- an interview with Mike Asplin, veteran angel investor.
What’s your idea of a stellar investment pitch? Does it involve experienced salesmen with buckets of confidence? A brilliantly original business idea? Adoption and equity Graphs that look like an snooty giraffe? Not if you ask Mike Asplin an active angel investor with range of startups in his portfolio.
Angel investors and VCs tend to have the sort of sober view of startups that is rare amongst the ‘startup community’. Investors focus on how a company will end up, not how it starts and sadly most startups run out of cash before they make revenue. If you’re looking for investment, try to think like an investor before you reach the first round of funding.
Far from expecting brash confidence, “I value people who are quite cynical about their own ability and the ability of the product or industry” says Mike. His first judgment isn’t even about profit, “I just look at the probability they will reach break-even. Because once you’ve made it to break even you can breathe again, then all these fantastic ideas people have, well maybe you’ll get a chance to explore them”.
And about those fantastic ideas, they’re probably not as central as the hype would have you believe, “it’s more about the people than the idea, and not necessarily experienced people, just hard-working, people who’ve done really good research, people who are quite grounded, not too arrogant”.
it’s more about the people than the idea, and not necessarily experienced people, just hard-working, people who’ve done really good research, people who are quite grounded, not too arrogant
“I hate business plans that say ‘the global market for this is so and so billion people and we only need .001% of it to break even. That’s bollocks. You should never argue a business from how big the “market” is. I look at it the other way round. How many people do you need to break even? And is it reasonable to assume you can get that many? I’d prefer something that said ‘we only need to sign up 10 restaurants to break even’”.
So be wary of setting out your vision for world domination, even if you think it’s what your investor wants to hear. “If you’ve got a convincing plan of how you’re going to make it to break even then you’re standing on solid ground, rather than a swamp, which is where most people are”.
Most small businesses fail in the first year or so because the money runs out. So it’s important to have a plan B. “You’re doing well if you can set how you will go for a slow-growth, low-cost route if things aren’t going well”.
Entrepreneurs, it seems, need to shift the goalposts when they talk to VCs and angels, instead of projecting adoption and growth to the stratosphere, they need a baseline survival kit. “My goal is that one of [my invested companies] doesn’t go bust” writes Mike on his blog.
Avoid the temptations of the linear growth line. Early adopters are not good indicators of future growth, warns Mike. You’ll always find someone who will buy a gadget or some piece of tech. “The problem with tech companies is that someone might be developing the same thing, it could make your idea obsolete by the time you launch, but you don’t know…just because you’ve sold a thousand of whatever it is, doesn’t mean it’s easy to sell 10 million”.
“The trouble is that most business angels see entrepreneurs at just the wrong point, when they’re at the thousand-odd users level. And a lot of startups are valuing themselves at a million, two million pounds. But most of them will still fail. It would be better either to just give to someone in a pub who’s just had an idea and wants two grand, and do a lot of those, or wait for them to IPO and invest a lot.”
“Pre-revenue businesses shouldn’t be worth more than half a million quid, around revenue, half a million to a million”
So why do startups tend to push up their value? Sometimes they need to quit their full-time and start supporting themselves or a family. “There’s nothing wrong with paying yourself when you’ve sold some product. It’s reasonable to raise some money and pay yourself a salary” says Mike reassuringly. “But look at it from an investor’s perspective, if we need to make 10 investments at £100,000 each, when only 1 in 20 are successful, we need a bigger slice of the pie to make it worth our while”.
Of course an investor is bound to say that he/she needs more of a business to make it worthwhile, it’s part of the eternal poker game between entrepreneurs and funds. But if, as a startup, you can start thinking about your business as an investor would, you’ll be better placed to tell an investor what they want to hear when your day in the board room comes.