I recently attended a seminar put on by Infusion Angels at the University of Waterloo. This group of angel investors did a fabulous job covering what is involved in obtaining angel and venture capital funding, and what you absolutely need to be able to answer. Half the presentation involved others making pitches to us as a crowd, pretending that we were venture capitalists. Very enlightening experience.

There was a whole lot to be learned here, but the biggest take-away from the whole thing was a list of the top five things venture capitalists look for in a desirable investment. As an entrepreneur you should be hitting every point in your planning even if you don’t intend to seek venture capital, as these are key criteria for an idea that has strong chances of success. Here they are in no particular order:

1) Exit Strategy

This is the number one point actually and the presenters emphasized it very heavily. You absolutely must know how you will cash out and get the big upside from building the business. Venture capitalists and angels are looking for approximately a 10x return in 5 years on their money, so your venture must be able to provide this. A popular exit strategy is being bought-out by a massive competitor or partner, such as the Web 2.0 companies who have been or are hoping to be aquired by a giant like Google. Other strategies like going public or simply liquidating the business exist, but remember that ultimately your exit strategy has to have data and some realistic thinking behind it.

2) Entry Barriers

A great idea is a start, but you need to be able to show that you can stay in the game after the cat is out of the bag. Who will your competitors be? What protects you from a much larger company entering the market with their own product and wiping you out? The stronger your entry barriers the more of the market you can reasonably expect to claim and the greater the chance your company will be around long enough to get that upside.

This was a really interesting one to look at when the people who volunteered to pitch their ideas presented. Patents came up a couple times, as well as some strong legislation banning an existing product. My favorite response came from a really cool laser technology start-up. Someone had asked about the risk of another researcher coming up with a similiar technique tomorrow. These two folks pointed out that their product required high expertise in a number of complex fields, and that very little research was being done in the area worldwide. Furthermore their prototype already worked and the venture was ready to build a fullscale machine as soon as they received funding. This placed statistics and time on their side.

3)What is Product/Service Similiar to?

This was a point I had never really heard before in terms of what VCs are looking for, but it makes a lot of sense. Your proposed business should have similiar ideas out there, or be a combination of similiar ideas. This provides a reference point for the potential investor and allows you to show a proven market.

If you have a really novel idea you can certainly still get funding, but this uniqueness can actually work against you.

4) Existing Revenue

The general rule presented was that angel investors don’t require revenue to be present, but venture capitalists usually do. This ties back to a mistake that entrepreneurs often make - seeking out venture capital funding too early. It’s not all about making the VC happy either. By having real revenue coming in at the time of investment you will also protect more of your equity in the business. This is very important as your VC will end up owning most of the company.

5) How Much Money Do You Need? For What?

You not only need to know that you need money, you need to know how much and how you will spend. The VC will be looking for realistic estimates that show you have a real idea of how much your product will cost to bring to market. Don’t forget the operating expenses, marketing, and legal fees that will accompany your venture. One very good pitcher suggested that she and her partners will work for free until the product is selling. The presenter immediately pointed out that an investor would much rather put a few extra hundred thousand into a multi-million dollar investment and have you concentrating on it fulltime rather than working elsewhere too. So include a salary for yourself!

Another very interesting point was brought up here too - venture capitalists like to hear large numbers (not necessarily true with angels). A VC is obligated to invest a certain incredibly large figure in a very short period of time, and larger investments mean this can be done sooner. If your company puts $20 million to good use, that’s 4 $5 million start-ups that don’t have to be found.

Conclusions

I’m glad I attended this talk and I hope my recap conveys some of the very important information covered. It’s always important to understand where the other side is coming from in business, and in this case real investors were explaining what really matters. None of the presenters hit all five points completely even though some of these were ideas that had already been highly successful pitches in new venture competitions. It’s easy to miss important details and the best way to be prepared is to hit this criteria long before you are seeking funding.

Big thanks to Infusion Angels for putting this event on. They are a Waterloo, Ontario company located at the University of Waterloo’s new Accelerator Centre. Give them a shout if you need funding for an idea.

To my regular readers: this is a little off what I normally write about, but it’s my blog and I reserve that right!

Software is a strange creature because it can never be perfect. In fact part of the trick to successfully deploying a great program is applying the 80/20 rule (or whatever ratio applies to you) to bug fixes in order to not waste prepostreous amounts of time and money fixing that last little glitch. Simultaneously a buggy program quickly loses its usefulness, so there must be balance between being perfection and being lousy. I’m here to offer one very important distinction to aid you in restoring this balance.

If You Are Going to Fix It, Do It Right the First Time

It’s very tempting to hack solutions in when you need something extra in your software, be it a traditional desktop application or a web application. Doing it right can often be costly in time and money, while a hack can take five minutes and save the budget. We can always redo it when the resources are available right? Well time moves on, the hack is never fixed, and slowly more and more of the code and users begin to depend on the hack. The amount of fixing that now needs to be done begins to multiply and pretty soon your little lifesaver is eroding the entirety of your application.

I’ve fallen victim to this more times than I can count. I recently spent all weekend fixing design problem in user management code that I wrote three years ago. A lack of foresight has required almost completely gutting the existing code and corresponding access routines, leaving me with gobs of dependent code that now needs to be fixed. The past can come back to haunt you, and when it does the cure is now much worst than it was in the past.

