Non Traditional Business Investing
MGG Consulting (MGG) helps a lot of diverse start-ups. Many of these stary-ups require seed funding since their value proposition requires initial funding that is beyond their financial means. Having or not having the financial where with all does not diminish a great business idea.
MGG sees many of its clients with one of a kind, unique value propositions they wish to bring to market. Often their products or services solve daunting problems or uncover new commercial opportunities or both. And without that seed funding, coming to market (read, open the doors) will never materialize.
Different Investing Approach
So here’s an approach that an angel investor might consider that differs from his/her traditional approach to where to place their investment bet. Consider a bottom up approach that I refer to as “Seed and Breed”, S&B for short. Many of my ideas on S&B have been inspired by the book, “It’s Alive” by Chris Meyer and Stan Davis published in 2003. It’s a super value read for only $15. http://www.amazon.com/Its-Alive-Convergence-Information-Business/dp/1400046416
The basic principle goes like this. Replace the top down filtering of intense business analysis, focus groups, comparable’s cross analysis and lengthy vetting with a bottom up approach that is faster, cheaper and way more revealing. To help understand what I’m talking about, think of a horse race. Maybe there are 12 horses in the field. You can place your bet on the one horse that your study indicates is the most likely winner or you can split your bet across 3 0r 4 horses.
A Real Life Example
A real life example of S&B is recounted in “It’s Alive”. Years ago Amgen “tripped across” the man made tomato. Amgen decided to internally sponsor open ended research by its scientists to innovate new drugs. Each group was given the same internal budget and turned lose. The result was not a pharmaceutical breakthrough but rather an agricultural invention! Who knew? Who could have predicted this? The man made tomato was born.
The lesson here is that there was NO FILTERING, no top down mandate to work toward one specific objective. No struggling to forecast which scientific team could “execute” and who couldn’t. No lengthy multi stage development and most of all NO BIG BUDGET! Rather the company sponsored a sort of scientific horse race, sat back and selected the winner.
How Angels Choose To Deploy Investments
So take your typical angel investor or angel group. They place sizable bets on filtered lists (entrepreneur business plans and ideas) presented to them in the hundreds per month. They might start out with 500 ideas, spend 3-10 minutes per idea and filter them down to 30 to review in detail. Once they do financial due diligence, they filter the 30 to 5. The five are then permitted to present in person to determine the softer but essential qualities that convince investors of the ability to “execute”. Then ONE is selected.
Statistic Brain http://www.statisticbrain.com/angel-investor-statistics/ reports that the average angel investment (usually made by a group angel investors) is $324,000. Approximately 80% of these investments are made in the seed or early stages of entrepreneurial companies. The actual range of individual company investments is estimated to be from $10,000 to $2MM. This wide range of investment is governed by the owner and his/her team, worthiness of the business idea, its uniqueness and barriers to competition and the speed of investment return.
Lower The Risk, Improve The Odds
Instead of an average single investment of $324,000, an angel or angel group might hedge their risk and target an attractive industry, geography and category and use a S&B approach by investing a smaller amount in multiple companies like $50,000 in 3 similar companies. Create a horse race! Once the winner is revealed invest the remaining balance (from the $324,000) in the company that demonstrates the most success in execution, market penetration, sales, etc.
I believe that this approach is an effective way to deploy capital that lowers risk and increases the odds of “picking a winner.”
MGG Consulting seeks to find investors for its start-up clients after making helping them to become “investment ready” by using a 9 step, consistent process of self due diligence, risk reduction and completely scrubbed business planning.
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