Miles To Go.

The Social Network is a hell of a movie, but the real people upon whom the characters were based have stated that the film’s version of the founding and growth of Facebook was overly dramatized. And appeared way more fun than it actually was.

Face it, entrepreneurship is hard. Angel investing is doubly hard. While we read about spectacular successes, one can hardly keep up with the many outright failures preceding them. The thin veil  can really only be perceived once you are on the right side of it-it’s practically see through! But if you are on the wrong side, the thin veil might as well be a brick wall.

Someone once said the two best traits an angel investor can possess are a strong stomach and a sense of humor. The strong stomach will tolerate its share of quick deaths from being too early, too late, poor execution or leadership, lack of funds, or just tons of competition. The sense of humor will come into play when you attempt to tell your God which element of your portfolio is going to be The Big One. God will invariably laugh and throw at least one thunderbolt, wreaking havoc with your “sure thing” — but turning your also-ran into a winner. (No kidding, it’s happened. But to protect the innocent, we won’t name those we feel were luckier than they were skilled.)

Other sources of angel heartburn include those frustrating periods of illiquidity…the fast pace of technology which upends business models and proprietary positions quicker than at any time in history… the global markets bringing competition to one’s door on a massive scale… the high valuations of exposed deals,…the lack of influence when part of a syndicate…the competition with other angels (and now, VC’s). The list goes on.

The angel game can be summed up in the words of the “advert” placed by explorer Ernest Shackleton (1874-1922) ahead of his Antarctic expeditions (none of them successful, by the way):

“MEN WANTED FOR HAZARDOUS JOURNEY.

SMALL WAGES, BITTER COLD, LONG MONTHS OF COMPLETE DARKNESS.

CONSTANT DANGER, SAFE RETURN DOUBTFUL.

HONOR AND RECOGNITION IN CASE OF SUCCESS.”

And yet, we do it.

EO: Great Group of Entrepreneurs

This excerpt is serialized from a whitepaper titled Angel Investing for Single Family Offices (SFO’s) by The Family Office Association and Vaux les Ventures. For a complete copy, visit the FOA website. 

Any SFO considering allocating a portion of their assets in venture toward angel investing has to acknowledge the significant risks in the market. One sobering take from the US Small Business Association is that roughly 80% of small businesses fail in the first year, 10% in the second and 5% in the third, leaving a paltry 5% of new ventures that even qualifies to deliver a return for investors. I am a member of EO (logo at left), a global organization with 8,000+ members that fosters entrepreneurs, and the odds are just slightly better there I think.

Sticking with the digital media businesses discussed in the last section, here’s a brief summary of the early stage venture risks associated with this sector:

Operational Risks are legion in startups. First out of the gate is execution on the development of the product. Many products and services simply fail to launch, whether due to poor specs, loose design
concepts, or from just plain misjudging a market need. Another common problem is never solving the cold start challenge and acquiring users. Assembling talent, accessing sufficient capital, maintaining differentiating advantages over competitors, and a go-to-market strategy are a few more risks to consider.

Timing Risk — also referred to as Luck. Often, an entrepreneur’s vision has merit, but market conditions have not yet gelled to support it. Frequently, capital is wasted on development and/or marketing in
anticipation of a developing market. When the tide doesn’t rise in time, the company is left high and dry. One example? The many mobile/ social networks that tried to deliver hyper-local advertising audience and failed. In the meantime, Gowalla and FourSquare entered the market just as mobile and social converged, and were propelled to higher and higher market caps. Likewise, any mobile/social solution launched now with similar attributes would be too late and face heated competition.

