may end up being longer term, but you should never go into a deal with that in mind. You and the entrepreneur must clearly have the same aspirations for growth and exit. Study the industry to make sure that the exit plan the entrepreneur presents makes sense.
– Befriend the vultures

“Make sure the term sheet is user-friendly to the VCs who will come later.”

In today’s world of high growth venture investing, angels most often provide the seed or early stage money. Know the likelihood that the deal will need future rounds of financing, and if there is even a remote chance that it will, structure the deal in a way that will make in attractive to future investments by VCs. Some angels try to protect their investment from possible future dilution only to block any VC interest in providing needed Series A financing later. That can actually limit possible returns for the angel by limiting the upside potential of the deal.
By the way, knowing how angel investors work is also important for the entrepreneur. Making sure you understand the deal from their perspective increases your chances of gaining angel money and working well with them once that money is invested in your business.

Report Shows Significant Business Start-up Activity

A new report from the Kauffman Foundation finds that entrepreneurial activity still very high in the US. From the National Dialogue on Entrepreneurship:

The new report shows that there were 464,000 people creating new business each month in 2005 — a rate of 0.29 percent of the total adult population.

That equates to:
– 5,568,000 new businesses a year
– 107,077 new businesses every week
– 15,297 new businesses every day
– 637 new businesses every hour
– 11 new businesses every minute
Any question that the US is now in an entrepreneurial economy?

Building a Business with Legs

A pilot will tell you that there are two critical times for a safe airline flight: the take-off and the landing. These are the two time where there is the most strain on the aircraft and when the most things can go wrong.
Entrepreneurial ventures have two similar critical points for success. The first is aligning your business to the market properly before you even open the doors. This is the process of opportunity assessment. The second critical point is when the business hits its growth phase. StartupJournal has a good case study of the challenges entrepreneurs face when they try to prepare a business for successful growth.
During growth, both the business and the entrepreneur have to go through transitions. For the business, the entrepreneur has to build systems and processes that can handle processes that the entrepreneur managed himself when the business was smaller. And that leads to the second transition. As the entrepreneur builds more and more of the day-to-day details into systems and delegates responsibility to the expanding team, his job must change. As seen in the case at StartupJournal, the transition from being mostly a “doer” into becoming a “real CEO” can be one of the biggest challenges an entrepreneur can face.

States Try to Get into VC Business

In yet another example of socialized entrepreneurship, a majority of the states across the US (44 to be exact) report on their attempts to get into the VC business. While possibly well intentioned, this is bad policy. Studies have clearly shown that governmental efforts to guide investment have little long-term economic impact. Markets create sustainable economic growth, not bureaucrats.
(Source: National Dialogue on Entrepreneurship).

Ireland Gets It

I commented the other day about my concern over Chile’s policy of focusing on high growth, high potential entrepreneurship for economic growth. Such socialized entrepreneurship short circuits the power of small business development within free markets. The National Dialogue on Entrepreneurship has a link to a new study showing a country that seems to get this right: Ireland. The study titled Small Business is Big Business shows the economic force of free market entrepreneurship in Ireland.

