Charlie Paparelli

Does Your Business Make Sense?

 

Greg Smith sold his business in 2008 to Xerox for 5.5 times revenue. It is part of every entrepreneur's dream to start, build and ultimately realize a successful exit. Greg did it and he shared his story at the Technology Association of Georgia's (TAG) Rock Star breakfast series.

 

Advectis, now Xerox, is in the document management and processing market specifically for mortgage and loan origination. Part of what makes Greg a success is his market focus and market touch. Even though he researched the mortgage market and its need for document processing, he still went and talked to the buyers in the market before he wrote any code.  He wanted to make sure his business proposition made sense and they would buy it. This behavior is something I have seen over the years from other successful entrepreneurs.

 

He did not know it but I recorded his talk. It is presented here for you to enjoy and learn from Greg's experience. I know you will enjoy this presentation as it feels like he is sitting across from you over a cup of coffee. (This is a 58 minute recording) I recommend you have pen in hand because there are many life lessons shared that will help every entrepreneur and angel investor.

Greg-Smith_Entrepreneur Audio

Here are 14 points I picked out of my notes from his talk. They are presented in the order of his presentation.

1. When being hired as the first key person in a startup it is OK to say NO but not OK to say YES and then NO.
2. Talk to multiple players in your intended market prior to burning cash by investing in a product no one wants. Make sure your business makes sense to the market.
3. Find adult supervision. It is what you don't know that will kill you.
4. If you happen to hit your market during an expansion cycle, it makes almost everything else right for the startup. Greg introduced his product when the mortgage market began to expand rapidly.
5. Experience is what you get when you do not get what you want. 
6. Management should be an open book about the company. It builds a relationship of trust among all the employees within the company. This increased retention and commitment. All good for the enterprise.
7. Entrepreneuring is a God-led event and career.
8. Their product was delivered using a SaaS, recurring revenue/per use, economic model. The market grew into early acceptance of this model which rocketed Advectis in the early years. It could just as easily stopped it cold.
9. In any deal there is good fortune and bad fortune that comes your way. Nothing goes right all the time. Be ready to respond. This is where the adult supervision can help a lot.
10. We were the first client for Arketi Group led by Sami Jajeh. They did a fantastic job in making us market credible by presenting us as bigger than we actually were in our formative years. This led to market acceptance with big buyers which leveraged our growth.
11. There are always some near-death experiences in any new company. It is harrowing to go through together but it is the foundation for the lore of the company in the future.
12. The business has to be bigger to be bought by a bigger company.
13. Greg wanted everyone in the company to think like an owner so he petitioned his investors to set aside stock options for all employees. (He tells a story in this talk that shows the impact of this decision.)
14. The journey is much better than the ultimate destination. Enjoy the journey.

And enjoy Greg's talk.

 

Entrepreneur Confessions and Startup Tips

The MIT Enterepreneural Forum asked me to facilitate their Entrepreneurs Uncensored luncheon. I was honored to have as my guests two successful entrepreneurs in Andy Ibbotson and Sanjay Bhatia.

Andy is the co-founder of Synthis, which enjoyed a successful exit last year, and he is the founder of a hot new startup called Digital Assent. Sanjay is the founder and CEO of Izenda a leader in the Business Intelligence marketplace. Andy grew his businesses with the help of outside funding and Sanjay bootstrapped.

There is lots to learn from these two entrepreneurs. The have gained lots of experience through their decade of company building and selling. Most importantly they have a heart to encourage others to do the same. These two guys are special because of their transparency, clarity and wisdom. 

Take some time to listen to their stories and the Q & A that follows.

 

MIT Forum - Entrepreneurs Uncensored

 

 

Here are my 7 take-aways from this panel discussion:

 1. You find your focus, you market niche, by staying in the game. Neither one of these entrepreneurs ended up with the market they initially targeted. In fact it took Andy seven years and Sanjay four years to hit on the right market with the right product. The lesson here: the longer you are in business the better your chances of seeing the right opportunity. So get started today and keep at it.

 2. Commitment to your business over a long period of times proves to the market and investors you are trustworthy and committed. Two of the key attributes buyers and investors look for in a company.

 3. Fear can be a positive motivator but it can also crush your spirit if you succumb to it. In both cases, the greatest fear was letting their employees down by missing a payroll. Knowing that payroll was coming up in a week, somehow caused the right thinking, driving right priorities to make the cash appear. Use fear to motivate not to cripple.

 4. Seek mentors that you admire and who admire you. Mentoring relationships are very personal and not just informational. Find someone who truly cares about you and your success. But be sure they also understand your business and the stage of your business' growth. 

 5. Keep it fun by doing what you love. You were called by God to start this business. When you saw the vision for what it could be, you got excited. Stay excited by remembering that vision and sticking to the things you do well as you chase the vision.