Funding Risk can be mitigated by an SFO in the early stages of the company, but in our digital media example, additional capital will be needed — or at least easy to acquire –in order to scale the business. A good example of funding risk affecting returns would be the inability for mobile ad networks/ platforms to raise capital before mobile was “proven” viable (see AdMob’s sale to Google and Quattro’s sale to Apple within a 6 week period). Before those landmark deals, funding sources constantly questioned whether there was a “real” market in mobile, citing the struggling networks who hadn’t succeeded, despite $250,000,000 of combined capital. Several early stage companies faltered for lack of capital, and several other investors suffered dilution from large downdrafts in valuations. An SFO can, of course, prolong the agony by continuing to fund (Fred Wilson’s famous quote here is “I have a 0% mortality rate- I just keep funding!”) but the effect on returns when others do NOT fund, or fund at lower prices, is undeniable.

So, if you are considering angel investing with your SFO be sure to match the risks with the rewards. There are more of the former than the latter!

 For a complete copy of the complete paper, visit the FOA website. 

Holy crap everything is mobile now

Don Draper and the Mad Men gang from Sterling Cooper return Sunday on AMC’s four-time Emmy Award winner, after a seemingly interminable 17 months away.

But a lot has changed in the 17 month hiatus. Not with the sixties, in which the show is set, but the ‘teens in which it is viewed. The Mad Men of the show were trying to grapple with the new medium of TV, which was a big departure from how people were spending time, and how advertisers spent money. They had a raw take on manliness, and a pretty much anti-PC bent to everything that transpired. I’ve written about it before (relating to another Vaux investment). They also wear pocket squares.

But in the here and now, the M’ad Men are on the scene (that’s Mobile ad men, and I’m among them) and there is another mass transformation in process.

Let me try to explain it this way: there is a scene in an early episode where John Hamm’s character driving upstate, listening to the radio (speeding, with a drink and no seat belt but that’s considered period charming). He hears a traffic report (backup on the bridge), and dismisses the information (ending up in a caught in the same). It was just the beginning of how ad-supported media would become capable of delivering information that is both timely and relevant, if not always used.

Today, a larger and larger audience will hear of Don Draper and Mad Men, watch his show, and comment on his show through mobile devices. It is the harbinger of the greatest transfer of time spent since the TV entered Don’s creative agency: out of no-where, people are now spending 10% of their total screen time on a mobile device. People are starting revolutions, looking up recipes, avoiding disasters, and of course watching MadMen videos on mobile devices. It’s going to get a lot bigger, at the expense of most other media out there. There are a few billion mobile devices in the world today, and it’s still growing.

I believe it will set off the greatest traffic jam of all time, in a digital media sense, anyways. Heres how it happened, in grossly oversimplified terms only I could dare to paint!

The publishers may have figured this out first. Companies like Time Inc, ABC, NBC Universal saw their audiences begin to shift. As their inventory of available pages evolved (aka circulation, or eyeballs in digital media speak), their mobile strategies got serious. They monetized through ad networks (see below), then other point solutions (see below also), some even tried to get online ad-networks to work in this new medium. Finally, they concluded that they needed a platform to run and maximize the yield on their entire mobile inventory. Lucky for them, there was one that served their needs.

The Early Mobile ad Networks were the first prospectors in this brave new worked of mobile, and they did well, stringing together exchanges of advertisers and publishers and taking a cut for matching them up. Though a hard business to differentiate in, the early winners were great exits. Enpocket to Nokia for a couple hundred. Third Screen to AOL for a little under fifty. Quattro to Apple for almost three hundred. Admob to Google for over seven. There are several more.

But a funny thing happened in almost all of those acquisitions: I truly believe the buyers really thought they were getting a technology platform that they could scale across their larger organizations, so they paid up. We’re talking billions of dollars in the hopes there was some tech under there somewhere that could give them a commanding lead in mobile.  But when I look at what those buyers are doing with the assets, I have to conclude they all didn’t get that. Not even the recent S-1 filings are all that impressive when it comes to ad tech. Facebook even acknowledged it as a risk- 122 times in their filing.