It Comes Back Down to Design

Whenever introducing a new feature or beginning an application, careful attention must be paid to the design. Ultimately you want something that will not only work well when its released, but will also be able to have the needs of the future easily integrated into it. I’ve been rewarded heavily for my foresight when I began a site framework years ago, because that base code, including the very first file that was ever written for it, is alive today and thanks to its modularity and high expandability it doesn’t feel dated.

Here are some general rules to check for to make sure the code that you are about to write is going to be a very sour gift for your future self:

• Flexibility: Don’t write a module that can only add a specific column of data when it’s only slightly harder to make it work for any column. Providing a reasonable amount of generalization encourages re-use which in turn lowers the amount of bugs that can creep in (as you aren’t duplicating the same functionality over and over).
• Modularity: If you aren’t writing a highly modular application that can easily have functionality added and decoupled then you are putting yourself at a tremendous disadvantage against nimble competitors like Google who completely redefine expected behavior and functionality overnight (see why GMail is destroying Hotmail). I like code that behaves like LEGO blocks.
• Sanity: My all-encompassing description for code that makes sense. This means avoiding strange solutions for problems (typical result of micro-optimization or laziness) and writing intuitive self-descriptive code. You should be able to look at the code years from now and have it make sense.

What you do in the present should be for the purpose of building up your future, not leaving future self a mess to clean up. This applies to software!

I came across an interesting book the other day titled the The Da Vinci Method, not to be confused with the controversial bestseller of similiar name. I haven’t had a chance to read the book itself but I sure did read about it and found the argument it poses very interesting: entrepreneurs typically have ADHD - attention deficit hyperactivity disorder. The primary characteristics of ADHD are inattention, hyperactivity, and impulsivity.

The book’s website claims the following entrepreneurial and inventive people had it:

• Richard Branson
• Bill Clinton
• Albert Einstein
• P. Diddy
• Ben Cohen
• Thomas Edison
• George Lucas
• Bono
• Walt Disney

and of course many more. The core of the argument is that ADHD people have personality attributes that greatly aid in entrepreneurial success. I’m on the side that ADHD is overtreated and I’ve never been convinced that milder cases of it are necessarily a bad thing due to the positive attributes it can provide, the most important of which is a very different outlook on one’s situation. ADHD people tend to get deeply involved in things that interest them, but have difficulties focusing outside this sphere of interest. They are also prone to starting multiple projects and constantly coming up with new ideas. All good things for entrepreneurs. This about.com article by Eileen Baily has a nice correlation of how ADHD relates to entrepreneurship:

ADHD Distracted-Seems to always have something new to think about.
Entrepreneur - Constantly has new ideas for how to improve the business

ADHD - Starts several projects at the same time, may not complete any of them.
Entrepreneur - Flexible. Approaches problems from several different angles, always ready to change direction if that is what is needed

ADHD - Distorted sense of time. For example, will spend hours playing a video game without realizing how much time has passed.
Entrepreneur - Immerses him or herself in the job and often does not realize how much time has passed

ADHD - Visual thinkers
Entrepreneur - Visionaries who paint a picture for others

ADHD - Hands-on learners
Entrepreneur - Hands-on managers

ADHD - Hyperactive
Entrepreneur - Always on the go

I hate self-diagnosis but I definitely recognize these attributes not only in myself but other entrepreneurs I know. People are always shocked when they learn how terrible I am at math despite being great at other analytical and logical areas. The reason is very simple though - I have about as little interest in the subject as I humanly can. This creates a double attention problem as I am simulateneously not interested in the material and my brain starts pummeling me with great ideas for areas that do interest me, such as my business. For differential equations I had a tutor every weekend who was there just as much to keep me focused as actually explain concepts.

I did some more research (typing words into Google) and came up with a PDF titled ‘ADHD’ or ‘Latent Entrepreneur Personality Type’ that goes into things in greater detail. It has a terrific description of ADHD, a redefinition of ADHD as “hunter genes”, and explanations of how ADHD works. The hunter concept is really neat:

Hunters will take some personal risks to catch
their prey, while those with peasant farmer
genes would prefer to stop for a strategic plan.
This behaviour is seen as impulsiveness and
risk taking. These are both qualities that lead
to successful entrepreneurship. Too much
focus on business planning actually reduces the
likelihood of business success. Instead
successful entrepreneurs iterate between
doing a little planning and then taking
action in a constant process of learning
while doing.

The hunter may get hurt when they pull down
the prey, yet the next day they will do it again.
Consequences lead to awareness of the risks
but do little to stop them from taking those
risks. For ADHD children this means that the
normal behavioural modification technique of
applying natural and logical consequences has
little effect. This characteristic can also been
seen as resilience to setbacks, a critical quality
in entrepreneurship. Highly successful
entrepreneurs will typically have a string of
failures behind them, but they won’t perceive
them as failures. Instead they will see these as
a series of learning experiences.
2003 - Deb Gilbertson

It’s ironic that the same characteristics that make it difficult to succeed in school can also be the ones that lead people to do great things. Yet another reason why the education system in western civilization needs serious reform, a topic for another day.

Summary of Materials I’ve Found on Entrepreneurs and ADHD

• about.com - The ADHD Entrepreneur
• The Da Vinci Method
• ‘ADHD’ or Latent Entrepreneur Personality Type? (PDF) - very interesting