Get Ready

The storm forecast is out for this summer, and it is not a good one.
In addition to sending oil prices up, it should be a warning for small business owners to start planning.
I have written often about the need to plan ahead for disasters, be it floods, terrorist attacks, hurricanes, ice storms, and so on. While small businesses are quite vulnerable to the impact of such events, there are steps that an entrepreneur can take to prepare.
Here are some suggestions on how entrepreneurs can prepare for disasters:
1. “Cash is King”. There is no better tool to weather a disaster than cash. Having cash reserves allows businesses to make it through the initial economic paralysis of a major event. Thirty days cash reserves (enough cash to cover essential and fixed expenses) would be my minimum recommendation. Even ninety days of reserve would not be too much to have at this period of time. One business owner recently told me that the new goal that many are setting is six months of cash on hand.
2. Manage overhead carefully. Overhead pushes the breakeven point of any business higher. If sales suddenly drop off for an extended period of time, a lower breakeven point that results from lower overhead expenses can soften the impact of any economic shock. It takes less recovered sales to get back to breakeven.
3. Avoid fixed, long-term commitments. Any major shock on a market may require new business tactics, strategies or even models going forward. One reason that the American auto industry reacted so poorly to the oil shock in the 1970s is that they had built their businesses assuming a very static business model. It literally took them years to undo this model and adjust to the new reality that they faced. They had to be able to react much more quickly to changing customer preferences, and operate in a market with many new competitors where there used to be only three.
4. Build in flexibility. Understand that you may need to quickly undo some decisions. Make this as easy as possible for you to accomplish.
5. Watch and manage your inventories carefully. Certainly you should not choke your business growth, but don’t go overboard with purchasing either. Purchasing raw materials or other inventory using volume discounts may not be wise. Be as “just in time” with your inventory as possible.
6. Create contingency plans. These need to be major plans for how your operations will be handled given a variety of scenarios, and minor plans that deal with the day-to-day safety and security of your employees and customers.
7. Look ahead. It is critically important to try to look beyond any single event, no matter how devastating. Believe in yourself, your business, and the system that makes it possible. Entrepreneurs need to be bold leaders. As we saw in the Gulf, leadership will not come from the politicians. Instead, it will come from the grassroots of our economic system. Be strong, be brave and be confident and others will follow.
There are some other excellent resources for small business owners for disaster planning. The SBA has a detailed set of recommendations at their website that every entrepreneur should review and put into practice in his/her business. StartupJournal also offers some excellent tactical advice (before and after a disaster strikes) to review with your management team to use to develop specific applications for your business.
Every small business owner (and homeowner, for that matter) should heed these words from the SBA:

Ask yourself: what if the worst happened? How would it affect my business and my family? Would we survive if the business were closed down for weeks, months, or perhaps my entire revenue season? What can I do to make sure we survive?
Be a little pessimistic now, and assume it CAN happen to you. Develop a Disaster Plan for your home or business now so you can rest a little more easily in the future.

Your Vacation as a True Sabbatical

I am getting ready to take a little vacation. In an article at Inc.com, Ivy Sea recommends that we should treat our vacations like sabbaticals.
Sabbaticals in today’s world refer to an extended time completely away from one’s normal work. At a university, this is usually either a semester, or in some cases, an entire year. In the corporate world, we hear of executives taking exotic sabbaticals. Some companies (Timberland and Men’s Warehouse, for example) even have a form of sabbatical in their company benefits. For an entrepreneur (or a recovering entrepreneur now teaching entrepreneurship), the thought of an extended time away from our business or work is unimaginable, impractical, or even impossible.
Sabbatical comes from the word Sabbath. If we look at the Biblical roots of the Sabbath, we see that it means the day of rest. But the intention was to not only rest the body and the mind, but also to refresh our souls.
If we look at our time off as simply a day to recharge our batteries to get ready to rejoin the battle, we are missing the point. It becomes simply a day to be physically removed from our workplace, but never completely mentally (or in today’s world electronically) away from our work. For so many of us, vacations blur with our work. We are never more than a cell phone or an e-mail away. People never think twice about intruding on our time off. Our minds never fully get rest, and our souls, well, we plan to deal with that in a meaningful way in some distant future.
So if we can’t take extended time away, and our time away never really seems to be time away, how do we really get a sabbatical from our business or our work?
Ivy Sea’s article from Inc.com offers some insights:
Use the term sabbatical
Words can be very powerful. If we call our two weeks away a sabbatical rather than a vacation, it clearly tells others and reminds ourselves that this is much more than just a physical time away from our work.
Be clear about your goals and intentions
If we go in without a plan, old habits will prevail and it will just be another time away from the office. Commit to actions that will help rest your mind and your body, and refresh your soul. but, set modest goals so as not to recreate the often frantic nature of work. A simple plan is often best.
Prepare your business
This can be one of the more difficult steps for an entrepreneur. It means that you must not only delegate the authority for people to act while you are gone, but to make sure they have the knowledge and confidence to keep things moving ahead without you. A lot can happen even in a week, so make sure that your employees are ready for whatever they will face. Don’t fall into the trap of frantically getting it all done yourself before and/or after your time away.
Prepare your self

Determine what you need to do to shift your thinking from vacation to sabbatical. Without this mindset management, it’ll be difficult to achieve the goals that you’ve set.

