Filtering My Angel Investments

I love early stage startups. So much so, that I will sometimes invest my own money when the startup is not much more than a few bright people with an idea. This is called angel investing.

I have the following currencies I can offer early stage companies:

• Money
• Time

I decided long ago that I would separate those two currencies. I did this partially because , when I worked at Microsoft, it was impossible to find the time required to provide meaningful help. But also because I intuitively believed the value I offered and the expectations of the startup were different in each case.

I don’t have a lot of filters to apply to coaching/mentoring. Basically, if the mentee is willing to work on the mentor/mentee relationship and I like the mentee (a highly subjective measure across many dimensions) I’m willing to put time in.

However, for where I put my money, it’s a very different story. My filters change over time, but right now, given the current economic climate, industry trends, etc… I have the following filters.  I will not invest in early stage companies that:

• Sell into the enterprise.
• Sell into small businesses.
• Expect to make money from consumer subscriptions.

Notice how these have nothing to do with technology or product? Building a product and building technology are easy. Not as easy as just having an idea, but easy compared to:

• finding customers
• selling to customers
• getting customers to pay

I have never, personally, been involved into either selling into the enterprise, or being an enterprise buyer. I simply don’t know how to do it.  But I do know, from watching from the sidelines, that selling into the enterprise is far harder than it looks. The sales cycles are extremely long and who you have to sell to varies widely. The experience I do have building enterprise products (networking, storage, and management) has taught me that I find the business side of this space excruciatingly boring for me.  So, I’m just not interested.

I have spent a great deal of time building products (and attempting to sell/market them) for small-businesses (e.g. Microsoft’s Small Business Server and Windows Home Server).  Without a sufficiently motivated channel (such as the VAR/VAP channel Microsoft uses to sell Small Business Server) the small business space is simply too broad, fragmented, and fickle for a startup company make serious inroads. I love products that are pain killers (v. vitamins) and the small business space is full of pain, but without a leveraged channel I’m not interested.

Annuity business models where a subscription fee comes from the consumer are very attractive. Who wouldn’t be enamored with the idea of having a bazillion consumers regularly paying you $9.95 a month for nothing but bytes?  However, the math rarely works out. The combination of extremely high subscriber acquisition costs, monthly churn, and consumers who are demonstrably adverse to paying yet-another-monthly fee means there are few (if any) proof points of subscription based businesses that do not involve a physical asset (such copper wire).  Subscription businesses like this need to spend tons of money up front on marketing to hopefully get a return down the road. I’m not patient enough and there are plenty of business ideas where the consumer pays up front or someone else pays (like advertising).

If you want my help, you are smart, you know how to execute, and you have a great idea I’m happy to meet and try to help. But don’t expect the conversation to be about me investing if the above “filters you out”.

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