Friday, April 30, 2010

Patents - What do they mean to you?

If you are interested in this subject you probably fit one of the following classes:
  1. You are an expert angel investor with IP due diligence experience - your comments would be most welcome.
  2. You are a potential or new angel investor (bless you for helping to grow our country). In this case you might be interested in one (mine) practical view of what protection a patent gives you.
  3. You are an entrepreneur that could use some financial help to get your invention (IP) to market (bless you for helping to grow our country too). In this case you should know what questions to expect from your angel investor and have good answers.
This post attempts to share, for the benefit of the last two groups, my experiences over twenty five years as an inventor, patent holder, investor in technology ventures, acquirer of intellectual property (IP), licensor of IP, entrepreneur commercializing my own or someone else's IP. If you want legal opinions or legal advice on this, call your attorneys. If they are IP specialists they'll have legal details and perspective far more reliable than mine. However, beware: because they are so familiar with the domain, they will often presume that you understand the nuances of IP legal protection principles and legal practice, not necessarily the practical aspects of it, which is what I am focusing on here. Mine is a "business" view of patents, not a "legal" view and therefore focuses on what is practical not only what is legally rightful.

What does a US patent give the inventor?
In simple terms, the RECOGNITION by the US government that he/she is PRESUMABLY the inventor of a certain concept, product or process and therefore has the EXCLUSIVE RIGHT to practice the invention for a certain period of time (e.g. 17 years) without competition. Note that contrary to public perception it does not give the inventor any real protection (with one exception) unless (s)he takes steps to enforce that right. The exception is that the Customs Office will do their best to stop an infringing product from entering the US if they are provided with a suitable request, documentation and proof of patent infringement. Otherwise, the inventor is solely responsible to enforce his patent rights, which implies taking legal action against an infringer generally at some considerable protracted cost.

Against the above background then a number of questions arise:

Can one afford to sue the infringer?
Practically speaking, only if the practice of the invention has a cash flow worth protecting in an amount that covers the expenses, distraction, aggravation, etc. associated with a litigation. Winning the case may not produce cash flow or a significant pay off; it may produce only an injunction against the infringer, which by the way does not preclude another one from coming along.

What if in the course of litigation one discovers that other aspects of the product infringe on patents held by the infringer or someone else?
This is very common in the electronics industry where frequently patents have great value to counter-sue and eventually settle by reciprocal licensing. Much of this jousting is now going on and reported in the press involving Apple and their iPad against various competitors among which only one (the smallest and weakest) was actually sued for infringement. In these cases there may only be legal expenses and the benefit of upsetting a competitor's product development road map.

If one has a validly issued patent, how much protection does it provide?
Better than none to be sure, but hardly a guarantee. The case of RIM (Research In Motion), makers of the Blackberry, is very instructive (details): It started in 2000 when RIM was a startup with strong beliefs that their issued patents covered their products well. After a surprising chain of events, by 2006 they settled for $650 million with NTP (plaintiff) after a court injunction forced the Blackberry network dark for one day (RIM by then had a $2 billion business at risk of going dark worldwide, hardly a desirable bargaining position). Since 2006 and continuing to this date "patent reexamination" action by RIM has sought to void NTP's prior art claims; NTP is responding in kind. One can hardly imagine the costs involved (at $500 or more per hour). Needless to say RIM investors had been confident of their IP position and of the issued patents. Conclusion: even ISSUED patents are no guarantee since prior art can be submitted at any time and re-examination requested.

Is a patent much ado about nothing?
Definitely not. A Provisional Patent filing, if properly written and searched, tells potential investors that there may be more than just an idea. It says that the company and the inventor understand the IP implications of their business and have invested time and money to protect their innovation. If a patent is issued, it tells investors that a pretty solid stake is in the ground that proves innovation, at least from a theoretical and PTO standpoint. If potential competitors exist, they are obviously not easy to find and on the time-line may be behind the current inventor and therefore not innovators in the PTO sense. Of course they could still come out later with proof of "prior art" and open the RIM type can of worms.

