A 10-Point Start-up Investing Checklist
Hey everybody, it’s great to be back with you. I’m so excited about today’s guest but first, let me give you a brief update on the start-up investing online course. I’ve been working on some free training videos for you guys to give you a flavor for the actual course. Two videos down, one to go. So excited to share these videos with you soon.
I was also in Portland, Oregon for a week and just got back a couple of days ago. If any of you are in Portland, shoot me an email and maybe we can plan to grab tea or coffee next time I’m in town, usually every three months.
Now, let me tell you about today’s guest. I’m super excited to be talking to Brian Church, a start-up investor from Nashville, Tennessee. Brian is a co-founder of Ideashares, a virtual idea incubator, and we’ll talk more about Idea Shares later on the show. Brian is going to share the 10 criteria that he looks at before investing in the start-up. In particular, we’re going to focus on intellectual property. But one of my favorite parts of the discussion was Brian’s high regard for his wife’s opinions and contributions to the decision-making process when investing in start-ups. I know that many of you are married, and figuring out how to bring your spouse into this process is very important. So you’ll get some great insights on today’s episode about this as well. So, here’s Brian. Hi, Brian, how are you today?
I’m doing great. Thanks for having me on.
Well, thank you so much for coming on the show today. Where are you joining us from?
Awesome! I hear it’s a great city. I’ve never been but my sister-in-law lives there so I really need to make it out there sometime.
You do, you do. The music city is happening. A lot of innovation, a lot of music, a lot of publishing. Great town, great people.
Amazing. Brian, we’ve talked before and I’ve looked at your background and what you’ve done; you have so many accomplishments and I’m pretty amazed. You’re an entrepreneur, you’re a consultant, you’re a best-selling author, and you’re also an angel investor and I cannot wait to hear more about your background, especially as it relates to you becoming an angel investor. So will you please share that story with us?
Yeah, sure. Well, first and foremost, I’m a husband and a father of a six-year-old, which I enjoy doing. I have a new agreement in place where I do not make any more angel investments without my wife okaying it. She’s the CFO of the family and she does a good job at doing that. You know, it’s funny; she just has a sixth sense about what can work and what doesn’t. I don’t have that, so I have to take much more metric-based assumptions when deciding on what to invest.
But, you know, I came right out of college. I am a failed football coach. I coached college football for one year and we were 0–10; we were the worst team in the NCAA and I think there was even an article written about that. But I had an opportunity to go work with a company called Putnam up in Boston. I moved to Boston for about three and a half years and eventually landed back down here in Nashville and have always had an entrepreneurial spirit. That came from my father who owned a chain of sports stores and I eventually co-owned a shoe company with him for a brief time that we exited about six or seven years ago.
But I had that itch to really do my own thing and there was a gentleman out of Memphis, Tennessee that helped to finance me to get involved in my first true entrepreneurial endeavor. I’d always dabbled in different things. So started a scratch financial planning business here in Nashville, Tennessee. I built that over five years and then came to an agreement with the gentlemen that financed me for them to continue and for me to exit that to the positive, which was good. I had backed myself into a situation where I was managing 30 people and that wasn’t exactly what I wanted to do. It’s funny how you can work yourself into that position.
But that was my first, I think, positive build and exit. As I began to consult and began writing and doing the things that I’m doing today, it provided me with a little bit of cash and a little bit of freedom that got me very interested in angel investing. I have, over time, invested either time or money and sometimes it’s equilateral in, I would say, about 12 different ventures. As a whole other story, I, myself, have been involved with 11 different start-ups. But in the 12 ventures, you learn some powerful and tough lessons and I have.
So my experience as an angel investor has been for over 10 years. I enjoy it. I love innovation, I love helping companies, and I love hearing about ideas and finding those ideas that are at the earliest stage that I feel comfortable with that I have, I think, enough information to make an educated guess because that’s what angel investing is sometimes, you know?
Yes, I agree with that.
So that’s my story, yeah.
That’s a great story. I want to go back to the very beginning in what you said about you being a husband and how your wife is involved and with her sixth sense is helping you make the decisions. I think it’s awesome because me and my husband have a similar dynamic. When I first got into it, my husband was very interested as well and was pretty active attending angel group meetings with me. But, over time, when I feel like we’re at a point where it’s worth writing a check, he comes in, meets the founder and gives me his sixth sense feeling about it. Like you, no checks get written unless we both agree that it’s going to be a potentially good investment for us.
