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Conversations With Investors Chapter Two

Conversations With Investors Chapter Two

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Every investor is different – they have different backgrounds and approaches to the process. This is one of the greatest lessons that founders need to learn. Each investor has a common characteristic – they have money to invest.
Every investor is different – they have different backgrounds and approaches to the process. This is one of the greatest lessons that founders need to learn. Each investor has a common characteristic – they have money to invest.

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Published by: Dr. Earl R. Smith II on Jun 15, 2010
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Conversations with Investors - Chapter Two
Dr. Earl R. Smith II
 DrSmith@Dr-Smith.com www.Dr-Smith.com 
J. S. Gamble, Founder and CEO, Montis Group, LLC
 In this series of articles, I describe several discussions that I had with investors in theWashington DC area. They range from angel investors to senior partners in wellestablished funds. I have known most of them for many years. That allowed us to cut through the usual PR crap and get to the heart of the process of reviewing investment opportunities. When I told them that my objective was to provide a series of articleswhich would help companies seeking funding, each was very willing to help  it is, afterall, in their interest to improve the process. I owe each of them a debt of thanks foragreeing to sit down and open the kimono so to speak.The first article in the series  Conversations with Investors Chapter One  focused on Jim Hunt of The MITA Group. Jim is afairly typical angel investor  a successful entrepreneur who hasturned to investing on early-stage companies. My next interview waswith a close associate of Jims whose background and experiencemakes for a different approach.
vive la différence
 Every investor is different  they have different backgrounds and approaches to theprocess. This is one of the greatest lessons that founders need to learn. Each investorhas a common characteristic  they have money to invest. But their life and businessexperiences are always more important than their bank balance. In the first of thisseries, I emphasized the need to match the investment opportunity to the interests of the investor. Many meetings are wasted because founders did not take the time tomatch their opportunity to the investors interest. The lesson for this chapter is the needto match the presentation to the experience and tendencies of the investor  to realizethat each investor is unique and will respond better if approached in terms theyunderstand.
 Visit with an experienced analyst
 I have known JS for a number of years. He is Founder and CEO of Montis Group, whichis focused on investing in and advising Early Stage Technology Companies. JS is an Advisory Partner of The MITA Group. In addition, he is a member of New VantageGroup, the Active Angel Investors of Vienna, Virginia, and a member of the Capital Access Network at the Dingman Center for Entrepreneurship at the University of Maryland. He is currently working with a dozen like-minded private investors to form a
Group of Angel Investors focused on more active engagement with their portfolioCompanies.JS has a more academic bent when it comes to analyzing investment opportunities. Heearned an MBA in finance at Wharton and is very experienced at building and testingfinancial models. As a result, he is murder on unprofessionally drawn business modelsand financial projections.Currently JS is invested in or actively engaged with several early stage Technology andService Companies in the Mid-Atlantic Region. He served as Acting CEO of Smart Imaging Systems, Inc. and as an adviser to Agilyst, Inc., Semantic Labs and WiserTogether, Inc.Prior to founding the Montis Group, JS was Senior Operating Executive in BroadbandCable and SVP of Wireless Operating Units with Comcast. He has more than 15 years of Full P&L (up to $1.2B in Annual Revenue) and CapEx responsibility. He hadresponsibility building teams focused on innovation, improving execution and launchingnew products and services to drive revenue growth.Way back when, JS spent several years on the professional staff of McKinsey &Company, Inc. and Price Waterhouse where his clients were primarilytelecommunications companies. He also served in various roles with GTE Mobilnet (Wireless Operations).
The Initial Screen
 We met at Old Glory in Georgetown  a bourbon house that offers tables with a fineview of M Street. After chatting about deals that we were each involved in and peoplewe knew, I turned to the interview. I told JS that I wanted to focus on how he decidedwhether or not to make an investment. My first questions was, What percentage of thedeals that come over the transom do you discard out of hand?He knew that I had already done an interview with Jim Hunt; so the first response wasa question. What did Jim say? I grinned and said, now, now  no cribbing. Ill tell youafterward. That was the first lesson from the interview. Angle investors in a givengeographical region generally talk to each other frequently. They share information andtrack closely each others success and failures. Seventy-five percent of what I see is discarded out of hand, offered JS. (Jims numberwas 70%). That means that, on average, three out of every four deals gets only acursory consideration. His principal reasons for dismissing opportunities were 1) thebusiness model does not hold up, 2) its not in my area, 3) the founders are looking fora passive investor and 4) I dont know any of the principals or their advisers.
The first reason relates to how JS approaches the process of investing. Because of hisbackground, he can take apart a business model and the attached projections quickerthan most can review them. I look at their model and projections. I take them apart and test them against what I know. If I find obvious mistakes, I walk away quickly. Hisrule of thumb, I cut the projected revenue in half and double the time it takes to reachit and then I look at the results. My experience is that that is probably closer to the waythings will turn out  that is, if they are successful. Other investors may get to thebusiness model later in the process but JS goes there first. As a result, he may loseinterest because your numbers dont add up or make sense.His second screen it very similar to one that Jim Hunt uses. Good investors know what they know about and are very disciplined about staying away from investing in what they dont know. A particular type bothers JS. I see these teams who have reinventedthemselves to fit the latest, newest, hottest thing. JS likes to see founders andmanagement teams that are focused on what they know and have been successful within the past. His investment is in the teams ability to execute their business model  not in the business model. Given a choice between a Superb Product/Model with MediocreExecution and a Mediocre Product/Model with Superb Execution, I will take SuperbExecution every time. This is an important distinction which ran through all myinterviews.The third screen is particularly important to JS. He likes to invest in situations that callfor an active participation by the investors. This is a variation of Jim Hunts third screen  they dont have any adult supervision. JS prefers management teams that see avalue in his or a co-investors participation beyond providing the funding. I likesituations that call for active participation. To be sure, there are investors who like totake a more passive role. It is counterproductive to approach an active participation investor with such a proposal.The fourth screen is one that many angel investors have and founders need to payattention to. Many of these angel investors will not look at deals that do not involve oneor more of their significant contacts. It is important to remember that angel investing isa much more intimate process than venture funding. Relationships and endorsementsgenerally play a big part of any angel investors decision to consider a deal.
The 25% Remaining
  So, JS, lets focus on the roughly 25% that make it through your initial screening.What do you look for and what reasons cause you to discard them? I look at the product or service that they plan to offer. My first question is does it work? Youd be surprised how many deals I see where the answer is negative or not yet. This investment round will get us there. JS doesnt like to invest in scienceprojects and isnt likely to fund product or service development. He expects the team to

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