Yesterday, the NY Times printed a great article on Angel Investing and Bootstrapping.
To see the article click here.
The article is a must read for start-up businesses.
The article starts off with some interesting facts:
The rules of the game of angel investing have changed in the post-crisis world. The average deal size shrank by 31 percent in the first half of this year.
…. and continues with some great advice on bootstrapping:
There has been a sea change in risk sensitivity; the more self-sufficiency a company demonstrates, the less risky it appears. “Bootstrap it as long as you possibly can to validate your business model and to get some traction,” Mr. Cerullo said. “The more traction you have, the more leverage you are going to have in a valuation negotiation with an angel or private equity investor.”
Entrepreneurs should find ways to finance their own growth: working without salary, moonlighting, seeking grants, running lean operations and focusing on an aspect of the business that can generate revenue.
Bear in mind that the worst of times for the economy can be the best of times for starting a company. Labor is cheap and plentiful. The costs of starting an Internet-based company have fallen sharply thanks to cheaper technology, including open-source software. “Work hard to figure out if there’s a business plan you can pursue where your capital requirements are zero,” said Ian Sobieski, founder and managing director of the Silicon Valley-based Band of Angels Fund. “The easiest way to raise money is to not absolutely have to raise money.”
Angels are looking for companies that can get to break even on the angel investment. In return, they are willing to be more patient, Mr. Rose said. In the old days, angels invested with the idea that they would finance the company at an early stage, then venture capitalists would step in with a large injection of cash that allowed it to blast off on a hockey-stick growth trajectory.
In recent discussions with an angel group about a company I co-founded, I received feedback that confirms the NY Times article. Investors are less willing to invest in ideas and more willing to invest in businesses that have established customers and a proven product. Further, investors are very keen on reducing risk wanting products to have barriers to entry for competitors (patents, trademarks etc). The last point about protecting the product somewhat goes against the principals of bootstrapping, but in many cases: what the investor wants, the investor gets.
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