Seven steps for precluding profitable exits (aka ‘worst practices’)
1) Acquiesce to the entrepreneur’s requested stratospheric valuation in the first round (because you can’t build a partnership if you start by being disagreeable).
2) Don’t bother to estimate how much additional dilutive capital will be needed to orchestrate a lucrative exit (because crafting a capital access plan involves too much imprecision to be worth the effort).
3) Base your potential return calculations on an IPO exit versus a company sale (because the enterprise is less likely to re-locate post-IPO, so let’s assume that’s our exit vehicle).
4) Disregard the historic data about M&A exit proceeds for VC-backed enterprises in the same industry (because today’s market is obviously in flux, so historic evidence is not applicable right now).
5) Base your investment decision solely on who has already invested in the deal (because you can conveniently avoid wasting time on boring due diligence which they’ve probably already performed).
6) After making your initial investment move to the ‘mute money mode’ (because by spurning opportunities to assist the entrepreneur you can be sure to retain your objectivity).
7) Only participate in the first round (because by being ‘Willie One Check’ you not only invest all your money at the lowest valuation, but also need not haggle over contentious term sheet provisions like pay to play and pre-emptive rights).
Note: The efficacy of these seven steps can be vastly enhanced if angels will simply make the following trifling assumptions when reviewing business plans:
a) The founder/inventor deserves to remain CEO until the exit (besides, this horse is such a winner any jockey can ride it to the finish line).
b) It is unlikely this enterprise will encounter any challenges not covered in the business plan (since it is so lengthy and thorough).
c) If new investors are needed they will surely appreciate the value angels have provided the company to date (so they will gladly respect our existing terms).
d) The level of detail in financial forecasts is highly correlated with accuracy (so the more complex the financial model, the higher the likelihood the forecasts will be achieved).
e) There are still some transformational ideas which truly do “sell themselves” once they are made available to the marketplace (and fortunately this is one of them because “great science can always trump any sales and marketing wisdom or strategy”).
f) If cash flow break-even can be achieved with just a tiny market capture percentage, then sales success will not be a daunting task (especially if the conservative forecasts haven’t even considered penetrating international markets, which could be gargantuan).
g) And, for medical devices: So long as a device improves patient outcomes the medical community will eagerly embrace it (since physicians are solely concerned about enhancing patient experience, even if they do not personally benefit).
This article is reprinted with the permission of John O. Huston of OhioTechAngels.
.Comments on this story? Send an email to the editor: address - editor [@] thechilli.com
 |
|
|
© Chilli Publishing Ltd 2008 |
22 JUL 2008 |