It should be noted that claiming infringement while holding an issued patent has risk. The "infringer" may turn up to have prior art and that may invalidate the patent. To wit, I had occasion of working with a small manufacturer who was an outstanding and recognized innovator but never filed a patent. He explained that, not being interested in having investors or selling the company, patents to him were a cost and of no value. His strategy was to practice whatever innovative process he devised without fear. If anyone came to try and stop him he depended on his meticulously documented prior art files from many years back to trump the action. Furthermore he had no interest in licensing his own inventions and felt that since issued patents files are open to the public, they are more risky than helpful unless one deals with fundamental inventions. By those strategies, his company never grew to dominate his markets, but he was happy with his lifestyle company; my lesson was to beware that prior art occasionally may come out only when one "kicks the beehive".

Why uncertainty cannot be eliminated
In the US the PTO operates on the doctrine of "first to invent". This means that anyone can come and claim to be THE inventor of anything if he can show with a preponderance of evidence prior art precedent to that of any patent filed. If a patent had been issued, reexamination is the cure. Documentary proof of prior art can be from most kind of documents, preferably lab books (numbered non-removable pages), dated and witnessed affidavits, etc. Elsewhere in the world the "first to file" rule is followed therefore it is imperative to not delay a viable filing and one can depend on the value of an issued patent to a greater degree.  Even there a patent can be contested with suitable evidence that the prior art was "published" and therefore in the public domain prior to the filing of the issued patent. Demonstrations of preponderance of evidence of prior art are not easy to do, so an issued patent is still a strong stake in the ground, but...


Conclusion
Beware: from a business viewpoint, the value of a patent is not an absolute one. It depends on the circumstances of the business, the market, the product, the objectives of the inventor, the objectives of investors and many other factors. Deciding to file a patent (the inventor) or to assign a value to a patent (the investor) is a problem without an optimal solution. Clear understanding of options, implications and trade offs is the best one can achieve in reaching an entirely subjective decision.
My "Should I get a patent" Roadmap may help with that analysis. Read more about my Roadmaps

By the way for my own IP I still file patents, but I am cognizant of how thin the ice is that I stand on.  If I cannot justify a costly fight to defend it, my patent is not more than a feather in my cap.

Marco Messina

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Sunday, April 25, 2010

Talking to Angels (angel investors, that is)

We all have angels of one kind or another. As a Tech-preneurs you have at least one kind you may wish to talk to ("pitch to" in the parlance of the angel investing community). The good news is that to learn to talk to those angels you do not need to retire to Nepal spinning prayer wheels or to Rome chanting psalms in Latin for years.
Angel investors are easy to "pitch" if you understand some basic rules:  Like all angels they are in high demand, hear requests for help almost continuously so they develop a short fuse.  Your "prayers" better be short and to the point, present facts clearly, use facts to support your claims and plans rigorously so that they are more than hopes.  Most importantly remeber that this "business" type of angels respond primarily to credible promises of significant rewards in return for their help.  Emphasis is on credible and significant.  It's that simple and we'll see how to "talk" to them in their language later on.

Angels, like all beings run in packs and cluster in places, so they are easy to find.  Universities, business schools, departments of commerce and other entrepreneurs, all know where to find them. In Arizona, this is your path to the Arizona Angels Venture Group of which I am part along with the Thunderbird Venture Fund, ATIF (Arizona Technoligy Investor Forum), the MIT Enterprise Forum, ASU Technopolis Invest Southwest Capital Conference.

Once you find them, follow carefully their instructions (rember the short fuse) on how to make contact and how to present your case.  Most often their rules are clearly published in their web sites.  For the above groups that I am familiar with, below are guidelines on how to present.

To avoid wasting your time, however, understand clearly what kinds of businesses stand any chance (see how).  If you don't fit their expectations, save the effort and frustration and find another route to get your business into the INC500. There are other alternatives, some published in my blog (e.g. SBIR grants, etc.)