 6. Test your idea in the marketplace first. Then test it with investors. There are many entrepreneurs that build in the garage but never share the design/vision with potential customers. Talk to customers. This will focus your development on what people will buy which keeps you in the game. Later, when you talk to investors, you can speak about the potential customer, or now real customers, and their interest and acceptance. If you go to investors first, you may find yourself facing questions you can't answer with credibility.

 7. Hire the right people. How do you know they are the right people? The right people offer little compromise and bring a whole lot to the party. You'll know one when you see one.

 Thanks again to Andy and Sanjay on sharing with our entrepreneur community!

 

Always Being Right Is Wrong

 

I just ran into an old friend who told me she gave up "being right" for Lent. I asked her how that changed her behavior. In other words, how do you give up being right? She said she just listened to people and did not give them advice. When I asked what she learned over that 40 days, she said she learned she is not always right.

I meet with entrepreneurs who are pitching their business on a weekly basis. I am also very involved in my current portfolio. And lastly, I have over 30 years of experience in building businesses in information technology product and service businesses. 

So when it comes to playing the part of potential investor it is easy for me to fall into the role of wise old sage. I realized from my friend's Lenten experience that I must protect myself from always giving advice.

Angel investing is fun. You are always surrounded by smart, motivated and totally idealistic people. People who know their idea will be the seed that grows the mighty oak of a company. People who mostly lack in experience but make it up with energy. If they knew what was ahead of them, they would never start. But start they do.

As an experienced angel, I feel it is my mission to encourage and to advise these early stage industrialists. Often times, however, I spend too much time on the advice and not enough time on the encouragement. 

You advise the entrepreneur by talking and you encourage the entrepreneur by listening. It is this balance that makes for an angel who is wise, respected and sought after. This is an angel who is focused on the entrepreneur and his mission rather than an angel who needs to be right.

In reflecting on this topic, I came to realize how many times I was wrong. Times in my angel investing career when I knew I was right but later was proved wrong by the entrepreneur who did not follow my advise. Then there were the times when they followed my advice only to have it be the death of their dream. 

Angel investors can add great value to the new enterprise. They can also snuff out all that is good in an entrepreneur and fresh opportunity. It is all a balance of talking and listening. What kind of angel investor are you? Are you serving you or the entrepreneur?

I was inspired to share these thoughts today because of a conversation with another friend of mine. He said he talked to a close friend who decided to practice "I don't know." I said 'What's that?" He said his friend, when asked what he thought about a particular topic, just started saying "I don't know. What do you think?" The results of practicing "I don't know" proved to be a steep learning curve.

Remember the words of Solomon.

"Even fools are thought wise when they keep silent; with their mouths shut, they seem intelligent."  Proverbs 17:28 (NLT)

 

The Angel Investing Drought in Atlanta Is Over!

There, I said it.

 

It appears to me that the Angel Investing drought it over. Angel personal investment accounts are restored. There is confidence in the economy's return and the stock market's floor. Angels are now investing or at least intending to invest. Corporations are acquiring. New money is entering the market.

Local Evidence 

At the Angel Lounge this month, I asked each of the attendees to give me the amount they have set aside for startup companies and private equity. The amounts ranged from $25k all the way up to $2mm. So there are a couple of elephants in the market but the average angel investor was seriously looking at $100 to $200k.

When I added all this up, including the elephants, I came to somewhere close to $20 million. Let's say this is wrong by a factor of 50%. That means there was probably somewhere north of $10 million in potential angel investment sitting in the room. That's $10 million that our little group of angel investors are saying they intend to invest in the Atlanta technology startup and early stage private equity market in 2011. That is impressive.

So why did I hold off writing this for almost a month?

First of all, I wanted to be sure this was not about how I feel, how my fellow angel investors feel and what we think we may, kind of-sort of, invest in 2011. So I waited. I waited because I was about to ask a couple of angels to look at a deal I was invested in and see if they had some interest. I think I have a great opportunity to invest in but these two guys committed to $100k each on the spot. They met the team, heard the pitch, saw the product, understood the risks and then said "Send me the paper work. I'll close by the end of next week." And they did it!

And there is more

I also heard from an attendee of the most recent Atlanta Technology Angel (ATA) meeting. He is not an ATA member. He understands angel investing. Invested in deals over the last decade. Now he is telling me, under Mike Eckert's leadership and the general mood of the meeting that he is going to join the ATA and do deals with them. I really respect this guy and this to me is compelling evidence of the thaw being over.

More personal evidence

I also have one of my angel partners (a good friend that I did deals with in the past) chasing me all over with a deal he wants us to invest in. I did not see this guy invest in a deal in the last five years and now he is all-in. 

