Lessons learned 2018?
Another year in the bag for Angel to Exit, and as usual, it's time to review the good and the bad. These would normally be lessons learned, but I am not completely clear that I have learned from many of them...
First the numbers:
We had a lot more applicants in 2018 than 2017. Something like 50/mo, not including folks we already knew or met directly.
Of these, we ended up with about 6/mo presenting, but stopped for 2 months to not get overwhelmed with advisory boards. That's a total of about 60 companies. This was slightly larger than originally planned, but in line with our updated plans at 6 months into the year.
Of these, ~12 ended up with Angel to Exit advisory boards. This was on plan.
Of the ~12 companies now with us for 9-12 months, 4 got through internal diligence with the decision to get outside equity funding. Three of them have such funding today, and one is still working on it, but is cash flow positive and might grow their way out of it.
Of the remaining ~8 companies, ~4 are not going forward with their original business idea, a side effect of looking into it more deeply. Another ~4 are proceeding with "life style" companies - proceeding without outside equity objectives (for now) and operating with some level of income as they mature.
Our current portfolio size (all investments not yet exited) is 23, but of those, 3 are essentially dead and unlikely to recover, leaving 20 with real potential for success.
Of these, ~8 have produced enough to give small positive cash flow to us over the last year. At least 3 of them have reached thresholds where they will start paying for advisory services in arrears and going forward in 2019. Another 2 are currently in discussions for additional advisory services after completion of their previous terms.
Why are these numbers approximate? (~) Because the time frames for when things happen is always in flux. Things do not happen on a month to month clock, and some of these things change over time, and we are not in day-to-day touch with all of them. Most historic companies give us quarterly updates, but some don't communicate nearly as well.
What caused the failures? We found three main issues over the last year - across our whole portfolio:
Co-founder issues: It seems to be a pattern. When there is more than one founder, there is likely to be trouble between them in the tough times. This is, I think, related largely to the early stage and limited experience of the founders we deal with. Of the 4 not going forward, two had this as a part of the problem. We see many companies coming to us asking about the need for a co-founder, and many folks seem to think that two founders are required for success. But in our experience, this leads to more failures than successes. Yes you need a good solid team for many companies, but more than one founder almost always seems to lead to issues as the expectations of each fail to meet the other.
Cannot deal with the numbers: Essentially all business failures we deal with result from lack of positive cash flow and runway. No surprise there. You run out of funds and give up. Sometimes it's because of inadequate sales, sometimes because of too much expense, but it all relates to the numbers. But an underlying cause we find, and others have told us they find, is a lack of clarity around and understanding of the numbers. We provide a cash flow modeling tool (a simulator rather than a spreadsheet) to portfolio companies, and of course after starting with this, many use tools of their own creation as well. We find that the ones who do this level of analysis, so far, have not died. We believe that this is a core issue.
Emotional issues: There is no question about it. Starting, running, growing, and/or failing in a business have a very substantial emotional component. The maturity of the key personnel and the stability of their family life are very often at play. Several of the successes and failures have encountered these issues this year and every year. A key part of advisory services has to do with dealing with these issues. Of the successful (so far) companies, more than half of the CEOs have faced periods of personal crisis related to, or exacerbated by the business. It seems inevitable that a good advisory board will have to help founders get over some personal crises related to the business. This ranges from a death in the family, to fires taking homes and business locations, to trouble between spouses, to illnesses, and on and on. Surviving these issues and deciding to succeed regardless, as you approach the ground with engines flaming out, seems to be just part of the game.
Creative solutions and old favorites:
I spend a lot of time thinking through potential changes that can help my businesses succeed or improve. And on advisory boards, we do much the same thing, taking advantage of the group and our joint experience to find and vet more approaches more quickly.
But the things that help most in getting through crisis periods tend to be the old favorites. Here is one for each of the failure modes identified above:
Don't listen to the folks who tell you to get a co-founder. Get a good lawyer instead: This is actually two separate pieces of advice. The first one is obvious. If they tell you it takes two, they are wrong. Most successful startups end up with a team, but you do not need a technical person and a business person to succeed or to start. But more importantly, if/when you decide to co-found, you will need a good lawyer to make a good contract so the one(s) who work harder and do more toward the success will be able to jettison the other one(s), giving them their proper due, without destroying the company along the way.
Spend more time and effort on the numbers: There is no way around it. If you don't have a "head for numbers", decide to develop one. Tools can help a lot, but the tools do not solve the deeper issue. You need to understand how it works, why it works that way, and good vs. bad numerical decisions. There are plenty of other decisions, but if you make a bad deal, or worse yet, a scalable bad deal, you may/will find your business accelerating toward failure, and it will often be too late to pull out of the crash.
Find advisors who have been there and suffered themselves: I see a lot of folks who think they want advisors that have made it big. I think successful people are good people to have on board. But how they got to success is important to understand in selecting them for your company. You will get better advice from folks who have had crises themselves and overcome them than you will from folks who made it big on their first venture and have lived off of that success since. Long-time big corporate, government, and academic folks are often good at what they do, but that doesn't mean they can provide the sort of emotional understanding and toughness associated with helping succeed as a startup or growth CEO.
We always hope to learn from our experiences. We hope to share our learnings with you. Our plan going forward is to scale a bit - but to focus on companies with more of the properties we find successful.
Our goal is to help grow companies. We do this by learning from you and helping you learn from us. We hope you enjoy reading our articles and watching our videos and hope that the coming year will be all the more successful for all of us.
Copyright(c) Fred Cohen, 2019 - All Rights Reserved