Guidelines for Companies Presenting to Arizona Angels Venture Group
PowerPoint Presentations

General Guidelines
  • Presenter must be the CEO.
  • Presenter remains at podium throughout presentation.
  • Presenter must wear formal business attire for presentation (not required for screening committee presentation)
  • Use of props or demo products is up to the company.  Realize that small items may not be visible to everyone in a large room and circulating items will be distracting from the overall presentation.
  • Presenters changing their own slides is preferred. Automation or outside helpers are risky and prone to untimely failures.
Guidelines for 10 Minute Presentation
  • Presentation must be 10 minutes or less, NOT more..
  • Must be in Powerpoint 2003 or 2007 versions with no extra software for animations. (animations are uncontrollable, risky and not recommended)
  • 10 to 15 substantive slides for presentation (excluding cover page and thank you/Q&A)
  • The 10 slides below are required for the Arizona Angels screening panel presentation and strongly recommended (few more if you must) for the full presentation.

1. Statement of the problem
  • This should identify the customer pain and the Company's solution for that pain.
2. Product or Service Description.
  • This should be a balance of information that gets the essential product/service idea across
  •  If the product/service falls within a recognized category, it is generally useful to identify that category.
  • Include proprietary protection, if that is applicable (e.g., patent owned or applied for).
  • Recommended: 2 minutes out of 10 of total presentation. A common mistake is to get stuck on ths overmuch.
3. Current Status Description (with historical information, if relevant).
  • Give a brief picture of where the Company is with relevant information (number of employees, development stage, early revenue, number of customers, etc.). 
  • Include historical information if it is helpful to understanding the current stage.
4. Description and Sizing of the Target Market.
  • This is one of the most important slides, because the investors will use it to determine if they have any interest in even thinking about the Company.
  • Their interest depends upon whether they think the market for these products and services is big enough to support the growth of the Company into a big company.
  • The information should be as pertinent to the Company as possible (i.e. the market information should relate to the market for these products and services and not a larger market of which these are a subset.). To the extent possible, use third party information (e.g., Gartner's, or IDC). If third party info is not available, make educated guesses, and indicate that the info is Company estimated.
5. Business Model (how we make money).
  • This also is extremely important. The investors want and need to understand how the Company makes money (e.g., licensing model, service offering, whether there is recurring revenue, etc.).
  • The Company’s "go to market" strategy: how it plans to manufacture, sell, distribute, support (e.g., distribution model—direct or indirect; partnering; go it alone; brand play for penetration; etc.).
  • How soon will it make money with that strategy? Until then the cash-burn-rate will work to kill the venture.
  • Common mistake is to be unclear either in the mind of the entrepreneur or in the explanation to the audience or both.
6. Competition.
  •  Identify who the Company's top competitors are and how the Company's believes it is positioned to successfully meet that competition.
  • Remember: a. doing nothing is always an option if there is no compelling reason to act,  b. the company with no competition does not exist
  • What is the company sustainable competitive advantage against competitors.
  • Barriers to entry?
7. Management Team Slide.
  • This is a very important slide. It should highlight relevant domain knowledge of the team and prior experience as a team. This is not a resume, do not over do the slide. MUST BE LEGIBLE
  • Advisory Board: valuable are domain experts and members with key industry contacts to open doors and willing to do so.
8. Historical and Projected Financial Data (1-2 actual, 5 year projected P&L).
  • Don't be too granular. Include current financials. Generally, all that is needed are Revenues Gross Margin, Expenses, EBITA, cash burn. More at your risk – MUST BE EASILY LEGIBLE.
  • Identify key assumptions orally.
  • The information should summarize (and be consistent with) the Company's underlying detailed plan.
9. Amount of Investment Funds Sought; Use of Proceeds.
  • Generally, this is a simple slide showing planned use of the money by 4 or 5 categories, and total being sought.
  • Call out unusual uses, such as for an acquisition, paying off loans, buying a building or expensive production/test/laboratory equipment.
  • Your proposed pre-money valuation. Articulate why you think is justified.
  • State if more raises will be necessary before exit 
10. Most likely way to exit and rationale for expected valuation