Well, it’s smart because we can all get enamored by ideas. As we talk a little bit further, I’ll tell you more about my company today and what we’re doing. It’s really that early stage of idealization that we play in. But you get enamored by ideas and I’m saying you do but, look, we all do. I know I do. I get this bright and shiny object of whatever digital, mechanical, electrical service-based business.
So I love the idea that I can start liking the person, then I can go through my criteria - the filter “Is it going to work?” or at least “Is it going to work to get me to a level that I’m comfortable with the risk that I’m associated with?”. But I can’t get by that objective blind spot that’s there.
That’s great; I’m glad that you do that too. What I ask her to do is to meet the founder because she just has that sixth sense when looking at and speaking with somebody and sometimes it’s, “Huh, don’t know,” sometimes it’s, “Wow, I really like that person,” sometimes it’s, “Absolutely not. I will kill you if you invest in that person.” So it’s good to have that.
Yes, and since you mentioned your personal criteria, is it systematic in a way that you can share with us or does it depends on each deal you’re looking at?
Well, I have a set, but there’s an art and science to this, right? I think it’s fair to say this. I try to build as much science around it as possible. But then there’s an art form of just a feel and that really comes down to what like to compare to the analogy of the horse and the jockey. The horse is the idea; the jockey is the person or the team behind it. The art form is really betting on the person - the jockey itself - and that often will get your further.
But, no, I have a science to it. Ideashares is actually a free software as a service marketplace for people who have ideas. We have built over quite a few years of being in the space where Ideashares is a relatively new company. We’ve actually built our own set of algorithms that test ideas and business logic. So just a quick plug, if anybody ever wants to go to Ideashares.com, they can go and take the Ideasphere, which is a room full of tests that will help you test your intellectual property, your ideas, your business model, your digital idea — if it happens to be web-based or something like that. So I always ask people to go and do that first. It’s free, okay? So there’s no reason for someone not to do it. It’s a test, they get a score back, and then a 35, 40 page swat analysis. So it’s nothing but value add and it’s 100% free. Then I like to go over that and walk them through it.
So that’s my starting point but I’ll give you 10 other things that I look at. I’m big on context. What is the context of the idea? Where did it come from? Did it occur because they really, truly solved the problem? I’m working on an idea right now with a gentleman that had an idea from being an exterminator and spraying for bugs; the context was indigenous to his field and that’s important. The company you’re investing in or looking to spend time with or mentor or whatever it is, were they indigenous to that field? I mean, is it a healthcare idea just because somebody thought of a good idea or are they a healthcare consultant that understood the market and how to navigate the different lines of communication and distribution in that market? Context is big for me and I love people who are solving problems in an industry that they’re indigenous to. That makes a lot of sense to me.
I think that’s a great point. I’ve noticed that, too, if you, for example, if you go to business schools and they hold these competitions, sometimes you can just get a feel that the people participating, just sat down and tried to figure out, “Well, what’s out there?” and that doesn’t necessarily come from a context of their background. It comes from just looking around and pulling things out of thin air. So, for me, I totally agree. You’ve got to look at the context and at their background.
Yeah, you do. I wouldn’t want to discourage anybody. I mean, look where Facebook came from. It can be argued that in the original context, Facebook was stolen. But it came from guys sitting around in a room who were bored and literally started a contest of who was prettier. But that’s as important a context as that I had a doctor that figured out a new device to make surgeries easier now in Nashville which is kind of the medical city too. But that context is very important. If it’s a mother that comes up with something that solves a serious problem and also it looks good, that context weighs as heavy for me as if it’s a banker that comes up with the new type of software to solve rounding issues. So that context is huge.
The next one goes along with that. It’s competence. I don’t mean ‘Is this person intelligent?’, it’s not really that. It’s ‘are they competent in the field?’ Everybody’s got an idea for a web app, right? But is this because the person understands the field or do they know anything whatsoever about the endeavor of web dev and developing an app itself and how it will work and how they can distribute it? If they don’t, that competence level is going to be significantly lower for us and we send them to our Ideasphere digital test, again, because if you go through those — I think there’s 45 questions on that particular test — there’s going to be 15-20 on there I wasn’t comfortable with. The first time I got to take the original test when we came out with it, it was like, “Wow, these are kind of tough.” But what we also do is we educate them as we ask them the questions so we don’t just leave them on the cliff.
Back to Ideashares; is it for any specific industry for software or can apply to physical products?