The point solutions came next into the market, trying to get attention (from anyone!) with their latest idea that would revolutionize mobile. Mobile Thumbprint (the equivalent of an internet cookie), video, full screen takeovers, SDK’s, app networks, real-time bidding and every other feature and business process under the sun has launched, and maybe saw Series A funding. Some were just too early. Most of them tried to give away the farm to get clients, and the VC money won’t last long with that model. Many are starting to top out, and will soon realize they have to bolt onto an enterprise with scale and relationships. It’s not going to be a pretty story as they get caught in the rush.

The Social Networks and social gamers have grown large and influential, but they too are noticing a problem- their audience is spending more and more time on mobile. Facebook is a game changer of epic proportions (here’s my take on a portion of that story) and they have massive advertising revenue from their online sites, but most of the leaders in the field have not figured out how to monetize mobile. If the trends continue (doubtless they will), they will be lined up at the mobile bridge in no time.

The Online ad networks may be themselves facing a rude surprise soon enough as more of their audience bolts to mobile. Online ad servers didn’t translate to mobile for a few very simple reasons, none of which I am about to give up here. But it doesn’t work, or it hasn’t until now and the bigs have been losing customers left and right because they could not get some basic mobile parameters to work. They need a bridge to mobile, and they will need it soon. Tailoring the existing online platforms hasn’t worked. They will need a bridge.

And so, the traffic jam begins to form at the bridge to mobile ad serving. Hundreds of online ad networks have to deliver on a mobile solution, but theirs have not worked to date. The remaining large publishers, and indeed the mediums and the smalls will have to finalize a sophisticated mobile strategy in order to compete as well. The point solutions who have entered the market will have to seek out scale. And they look across that yawning chasm to those that have made the move to mobile and are beginning to ramp (some thirty mobile ad networks, and about thirty of the largest publishers by my count) and they are thinking oh shit, if this trend continues I’m gonna get killed on this side of the divide.

It looks to me like there is only one bridge, and people are going to want to cross it sooner than later. Even a one-hand driving, seatbelt-scoffing, scotch-in-hand Don Draper would see that signpost up ahead.

Note: I founded, with Krish and Dan, and financed Mojiva, owner of the Mocean Mobile Ad Serving Platform. That is the bridge, IMHO.

Fred w phone. No unlimited data plan just yet...

There is a yawning gap emerging in the world and I think this gap will define the advancement of societies, the creation of jobs,  and even the happiness of populations in the decades to come: it is access to mobile data and I call it Flintstones vs. Jetsons. (shout out to April Rudin for the headline).

• Generation segue: Some of us remember Fred Flintstone. Worked in a quarry, drove a foot pedal car. Loved to bowl and eat steaks. Life was simple, and there was not a lot of reason to innovate. Pebbles and BamBam didn’t seem to be a big generational culture gap. A loveable guy in the Jackie Gleason vein.
• And his cartoon counterpart, George Jetson. Worked are Spacely, drove an automated space scooter. Astro walked himself, Rosie the Robot did the chores. Skyped with the office, used the tele-puter on his wrist. Loveable knucklehead is in a fast-moving world, but he kept adapting and he kept pace.

So my point, my belief, is that we have arrived at a crucial inflection point in our history, where people, countries, leaders (and entire industries) are choosing to go Flintsone or Jetson. And the catalyst for this decision is, clearly, the smart phone and the data it generates. The Flintstone are content with how things are. They have found ways to live until now without technology, and they resolved they would coast from here on in, whether in their carreers or their lives. Financial planners are on the list. So is much of the financial services (non retail) industry. Traditional media has hated the transition. KONY is no fan. Nor is Assad, or Mubarak. People of a certain age (but not all!). There are lots more.

Meanwhile, the Jetsons accelerate. The gap has not even yet begun to present itself.

mOcean at Mobile World Congress

If you have any doubt of how quickly this industry has grown, check out the Mojiva/Mocean (I am an investor) booth at The Mobile World Congress. MWC was, five years ago, just a bunch of suits from Nordic and Asian countries wielding flip phones for voice and text. Today, MWC is heralded as the biggest and the best mobile technology event in the world. According to conference organizer the GSMA, this year’s event played host to a record number of attendees, topping out at 67,000 visitors from 205 countries; an 11% increase over the 2011 show. The four-day conference and exhibition attracted mobile operators, software companies, equipment providers, Internet companies and media and entertainment organizations, as well as government delegations from across the globe. More than 50 percent of this year’s attendees hold C-level positions, including more than 3,500 CEOs.