  • Do the math for the investor. How many times their investment will they get back, what ROI
  • Restate why it is believable (IP, team, experience, market dominance, market growth)
  • How have you covered the downside risk

General Guidelines
  • The presenter/team determine the order of the slides, and if more than the above are necessary to tell the story then use them, but experience shows: (a) the fewer the better, and (b) more than 15 total slides is not likely to work well.
  • The openingtitle slide and last (Thank you/Q&A) do not count.. The 10 minutes time limit begins when the CEO begins his/her presentation.

Some Insights and Caveats from Experience

  • Investors respond to a compelling story of a serious need for which you have a (nearl) unique and practical solution that will deliver strong market position or dominance that justifies your projections of fast growth and ROI that lead to a successful exit where you AND the investors cash out of the deal.
  • Stay focused on your target audience and be courteous to a fault. Help everyone understand why you are excited about what your company is doing and how it will impact the world. Do not “dumb” your presentation down.
  • Communicating is YOUR responsibility, the audience owes you no duty to easily or quickly understand any of it, but they have the funding you seek.
  • There are potentially only a few people in the audience who may be deeply familiar with the technology and the competitive landscape in the area you are addressing. They are your most likely investors and it is most critical that you convince them that you are on the cutting edge of the market and/or technology.
  • Keep the slides as simple as possible; cluttering is distracting, and investors are quick to be distracted. When busy reading or making sense they tune you out. Font size must be readable from the last row. That translates to about 3-4 bullets per slide, about 8-10 words max per bullet. Less is better (see http://bit.ly/pp10-20-30)
  • Use graphics carefully, strategically and sparingly. If they do not communicate better than word or numbers, they are distracting (e.g. pie charts with too many undistinguishable slices are useless). Make the numbers and elements of graphs readable or skip them

Now that you have the roadmap, qualify your business for fitness to the angels' criteria (see how) and go angel hunting (begging is more like it).  Good luck, and ask for help, many angels are passionate about helping you succeed.

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Thursday, April 22, 2010

Roadmaps and Knowledgebase Navigation (KnowNav™)

For nearly ten yars I have researched uses of "mind mapping" for a variety of communication and collaboration purposes. Part of my research and usability testing was done as Director of Technology Programs at Maricopa Colleges Small Business Development Center in Phoenix, AZ. The opportunity provided by the Maricopa College SBDC to publicly test the results of my research is gratefully acknowledged.

I dislike the term "mind map" originally employed for this technique. I believe it is a confusing term with new-age overtones that has hindered its acceptance and that of derivatives and tools to implement it. For that reason, and for the particular use I make of it, I prefer the terms Roadmap and Roadmapping, which are more descriptive of the knowledge domain navigation process enabled by the map.

Roadmapping is particularly powerful to navigate complex knowledge domains where a problem solution is sought which cannot be readily optimized. In that case, optimizing the exploration and reasoning process is the next best thing. I call this process Knowledgebase Navigation or KnowNav™.

KnowNav™ allows users to explore alternatives and their associated facts through the prism of their personal preferences. To this goal, the domain expert lays out in a roadmap, as objectively as possible, the alternatives and all the judgmental considerations that could be made about each. Users then can navigate the knowledgebase, in an almost random-walk fashion, intuitively attaching relative personal preferences to each of the considerations identified by the expert.

The roadmap's power comes from:
  1. ability to taxonomically organize the knowledgebase hiding the overwhelming size of the data set
  2. ability to open and close branches at will thereby switching from macro to micro views
  3. keep open only the branches relevant to the user at any given moment
  4. express options and features in one line statements thereby breaking down the complexity of any concept
The expert's challenge involves:
  1. definition of the alternative navigation paths
  2. taxonomic organization
  3. break down complex ideas until they can be defined in one-liners
Following are some simple and abbreviated examples open to all. Some more detailed roadmaps are available to my consulting clients:


  1. Angels' Due Diligence
  2. Should I get a Patent?
  3. Should I file for a Trademark?
  4. Should I apply for a SBIR Grant?