I asked a potential, new, angel investor who is experienced in this industry and business we are evaluating, if he would like to invest along with me and my partner. He said "Yes." You may be saying "He said 'Yes' because you and your partner are leading the deal." I say he said 'yes' because he is feeling positive about the direction of his business and his income. He now recognizes there is some stability in the financial floor he is standing on. Further on this example, I personally am interested in investing and this was not the case as recently as six months ago.

New Money is Hitting the Streets

Lastly, there have been a couple of exits in Atlanta of late. The most recent is Secure Works being acquired by Dell Computer. This deal alone will probably make a few dozen people millionaires for the first time in their lives. These people all live right here in Atlanta and are a part of the Atlanta technology community. In addition, there are local VC's that did real good on this deal. This money will also come back into the community. 

My conclusion

Angel investors' personal investment portfolios are back to or beyond 2008 levels. They believe the downside on there net worth is somewhat predictable. They like to invest in entrepreneurs and new companies. As one of my fellow angels told me when he was about to put a second round into one of my companies; "When I tell my wife I am putting this much money into this deal, she will just have to understand this is what I do." In other words, investing is what angel investors do because they are purposed to do it.

We should see more exits in Atlanta. We went through a dry spell as corporations stayed flush with cash waiting to see where the market was headed. These companies also reduced their R&D spending as they pursued increased earnings in a tough economy. We all know, you can't cut your way to growth so now these cash-rich companies need new innovation to push through their distribution channel. They will buy young companies with innovative products. It is all of our jobs to build them.

Angels, VC's and corporations...the cash to invest is there. 

It is going to be a great 2011!

 

 

 

Five Rules Plus Three Tips for Successful Angel Investing

"You make money or lose money the moment you write the first check."

Anonymous Angel Investor

 

In our last Angel Lounge meeting we kicked around the question: How do you make money doing angel investing? This question was introduced by a venture capitalist who is now a private equity investor. He was interested in the answer to this question because he has seen what happens to angel investors after the first professional round of financing.

When the question was asked some of the experienced angels jumped right in with their principles and methodologies. The inexperienced and befuddled angels were asking some great follow-on questions. I think we walked away with an answer to angel investing that we can all apply.

Here are the Five Rules of successful Angel Investing:

Rule #1 – Group together and speak with one voice.

Angel investors generally fly solo. Angel investors generally never make money. This rule is from the guys that made money and continue to make money at angel investing. There is depth of resources and experience in a group. You don't know what you don't know applies to angels too, not just entrepreneurs. Everyone should have something they can bring to the startup to help make it successful.

And every group must have a leader. The leader of the group is the lead angel on the deal and he should be compensated in money and/or equity for doing this job. He is also the angel that calls the shots on the investment. The individual group members will be called upon to help in certain situations but the lead angel is the decision maker for the group of angel investors. As one of the successful angels said "Lead, follow or get out of the way."

Rule #2 – You must have the money in hand to get a deal done on favorable investor terms.

The solo angels are at a distinct disadvantage to the group of angels. If you are putting $10-25k into startups as a solo angel then you are a slave to the terms of the entrepreneur. As part of a group that is committing $250-1mm in funds to a startup, you are writing the terms of the deal.

To write the terms, you must have the money in hand. It is not fair to the entrepreneur for you to negotiate on behalf of a group that is making a "soft" commitment. Do you have the money or not? If you do have the money then pursue the deal and dictate favorable investment terms for the group. But if you don't have the money in hand then you are, at best, a bunch of solo investors.

Rule #3 – Invest in at least 5-10 companies

This is the VC approach and it works assuming you have the group that has the funds to invest. (If you don't have the funds in the group then go back to Rule #2). You will only invest in deals that make sense to you, deals that look from the start that will be successful.

But you must also keep in mind these are startup companies. A lot of things can happen that can make a deal go right or wrong. The external factors in startups weigh-in much more heavily than the internal controllable factors. (The biggest external factor is the market you are serving. If they decide to buy what you are selling when you are ready to sell it, you are golden.)

Rule #4 – You need enough money in reserve (dry powder) for two more rounds.

There is an old maxim in startup investing: It will always take twice as long and cost at least twice as much as you thought when you started. I can't tell you how many times I have heard this from experienced angels and how many times I said it (even to myself).

If you think the $500k you are putting into the deal will get you to positive cash-flow and it happens, great. If not, and you have no reserve, then the next investor group that comes in will crush you and your equity stake. As one of the experienced investors said, "The last investor in a deal doesn't care about anyone making money but him."

Have enough money in reserve so that you can choose to be that "last investor in the deal."

Rule #5 – Secure a major stake in the startup, preferably a controlling interest.

Angel investing in startups is a very high risk game. This is true especially if you are investing in first-time entrepreneurs. Proven entrepreneurs generally bypass angels and either fund it themselves or go directly to VC's.