That is why our worship services on Sunday start with prayer. It is a time to get our minds and our souls ready. For your sabbatical you should do the same: prepare your mind and your soul to be refreshed.
I will be back in about a week. We are off to the Land of Cheese. I hope that my time off will be, at least in part, a short sabbatical and not just a vacation.

A Cheap way to Gain Customer Leads

You’ve got to love a good bootstrapper!
StartupJournal has a story about an entrepreneur who took over a former competitor’s phone number when they went out of business.

While leafing through the Yellow Pages last fall, entrepreneur Mark Bright saw an ad for a recently dissolved competitor listing an out-of-service phone number. On a hunch that readers would continue dialing the number for some time, he arranged for the line’s outstanding calls to be rerouted to his company. Since then, he says, he’s turned many unsuspecting callers into customers, thereby boosting sales….
Mr. Bright adopted his former competitor’s digits in October, and says his company…now receives about 40 calls a day, double the number of calls from before he added the number. As a result, monthly sales…have increased by an average of ,400, he says.

The average business line costs about $50 a month. His $1,400 in increased sales is a pretty darn good return on that investment!
(Thanks to Scott Pafford for passing this along).

Innovation Comes from Small Business, Too

Many of the myths about small business are being rebuffed. One myth was that although small business employs a growing number of people, the pay rates are sorely lacking. The truth is that small business now pays about 90% of big business, while offering more flexible working conditions. They are able to compete for some of the best people with a combination of good pay and desirable working conditions.
Another myth is that innovation in our economy comes from VC backed high growth ventures, large corporations with big R&D budgets, or government backed research, but rarely from small businesses.
A new study just released from the NFIB (all of their studies can be found here) shows the fallacy of this myth.
“Small businesses produce a significant number of innovations,” said NFIB Research Foundation Senior Research Fellow William J. Dennis. “Smaller enterprises appear particularly adept at major breakthroughs in contrast to more incremental or evolutionary changes.”
Even small businesses that are not deliberately attempting to discover innovations employ at least one person, including the owner, whose primary job is to develop new products, services or designs, the study found. Twenty percent say they have one or more people assigned in such activity, suggesting that the owners consider the creative function to be valuable to the business.
Three-fourths of those surveyed said they specifically encourage employees to suggest ideas for new products or services, or to seek better ways to produce and distribute what their company sells. More than half of those who do inspire buy topiramate online uk workers to be innovative offer recognition, bonuses or both to those who succeed.
In the year leading up to this study, more than two-fifths (42 percent) of all small businesses surveyed reported introducing at least one new or significantly improved product, service, process or design into their sales inventory.
Design is a major innovative focus, the poll found. Twenty-one percent of small firms market design, which is profitable. Almost two-thirds (60 percent) of those marketing design said it generates half or more of their sales.
“Patents and copyrights often proxy for innovation in business,” Dennis said, noting that some 5 percent of small-business owners hold a patent (in their name or the firm’s name) that they actively use in their business activities. Manufacturers hold one-third of patents.
Copyrights are more common: 13 percent hold at least one. Data from the survey show that once small firms reach the 10-employee level, copyright acquisitions rise notably. Almost 20 percent of firms that grow to this point own one or more. Manufacturers and those in knowledge-intensive industries such as information and professional, scientific, and technical services are the most frequent holders.
It is critical that entrepreneurs remain , in a word, entrepreneurial. In most cases it is change that created the original opportunity for their business. If they fail to remain innovative, the very changes that gave their business birth could soon make them irrelevant in the market.
“Change is the constant, the signal for rebirth, the egg of the phoenix.” (Christina Baldwin).