Very large data sets and complex issues can be summarized and detailed so that the end user can navigate them with ease. More details on these methods are contained in my forthcoming book "KnowNav™and Roadmaps: Simply Reasoning About Complex Issues"

I use this technique because, folding and unfolding branches of the roadmap (read carefully the instructions at the top of each map), you can switch from a "30,000 foot" summary view to "detail" view of different parts of the issue and navigate the knowledgebase with continuous reference to the general context.

All content and roadmaps copyright of Marco Messina 2006-2010 KnowNav™ is a trademark of Marco Messina

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Tuesday, April 20, 2010

The 10/20/30 Rule of PowerPoint

This is a partial reprint of Guy Kawasaki's 2005 blog posting by the same title. 
I repeat Guy's guideline so regularly to the tech-preneurs I mentor that I decided to direct them here rather than to a Google search page. Guy's experience in this space is matchless, his insight has served me well. The main point here is not to detail how to pitch investors (there is another post for that): it is how to communicate effectively in any field.  The essence is: keep it short, simple, legible and avoid distracting you audience (once you lose them you never get them back).  You'll be more compelling and convincing.

 and here is Guy...

As a venture capitalist, I have to listen to hundreds of entrepreneurs pitch their companies. Most of these pitches are crap: sixty slides about a “patent pending,” “first mover advantage,” “all we have to do is get 1% of the people in China to buy our product” startup. These pitches are so lousy that I’m losing my hearing, there’s a constant ringing in my ear, and every once in while the world starts spinning.
To prevent an epidemic of Ménière’s in the venture capital community, I am evangelizing the 10/20/30 Rule of PowerPoint. It’s quite simple: a PowerPoint presentation should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points. While I’m in the venture capital business, this rule is applicable for any presentation to reach agreement: for example, raising capital, making a sale, forming a partnership, etc.

•Ten slides. Ten is the optimal number of slides in a PowerPoint presentation because a normal human being cannot comprehend more than ten concepts in a meeting—and venture capitalists are very normal. (The only difference between you and venture capitalist is that he is getting paid to gamble with someone else’s money). If you must use more than ten slides to explain your business, you probably don’t have a business. The ten topics that a venture capitalist cares about are:

1.Problem

2.Your solution

3.Business model

4.Underlying magic/technology

5.Marketing and sales

6.Competition

7.Team

8.Projections and milestones

9.Status and timeline

10.Summary and call to action

•Twenty minutes. You should give your ten slides in twenty minutes. Sure, you have an hour time slot, but you’re using a Windows laptop, so it will take forty minutes to make it work with the projector. Even if setup goes perfectly, people will arrive late and have to leave early. In a perfect world, you give your pitch in twenty minutes, and you have forty minutes left for discussion.

•Thirty-point font. The majority of the presentations that I see have text in a ten point font. As much text as possible is jammed into the slide, and then the presenter reads it. However, as soon as the audience figures out that you’re reading the text, it reads ahead of you because it can read faster than you can speak. The result is that you and the audience are out of synch.

The reason people use a small font is twofold: first, that they don’t know their material well enough; second, they think that more text is more convincing. Total bozosity. Force yourself to use no font smaller than thirty points. I guarantee it will make your presentations better because it requires you to find the most salient points and to know how to explain them well. If “thirty points,” is too dogmatic, then I offer you an algorithm: find out the age of the oldest person in your audience and divide it by two. That’s your optimal font size.

So please observe the 10/20/30 Rule of PowerPoint. If nothing else, the next time someone in your audience complains of hearing loss, ringing, or vertigo, you’ll know what caused the problem.