To compensate for this risk you must have a formidable stake in the company. Most of these startups, if successful, will sell for less than $10mm. If only one or two of your startup investments in ten are successful then you must have a serious stake to get a risk adjusted return.

Those are the rules but here are a couple of more tips from experienced investors:

Tip #1 – Invest in what you know.

You will see a lot of startup opportunities as an angel investor. You will quickly realize how much you don't know. When you decided to invest in startups and help entrepreneurs you probably thought you were God's gift to entrepreneurs. This confidence is short-lived.

When you finally see a deal that is in your industry or experience set, you will immediately start asking better questions and adding value during the initial presentation. You gain confidence. The entrepreneur wants you in the deal. You will get a better deal and reduce your risk because of your expertise.

Tip #2 – Frugal operators are likely to provide better returns

If the first thing on an entrepreneurs mind is office space, run. You are about to give your money to someone who has the authority to spend it. Frugal operators spend money only in areas that make money. I read a great quote recently: "An entrepreneur is someone that steals office supplies from home and brings them to work."

Cash is oxygen in a startup. When you find an entrepreneur that treats cash this way then you know you have a fighting chance at success.

Tip #3 – Stay close to the company. Hold the entrepreneur accountable regularly.

I personally lost money in every single passive startup investment. I made money in the deals I stayed on top of. One of the angel investors said "Be a fellow operator."

This may be a bit strong as the entrepreneur must be "given his head." In the early stages you must meet with the entrepreneur weekly face to face with maybe some daily phone contact. After the company starts generating revenue and has what appears to be a workable economic model, you may move to monthly meeting with weekly phone calls.

Angel investing is a contact sport. You need to be involved or you'll get bloodied quickly. First time entrepreneurs are just that, first timers. They need your advice, mentoring and experienced council to succeed. If they don't believe this then pass on the deal.

New Video - How to get to the second investor meeting

Click here to go to the video

I gave a presentation in August at the ATDC on how to raise money. It was very well received and the content I covered is timeless. The presentation was reviewed in the ATDC (www.atdc.org) blog – Peach Seedz (Peach Seedz review by Cindy Cheatham)

If you have entrepreneurs that need some help in this area, you may want to pass this video on to them. Just copy and send this link: http://paparelli.com/page3/page3.html

Hope this helps get some of our Atlanta startups funded sooner rather than later. And, if you are not from Atlanta, I hope it helps you too.

Start a company today!

Sig Mosley Inducted into the Georgia Technology Hall of Fame

John Imlay (former CEO of MSA) inducted my friend Sig Mosley into the Georgia Technology Hall of Fame. John first met Sig 38 years ago when he was brought in to do the turn around on MSA. John and his team, including Sig, took MSA from $2mm in revenue to $290mm. It is a Georgia technology success story and software company legend.

After the sale to Dun & Bradstreet, John and Sig sat down one night and decided to start Imlay Investments and the Imlay Foundation. In both cases, these organization were missioned to give back to the very community that provided them with the opportunities to grow and prosper. They didn't leave town. They reinvested. As John put it "We wanted to give back to the community and make money at the same time." He succeeded on this mission, thanks to Sig.

Sig is tireless in his dedication to serving entrepreneurs. He listens to almost every pitch and has invested in close to 100 companies in the last 17 years. He is still actively involved in over 35 companies. Keep in mind that he doesn't have to work that hard. John gives Sig free reign to set the throttle wherever he wants it. Sig is always running full speed ahead.

I am so proud of our community for selecting Sig Mosley as the 2008 Georgia Technology Hall of Fame inductee. What an honor for Sig and what a blessing to have Sig as part of our community. He is a tireless worker, a wise investor, a success and he does it all with a servant's heart. Congratulations and thank you Sig.

Angel or Entrepreneur?

At the Atlanta Capital Conference I ran across Michael Reene holding audience with a gaggle of Angels and VC's. I challenged him that he should be talking to entrepreneurs and not investors. He shot back with a question:

What's the difference between an entrepreneur and an angel investor?

Answer: ONE DEAL!

How right he is.

Just wanted to share this one with you. Michael is one bright and dynamic guy and now we know he is insightful too.

Naive or Nuts? Investing in the Right Quality

I was in a board meeting with one of my entrepreneurs and I asked the question: "How did we get here?" The answer he gave was honest and insightful. "If I wasn't naive, we wouldn't be here."

Why I've said, "No." to good deals

I love entrepreneurs. I think it is because I believe they are all called by God to do what they do. They are authentic. They have burned the ships and have no plan B. They don’t think they need one. As one told me just last week, “I am absolutely positive that we will be successful.” He said it with downward voice inflection. He believes it and so do I. But I told him...