Most telling perhaps, CEO’s were wearing jeans, T’s and blazers…

So here’s the shocker datapoint from cisco: 40% of the worlds smartphone data is consumed by… 1% of the world population. That means a small group of people are gaining an unfair (perhaps) advantage because of their access to information

• The subways are down: take the bus.
• This new place is overcrowded: here’s another local option.
• Gas prices are skyrocketing, but discounted in NJ this weekend.
• This client has spent xxx seconds on the site and is ready to take the next buying step
• Yo Twitter! The rally to unseat the government has been moved to the following sidestreet!

The examples go on and on. A few minutes saved. A better solution for the moment. A bit more background before the interview. A better way, on the way. Compound that millions of times over billions of people and guess what: you have a new gap between the haves and the have-nots. Food for thought before you make your choice between Flintstone or Jetson!

Shields up!

This excerpt is serialized from a whitepaper titled Angel Investing for Single Family Offices (SFO’s) by The Family Office Association and Vaux les Ventures. For a complete copy, visit the FOA website.

I am often asked how I have dealt with risk as an entrepreneur and now more often as an angel investor. Short answer is I have just become accustomed to it, and at least always know when it’s there. Here are a few risks that both angels and entrepreneurs should consider:

Structural Risk must also be considered before making angel-type investments. While there are several angels who’ve become well known with their “spray and pray” philosophy, diversity won’t save an investor if the structure of the investments isn’t optimized. Unless the criteria are to be entirely passive and devoid of value-add to the company, then an SFO might consider putting some basic protective structures in place. These can be as simple as board and information rights for the SFO or one of its angel partners; basic protective provisions in the stock purchase agreement or reasonable valuations that still leave room in the cap table for another, larger investor later on.

Super-long hold periods are a recent – and generally unwelcome — development in the angel market. These are primarily a result of the moribund IPO market in the tech market over the last few years, as well as VC’s managing billions of dollars in committed funds. As a result, most companies are being forced into “hold” periods that can last 7-10 years — without liquidity. The VC’s have a vested interest in funding the company for a bigger exit (as they’re paid in part based on the amount of funds they manage). Entrepreneurs and angels are on the other side of this argument, as many have committed their lives, livelihood, and capital, and continue to risk significant portions of their net worth (in the entrepreneur’s case) and investable assets for the sector (for the angels) over an entire decade of risk exposure. The pressure has begun to release in the form of secondary funds like Second Market and Millennium Technology ventures, which purchase founder and angel shares far before the respective VC would consider doing so.

There are so many risks to being a start up, and those risks can be compounded (and/or mitigated) through how you go about angel investing.

Best rule of all: go in with eyes open!

Not exactly the deal honeybadger

This excerpt is serialized from a whitepaper by The Family Office Association and Vaux les Ventures.  For a complete copy, visit the FOA website.

I am often asked- by both entrepreneurs and angels- about where the best places to find superior deals and superior angels. Well, your hang out Group will determine Your Structure (for better or worse). One of the most important – yet frequently overlooked – elements of angel investing is how an SFO or angel arrives at terms for investing in a company. How you source and who you associate with will dramatically affect how successful your investment might be, regardless of how well the company does.

I’ve always trised to keep an open mind as to where ideas come from, and avoid getting locked into all the same sources.

On this point, here are some things to consider:

EIR Program- “create your own deal” is the scenario in which an SFO has the greatest control over terms. They literally dictate. While this seems ideal for an investor, it does leave out of the equation market forces, setting up surprises if outside financing is ever sought. The venture landscape is littered with rejected companies whose cap tables and governances were reflective of a controlled situation — that don’t fit into real-life market conditions.