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Monday, April 19, 2010

Two Ways To Invest in Green

In the last few weeks I attended several presentations from companies presenting their business plans and experiences as “green businesses”. Two stood out in my mind at the extremes of what’s out there for angel investors to seek. Since in some cases I signed NDAs I’ll keep all companies confidential but it may not be difficult to deduct their names with a little research and detective work.

Company1

Purpose of the presentation: Present a business plan for investment by accredited investors to raise several million dollars

The Idea behind the business (as stated in the presentation): Take advantage of the huge amount of government money promoting technological migration to a “greener” world.

Competitive advantage: Far out patent pending technologies invented by undiscovered brilliant inventors with no industry track record of delivering working products or systems – the power of the outsider to think out of the box.

Business model: promote the patents through associates, consultants and green enthusiasts, license the patents to major industry players to make and market and collect royalties

Secret sauce: patent pending untested technology that must be kept secret from the big competing interests in the industry, therefore little can be disclosed.

Use of funds: Promotional expenses, R&D to prototype and demonstrate the technology, salaries to management and marketing team, filing more patents, pay licensing fees to the inventors (50% of funds raised) for untested technologies.

Take away: Too good to be true? Perhaps so judging from the response of several attendees. The technologies presented promise a) cars running on various fuels (including H2) continuously converted on demand from water, b) energy from waste water to feed the utility grid, c) solar plant daytime energy storage for redistribution at night and/or to distant locations at higher prices. One alone would be a holly grail, but diversification calls for all three and the markets are ripe for it. Buyers beware.

Company2

Purpose of the presentation: Educate entrepreneurs on a “green business” perspective derived from ten years of R&D and product marketing.

The Idea: “green” has taken an unfortunate connotation of either fashionably exploitable business angle or expensive luxury that costs businesses a lot. Both are wrong.

Products: Water-based, human and environment safe chemical cleaning products for industrial processes, aviation, gun cleaning, and more to come.

Use of funds: N/A – Company2 need none, they are offered more they want to take, the business is profitable and fast growing

Take away: Company2 has demonstrated, over ten years, that environmental and human safety offer a) profitable markets for the producers and b) can be demonstrated to reduce TCO for the customer that switches from noxious chemicals (the only ones available in the past) to the more worker and environment safe products available today. C) There are great opportunities for entrepreneurs, and their angels, that want to pursue a similar business strategy.

The key to Company2’s market penetration was and is to effectively communicate and demonstrate the value proposition to prospective customers who are frequently under great pressure and incentives from legacy suppliers to continue past practices. It takes time, commitment and tenacity. The pay off takes time.

So why does this matter? Because in the current euphoria to go green with our investments and to benefit from the ongoing global technological transition, it is easy to seek an end-run with some magic sauce. It may be possible but unlikely. More probably the returns we seek will come from: innovation that creates incremental improvements, education, rigorous analysis of alternatives and serious commitment to a mission. Technological transitions have never been an overnight affair (see railroads, automotives, semiconductors, internet, telecoms, etc) and angel investors will need now as ever due diligence and patience. More importantly, we should seek credible business models, not promoters’ wild promises of world changing magic.

Republished from http://marcoessina.com

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Monday, April 12, 2010

Venture Funding with SBIR Grants

When I was at Maricopa Colleges SBDC I developed an audiovisual introduction to the SBIR grants program sponsored by the SBA. It appears to no longer be on-line despite havng been told that it is a helpful explanation of the program and how it can benefit certain entrepreneurs. I decided to repost it here as a public service. In addition to this summary, I provide consulting services on how to apply for SBIR grants. I can also assist with a multitude of programs provided by the Arizona Department of Commerce to assist innovators who wish to apply for SBIR grants.

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Wednesday, April 7, 2010

Calculating with Angels - Angelcalc

Do you know when your young business venture is "fit" to attract angel investor financing?

There are many theories and rules of thumb being bandied around about how angels seek their targets. The reality is that angel investors can be roughly divided in two groups, each with dramatically different decision making processes (and ROIs).

