Article from TechyVent/Pittsburgh
by Peter Longini
Angel investors, particularly those high net worth individuals who have been burned by soured investments during the past few years, are still on the lookout out for deals, according to Mel Pirchesky, founder of Eagle Ventures. But they're looking for great deals, not just good ones. Today, warier but wiser, these investors now know the difference. Problem is, it's sometimes hard to tell the two apart - particularly when you don't catch the real significance of what you're hearing in a short business presentation.
That's where Pirchesky can sometimes help. "The biggest challenge for me is finding great deals," he said. "They're hard to find. It's very common to find a great deal disguised as a good deal. And to get at whether or not it's really a great deal, requires a particular process. "All it takes to differentiate a good deal from a great one is for one critical component to be missing. So if the entrepreneur says X, I'll dig in there to see what the significance of X is. When you get in there and poke around - unless there's a fraudulent situation, which is pretty rare - the pimples on a deal will be obvious."
Huh? It's awfully easy for investors to miss the point of a new business pitch.
Pirchesky is not embarrassed to admit that he frequently misses the point of a business pitch he's just heard, and so do many of the other angel investors he works with. That isn't surprising, given the highly specialized nature of those businesses and their founders' views of its prospects. But he is convinced that the way for prospective investors to distinguish good businesses from great ones lies in the way the company's story is told. "I almost never understand the significance of what the entrepreneurs are saying. And neither do the high net worth individuals. However, if they are articulated differently, maybe you can come to understand it. When you dig in, you can find out whether or not X has great significance."
Your mother. Unless you'd ask your mother to invest in it, don't ask an angel.
"Initially, only the entrepreneur knows in their heart whether it's a great deal - the kind of deal you'd tell your mother to invest in if they had the money. So if you have a great deal, and you know it's great, but you're not getting funded, it's in the articulation. Somehow or other, people are not understanding. They hear what you say in your presentation, but they don't recognize the significance of what you say. What entrepreneurism is really about is having them understand to their bones. It's not easy, but it's that simple."
A strong presentation is one that gets at the essence of the deal across in a clear manner, and that deals with the risks in a way that they're understandable, he said. "What makes a great deal is that there are a lot of pluses, and the negatives seem to be appropriately managed. What I do is figure out how to articulate that clearly. I've been around investors for 35 years, so there's a bit of experience in my understanding of how investors listen. So even though I hear somebody, it doesn't mean I understood to my bones what they're saying. I work with them on that."
Elevator stories. Good ones are critical, bad ones are common.
Compelling elevator stories - one- and two- minute persuasive pitches
for the company's core concept, are critical, according to Pirchesky.
"If you can't catch somebody's attention right off the bat, shame
on you, especially when you're selling a concept. You've really got to
practice that and have it be clear and effective and concise. Pretty much
everybody acknowledges that there could be a vast improvement in what
they're saying, and in how they're saying what they're saying," he
Pirchesky, who grew up in his family's Mon Valley scrap yard business guarded by a vicious three-legged dog named Blackie, came to understand at an early age that in any enterprise - whether it's a new medical device, a home grocery delivery service, or a salvaged Dodge fender - establishing a fair value for the product, service, or company is fundamental to any business transaction.
"Some people are bottom fishers looking for steals. But most angel investors are looking for fair value, although 'fair' is in the eyes of the beholder. At the same time, although you might think valuations are a function of future cash flow, or present value, or a function of historical investments, of cash, or sweat equity, at the end of the day, it is a willing buyer, willing seller determination. Period."
The chasm. A lot of entrepreneurs fall in without ever realizing it.
The concept of a time lag separating the early adopters of a breakthrough product from its acceptance by the mass market - a concept popularized in Geoffrey Moore's Crossing the Chasm, was also important to understand, according to Pirchesky. "The greater the leap, the greater that gap; you can count on it. In venture capital, it's nothing unusual for it to be a big leap in technology - a paradigm shift or whatever you want to call it. What people forget is in their projections they don't really plan for that. They always project that when their product hits the market, boom, right out of the box."
"Every field is that way. When your company starts selling its product, you have those first couple of sales, and then it trails off, it doesn't jump. And you're saying what's wrong? Really, nothing. Except you think there is. Until you realize this chasm thing."
That lag - which can puzzle, distract, and demoralize people in any industry
- is simply a fact of life, according to Pirchesky. Even the greatest
product - particularly if it represents a real breakthrough - will take
a while to catch on. "Nothing sells itself. You've got to have feet
on the street. You've got to get them to use it five times before it starts
to become a habit and they start using it," he said.
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