Are demanding angels demanding the right thing?
Much is made of the difficulties of being an entrepreneur, including the folly of attempting. Most are a poor fit in that role: they are ill-suited to successfully adapt to the rigours of building a new company from the ground up, introducing new products into new markets, with new people doing the work in a new organization, particularly when burdened with seeking funds from investors.
Much is said about demanding angels and the often apparently endless chasm between question after question and the cheque being sought. So much is said that many entrepreneurs choose to raise funds by making sales to customers, a wise choice, especially if angels are demanding answers to the wrong questions. In my view the burden rests with the entrepreneur to focus investors on asking the right questions to which the well prepared entrepreneur has the responses, enabling the let’s get this deal done rhythm to be unbroken. For many funders and founders this point of view will be novel.
In the following paragraphs we sketch out what this type of interaction could look like from a funder’s perspective, The Live Fire Fund. Our sketch contains some specifics of that would be expected of a well prepared entrepreneur seeking not only funds but the right kind of money from the right kind of people asking the right questions; demanding angels asking the right questions for both parties. The thrust leads to far fewer deals considered but a far higher percentage of them being funded. The odds of a founder finding early stage funding range from 3% to 8% of those approaching a demanding angel in Canada and the USA. An old engineer’s drive for efficiency never fades away, even when it means he too must become more efficient.
Do you share our view that were the Live Fire Fund live, founder and funders would be better off? Why or why not?
LIVE FIRE FUND SYNOPSIS
Investment Approach
Deal Generation. Relying on The Kemball Group’s extensive contacts within the angel community, initial promotional efforts will be made within that community accompanied by promotional efforts in Ontario via Ontario Centres of Excellence, plus IRAP and BDC’s network to which the Fund shall have full access including the contents of their client data bases.
Deal Screening. All prospective investments will be required to provide a Critical Factors Assessment Report ($1,500) and for the CEO a level of work capability assessment ($2,500) plus profiles from Optimax and Plum of all C-Suite members ($700) accompanied by c.v.’s arranged in chronological order. A Value Proposition incorporating the jobs to be done approach as contained in Value Proposition Design by Osterwalder will be required as a minimum to provide a foundation for discussion of the business potential. A Business Canvas will also be required of firms with an initial round of equity funding. (The longest lead times for production of these basics for collaborative due diligence are expected to be from the latter two requirements.)
Receipt of a complete package containing a founder CEO with a current level of work capability able to create a business model — Level V — will be placed in a priority queue, with top priority to applications with CEO’s who can evolve to Level VI and who wish to perform the work required of a CEO. We anticipate that this will be an unusual event. In such cases to secure participation in an opportunity The Fund will provide interim funding support with a self contained exit independent of the investment outcome, e.g., advances against refundable SR & ED claims submitted and work in progress.
The General Partnership will conduct at least one in depth discussion with the key team members, preferably on site, to decide whether or not a term sheet should be issued and negotiated prior to conducting due diligence. A key factor in the discussions will be (i) the duration between the advance(s) of funds; (ii) the advent of the first royalty payment; (iii) the quantum of each payment; and, (iv) the number of years over which they are to be paid.
Investment. Following completion of collaborative due diligence, including reference checks on the individuals, IP assessments by a qualified party and financial statements, and agreement on an approach to building the organization required, all prospects becoming portfolio companies, that is offered and accepting investment will be required to: a) implement a cloud based financial system with full access rights for the General Partner; b) retain a part time contract Comptroller and or CFO acceptable to both the CEO and the GP; c) operate a hiring and recruiting process based upon Level of Work with design of the organization structure and roles and responsibilities and exercise of accountability for performance in accord with Level of Work and other concepts of Elliot Jaques; d) form a Formal Board of Directors of five to seven, containing only the CEO as a voting member from the C-Suite but not Chair, establish Board roles — expected consulting to the CEO shall be distinctly identified; e) provide all key contributors within the firm and external coaching based upon their profiles and that of their direct reports, peers and managers. Mentorship is a personal responsibility.
The fund shall make 25 to 50 investments including follow-on rounds, resulting in at least a six year investing period. Exposure of LP through the Fund to any company shall be limited to $2M.
Exit Provisions. While the default exit option will be a defined continuing stream of royalty payments, from time to time the fundamental economics of some investments can be expected to warrant a sale of the firm. In this instance when, particularly when those in whom we invested are no longer in control, the Limited Partnership will require a buy out from the proceeds of the sale in cash yielding an amount providing an ROI to the LP of 20% and or a multiple of ten on capital invested, generating an equal gross amount for the General Partnership. In such cases, the LP shall obtain a return of capital with the balance remaining in the Fund.
General Partnership Structure
Full partners will have to be functioning at a cognitive level of work capable of manipulating a business model {Level V} and associate hires will have to be functioning at Level IV at the time of hiring and can serve only as observers on boards until they evolve to Level 5.
It is preferable the founding managing partner be expected to evolve to Level VI within less than a decade.