"Golf Cart Investors"


These are the ones who buy into a deal on a hot tip, topically received by a buddy on the golf course. Most often the buddy has done little or no due diligence, has little or no knowledge of the industry and technology involved, and has received the supposedly hot inside information from another buddy in similar fashion.

These angels are dangerous to your and your business' health. They invest with virtually no understanding of the deal, have unjustified expectations and eventually will prove to have little or no patience to wait for the business to succeed. Their returns are almost inevitably negative and most often they will do no more than one or two deals before they go back to golfing only. Unfortunately they will tell others that angel investing is a crap shoot and waste of money, thus limiting startup capital availability in the community.

"Professional Angels"

These are the real Angels entrepreneurs want to work with. Frequently they work in groups so that they can share the heavy burden of due diligence research required and they bring to their side of the table scientists, engineers and management experts in different industries and technologies. They will ask a lot of questions and then more questions and then proof and supporting documentation. They will not move fast but will cover their bases well. When they invest they will stay involved and help with seasoned advice and working their contacts to help the business succeed. These are true ANGELS.

Research by the Kaufman Foundation shows that their returns are on average quite attractive (2.6 times their investment in 3.5 years). On the other hand, a rule of thumb often quoted is that these angels consider a deal if they see a potential to earn 30 times their investment in about 5 years. These two seemingly conflicting perspectives are reconciled if one presumes that the probability of success of a well researched deal is only about 10-12%. From experience I believe that it is a reasonable and not overly pessimistic expectation considering that the typical business that fits angel investors has many or all of these characteristics: Little or no sales, limited proof of market, may have lab tested technology, but little or no production, no proof of scalability, delivery, distribution experience. Moreover, all of the following may aply: in some other garage a similar or better mousetrap may be ready to come to market, the management team may have or may develop unforeseeable weaknesses (from sociopathy leading to financial embezlement to personality incompatibilites to love affairs - I've seen them all as causes of aborted successful businesses); "effective" IP protection may prove difficult to obtain or worse may be revoked when prior art appears unexpectedly (see the post about patents and RIM's adventure), government regulations may prevent or delay market acceptance, unforeseen and totally unrelated vested interests may create insurmountable barriers to market acceptance. All considered the 10-12% probability may even be high, but it appears to be what angels use implicitly if not explicitly.

So, with all this in mind, below is AngelCalc (copyright Marco Messina 2007-2010). Its intent is to help you determine if your business has sufficiently high growth and profitability potential in an industry with sufficiently high PEs to satisfy the requirements of the Pro Angels. Services, generally are unlikely to qualify unless they have a unique IP component and market dominance potential. If your business cannot meet the angels' criteria, your funding efforts will be better put elsewhere. F&F (friends and family) may be an alternative at least until the criteria may be met.


Calculating with Angels
This model attempts to explain the finance-ability of a business based on angel investors' required returns.

Its objective is not to set a valuation
. It seeks to determine whether the relationship among the following factors allows a viable solution that meets investors criteria.

The factors for a P/E-Multiple based calculation (as for a public company) are:
  1.  time horizon is 5 yrs, 
  2.  future EBITA,
  3.  future PE and market cap (from current comparables),
  4.  investor's average returns and required return,
  5.  the ASK needed to implement the plan
  6.  The % equity to give up for the ASK
 The factors for a valuation based on revenue multiple (e.g. selling the company) are:
  1.  Time horizon is 5 years
  2.  Revenues in year 5
  3.  Applicable multiplier for comparable companies sold

With both valuation methods the implied probability of success is 12% because it reconciles the return multiple identified by the Kaufman Foundation research (2.6 times return in 3.5 years) with the rule of thumb often quoted of "30 times the investment".

See input instructions above



Questons or comments? I'd love to hear from you, particulalry if you disagree.

Good luck. May you be so lucky to find a real ANGEL.

Marco Messina
The Angel Pitch Guy

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