Yeah, literally everything. The original Ideasphere is really for that physical, electrical, mechanical type product for intellectual property that you can hold in your hand. Ideasphere Enterprise is really for a business service idea or to take along with the original Ideasphere because you are turning it into a business. Because not everybody that develops a product really is building a business. Just because you try to go and license it to Home Depot doesn’t mean that it’s really a business. That’s not an enterprise. But if you do want to build a business model around it, you can test that through Ideasphere Enterprise and then we have Ideasphere Digital, which is really for the more web-based and then even Internet of Things. So we have three tests and then an abbreviated test now. In the future, we plan to have as many as 10 to 20 tests. Think of it as a private place that you can go and hold and test and develop your ideas all in one ecosystem and is 100% free.
Wow, I’m thinking about maybe I should run my podcast idea through that and see what comes out.
I run my stuff through it. I mean, that’s where it came from. Again, think of context. This came because we developed an algorithm that we used to call the erimm that measured relevancy, impact, marketability, and manufacturability. The ‘e’ was because we put it online in the form of algorithm to test our own ideas. The biggest and best scoring idea we ever had was the erimm itself. So we said, “You know, we better do something with this.”
Huh, well that’s great. So we were talking about competence and I also think that’s a great point and just made me think that, as a former lawyer, I personally like investing in legal tech but I have a classmate from law school who is now trying to develop this software for e-discovery. Never being a litigator, for me personally, I have no competence in that. So I think you’ve got to dig deeper. You can’t just assume, “I’m a lawyer so I would really understand e-discovery.” No, because I never really practiced in that area. So that’s a good point to remember to always check for competence.
I can completely understand where you’re coming from there. One of the original seed investors in Ideashares is a gentleman by the name of Roe Frazer who owns a company called Cicayda which is in e-discovery, and I had a hard time wrapping my head around that because I didn’t understand the context, right? I’m not a lawyer.
Yeah, I’m a lawyer and I don’t understand it.
Yeah, so competence is big. The next one is confidence. They really have to believe in what they’re doing. If they don’t believe in themselves and the product — and, again, when I say product, it could be a service and it’s still a product. You’re selling something whether it’s tangible or not or digital or not. Even if it’s a book, it’s intellectual and it’s still a product. But you’ve got to have a high level of confidence and that’s why we set up the tests the way we do. It’s not just for testing and to encourage you to move forward or not and to provide a score, but it’s also to build that confidence level because you should be confident. There’s no such thing as a costless start-up. You should be confident to go and spend that money and get to that friend’s family round and your own money round before you start going to the next level which is angel investing. Because, until there’s traction, quite frankly, people don’t invest in ideas, right? They invest in traction or, at least, we hope they do. But I’m looking at confidence, that’s a big thing for me and if they really and truly believe in what they’re doing.
The next thing I’ll look at is something I like to call intent. What is their intent? People may call that an exit strategy. I just want to know what their intent is. That’s where you can sniff out the delusional nature of the entrepreneur and go, “Hey, I want to build a Fortune 100 company,” “Well, that’s great. Maybe that’s possible but prove it to me.” Or if it’s someone that’s looking for an exit in three years and there’s three competitors that are very natural acquirers for the business, we love those because they get my money back sooner. But I’m always looking for the intent and the fact that they truly have an answer. We all know that there’s probably going to be a pivot and they’ll never end up like any of us thought it would. That’s the way business goes. But that there should be a very clear intent and hopefully it lines up with the intent that I’m looking for. That’s part of my criteria.
The next thing - and I kind of have them in two different categories - is what I call resources. Resources is team; resources is current money. I look at how many resources and the time that they’ve already put into this. It’s satisfying really, the other things that we’ve talked about. But all of those resources that are around them, money is just one resource. I want to know that they have time and country. Do they have traction? Is there a team? Do they have more money or are they just praying that they get capital from me to keep going? Because that’s not a good sign. Yeah, of course, they need capital to move to the next level or scale but I’m looking at those resources. So those are the more business side of the things that I really look at.
Because I deal a lot with intellectual property, a lot of folks come in. We’re working on a project right now called ‘Dana Baby’ which is fantastic. I can’t tell you all about it but it’s a new child clothing feature that we think is going to be incredible. It’s very patent-able. But when we’re looking at a product and whether or not we either want to help these people go to the next level or we’re going to invest in or I’m going to invest in it personally, I look at these five things. So these are the final five.
But wait…there’s more!
This post has been adapted from the Angel Investing with Tatyana Gray podcast.Listen to this recent episode for more great information from BRIAN CHURCH!
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When Tatyana learned that out of almost 9 million accredited investors in the United states only 300,000 (about 3%) were active angel investors, she made it her mission to attract, educate, and inspire the next wave of angel investors in this country.
As a new angel investor herself, Tatyana loves to learn the craft of investing in startups from experienced angel investors. It was only natural to share this process with a broader audience via her Angel Investing podcast.
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