Angel Networks drive a unique dynamic in funding companies, often referred to as “herding cats,” a/k/a the Syndicate from H*LL. Companies on the prowl for more investors than they can naturally attract will show up at any number of angel networks. They often pay a premium to present to “qualified investors”, and even endure a vetting process to get into the room. But once they present, something troubling occurs: many of these angel investors don’t have the resources or the confidence to take down the entire round themselves. And so, the company attempts to set the valuation and the terms of the placement. The results are often disastrous, with unwieldy expectations and no one investor to keep them in check. The typical result, especially in a frothy market, is that the angels do deals with terms that are not negotiated with any sort of leverage, and no hopes of control or influence on the future of the company. While some companies do get funded this way, and some angels actually emerge with decent returns, the odds are stacked against it.

The Angel Alliance [or, “Buddy Deal”] there’s one significant advantage to a small group with the resources to do an entire round: leverage. If an SFO is fortunate enough to align itself with a group capable of filling every round, it offers the entrepreneur a solid financial partner that allows them to focus on growing the business. This typically results in enough equity for the angel group to share some with the member stewarding the deal, and still leave room for attractive valuations and reasonable governance structures. If the economics aren’t there, most groups have the benefit of enough deal flow to move on to the next opportunity in the sector (as opposed to the EIR), while still maintaining their leverage.

So, while many angels are wondering how they arrive at better terms on more interesting deals, what they sometimes fail to realize is if they look in all the same places, they are likely to see all the same deals, and all the same types of structure.

Said another way: get out more often!

For a complete copy, visit the FOA website.

Hobbes said it: Nasty, brutish and short.

This excerpt is serialized from a whitepaper titled Angel Investing for Single Family Offices (SFO’s) by The Family Office Association and Vaux les Ventures. Those looking for tales of my latest death defying adventure may find it extremely boring. Entrepreneurs looking for angel, or vice versa, may find it shockingly illuminating.  For a complete copy, visit the FOA website. 

People often ask why I have gravitated to digital media. Point number one might be I have been doing it long enough I have seen enough ways to fail that I might know how to succeed- by process of elimination. But Digital is efficient and Angel investing works best with capital- efficient businesses, where startup costs are minimal but exits are still attractive.

• For example, Manufacturing is tough to justify, as the capital investment is significant, the likelihood of finding other capital sources is remote and the necessity of leverage is likely if the business grows. Likewise, the exit multiples are generally based on historical earnings power and don’t command hefty multiples.
• Conversely, Digital Media has many of the attributes SFOs find attractive for angel investing. Here’s some of what drives leaders like Facebook and Groupon:
• They sprout from vibrant eco-systems that help solve the “cold start” problem and give quick scale without huge capital requirements.
• They leverage the power of the social network and the mobile phenomena that symbiotically drive adoption and always-on usage.
• They enjoy lower development costs as the recession and web 2.0 has enabled developers to launch “minimally viable products” for a fraction of the cost of many launches from even five years ago.
• Likewise, go-to-market costs are dramatically lower than five years ago, a result of the leverage of the global affect of social and mobile media.
• Younger entrepreneurs are starting many of these businesses, bypassing the carrying costs of their more established brethren. “Ramen noodles and peanut butter” have a certain appeal for first time entrepreneurs unburdened with mortgages, tuitions and families to support.
• Digital media businesses typically have global potential for an audience from day one, without the costs of setting up operations in multiple time zones. This is especially true with mobile applications and solutions.
• The jumps from Angel valuations to Series A and even exits are significant for those enterprises that execute well.

Factors like these have generated a significant uptick in interest in digital media companies, but consider a few more facts. Those that succeed usually do so dramatically; those that don’t die in equally dramatic fashion. But, because of the dynamics in the market, one success in the portfolio should pay for more than a handful of total failures, and still leave plenty of return.

Downside of all this is: it’s no secret. Plenty of guys coming to compete in this market. Game on.