Angel-Backed Companies More Likely to Succeed, Says Harvard Study
A new study published by professors at the Harvard Business School shows that angel-backed companies are more likely to succeed and show more growth than those funded by venture firms alone. Researched and written by William Kerr and Josh Lerner, the report found that companies with angel funding see between 30% and 50% higher growth figures in terms of website traffic, are more likely to survive for four years, and are also in a better position to receive further rounds of funding. Sponsor Angel investing itself has seen large growth over the last several months with the creation of various organizations, events, firms and legislation to spur it on. We’ve discussed the Open Angel Forum series of events, the creation of “Super Angel” firms , the curated Venture Hacks AngelList , as well as current legislation both helping and hurting angel investments. Angel investing has become more common, and as this report shows, this is largely due to the value and success it tends to breed. But why are angel investments the secret sauce for some companies? As the report points out, its the intangibles that angels bring to the table that could be playing a large role in company success. “Access to capital per se may not be the most important value-added that angel groups bring. Some of the ‘softer’ features, such as angels’ mentoring or business contacts, may help new ventures the most,” the report says. One of the other reasons that companies could tend to be more successful with angel funding is because of the human face placed on the investments. Angels are usually investing in companies at an early stage, and are investing their own capital in the company. Entrepreneurs may be more likely to work that extra bit harder when they know they are playing with the personal cash of an actual person, not the collected funds of an entire firm without a human name. The reputation of the angel could play a large role as well, both for the attitude of the people running the company, and for the audience they are looking to attract. Most angels tend to be successful entrepreneurs themselves, and thus are likely well known in the startup scene. The chance to sit and talk with these investors, let alone receiving funding from them, is likely a treat for most entrepreneurs, so they may be more likely to be more careful with their money. Additionally, when the public hears of a new startup that may not immediately interest them, the mention of particular angel investors can change their mind. As angel investors mature, they build their own personal portfolio of companies they noticed and provided early funds for, so when company XYZ launches with angel funding from an influential angel investor, that alone can attract people to the product. I know personally that I have looked into startups I otherwise would have largely ignored simply because an important angel investor was certain they’d be a hit. “Some of the ‘softer’ features, such as angels’ mentoring or business contacts, may help new ventures the most.” – Harvard Business School report Since some companies receive early financing rounds from angels, it is also logical to assume that when working with a limited amount of cash, the entrepreneurs may be more focused on doing more with less. A company that bursts out of the gate with large amounts of VC firm funding may spend it slightly more haphazardly, whereas a company running on limited angel funds may adopt leaner practices and take baby steps toward success and future funding. As the report mentioned above, the “softer” features provided by the angels are also a large help to the companies. In his email newsletter yesterday, angel investor Jason Calacanis discussed loyalty and how he goes to bat for the people who are loyal to him and his companies. He mentioned that whenever he invests in a company, he immediately becomes an evangelist for that company and it’s founders, doing all he can to promote it. This may not be the same for all angels, but when influential investors like Jason get behind your company, they do their best to make sure good things happen. I would be interested to see similar data from this report that compares companies with solely angel funding versus those with more traditional VC firm funding mixed in. The influence of angel investors is significant, but I would think the angels alone are not enough to create more successful businesses at a higher rate. But the lesson here is, if your startup has the opportunity to include some angel investors (especially at the early stages), it would seem like a wise decision to go ahead with. Photo by Flickr user Brooke Anderson . Discuss
Learning From Failure: One Startup’s Story of What Went Wrong
Devver , maker of developer coding tools and TechStars 2008 graduate, announced last Monday that it would be shutting down after being active for nearly two years. News of a startup closing up shop is never a fun thing to hear about, but fortunately many lessons can be gleaned from the experiences of the entrepreneurs. Today, co-founder Ben Brinckerhoff provided just such lessons with an insightful blog on the Devver journey and why he and co-founder Dan Mayer are choosing to move on. Sponsor An unfortunate truth about startup culture is that a lot of the most valuable lessons are learned when entrepreneurs fail to heed them. Some notice their mistakes early on and can pivot their products and business toward a more successful future, but sometimes they don’t realize their mistakes until its too late and there is nothing that can be done. This was the case with Brinckerhoff, Mayer and their startup, Devver, which they say failed to focus enough on one of the most important parts of building a startup: customer development. As Brinckerhoff points out in Monday’s blog post, the company assumed they had found their minimum viable product (MVP), and as a result focused more on product development than listening to customers’ needs. “You can teach a hacker business, but you can’t make him or her get excited about it, which means it may not get the time or attention it deserves.” – Ben Brinckerhoff “Our mistake at that point was to go ‘heads down’ and focus on building the accelerator while minimizing our contact with users and customers (after all, we knew how great it was and time spent talking to customers was time we could be hacking!),” writes Brinckerhoff. “We should have [been] asking, ‘Is there an even simpler version of this product that we can deliver sooner to learn more about pricing, market size, and technical challenges?’.” Both Brinckerhoff and his co-founder are “technical founders,” which means their specialities are on the development side, not the business side. The only other person the pair hired to help out, a fellow software developer, also fits into the technical side of the startup. Brinckerhoff says this may have been one of the hurdles that led to the downfall of the company. “Looking back, it would have been to our advantage to have a third founder who really loved the business aspect of running a startup,” writes Brinckerhoff. “Having solely technical founders is non-optimal. You can teach a hacker business, but you can’t make him or her get excited about it, which means it may not get the time or attention it deserves.” Brinckerhoff also adds that having a split team located in different states contributed to the company’s struggles, but it seems to me it was more of a hassle than a reason for failure. Split teams are actually growing in popularity and probability for success, as we discussed earlier in the year with companies like Blank Label and chocri . Devver undoubtedly had issues with its split setup, but its likely that it didn’t contribute toward its closing as significantly as the other errors. Regardless of this issue, its clear that the Devver team learned and shared some valuable lessons about the importance of customer development. As Steve Blank noted during his presentation at last week’s Startup Lessons Learned conference, startups shouldn’t be too eager to product management before customer development. Devver may have jumped the gun a bit in terms of over developing their product, so learn from their mistake and remember to develop your customers before throwing the kitchen sink at them. Discuss
Marshmallows and Spaghetti: How Kindergartners Think Like Lean Startups
As an avid podcast subscriber I have dozens of audio and video programs feeding into iTunes daily, but one recent submission from the TED Talks video podcast caught my eye because of its parallels to lean startups. Tom Wujec, author and fellow at Autodesk, presented at TED 2010 back in February, and his talk, “Build a tower, build a team,” is now available online. Wujec conducted a team building experiment with all types of people, from business execs to kindergartners, and the results he presented were surprising, to say the least. Sponsor The activity, known as the marshmallow challenge , was borrowed by Wujec from Peter Skillman, VP of Design at Palm . Small teams are given 18 minutes to build a free-standing structure made of dry spaghetti, one yard of string, one yard of tape and a marshmallow, which must be placed on top. The team wins by creating the tallest structure of all the groups participating. What Wujec discovered is that this simple game revealed some fascinating insights into how groups collaborate. Wujec has conducted this experiment with over 70 groups of “students and designers and architects, even the CTOs of the Fortune 50,” he says. Most teams quickly break into roles and plan their structure, and then spend the remaining time building it before quickly and gingerly placing the marshmallow on top as time expires. More often than not, the structure pitifully fails as the marshmallow is added, leaving the team with a pile of spaghetti and no time to try again. “So there are a number of people who have a lot more ‘uh-oh’ moments than others, and among the worst are recent graduates of business school. They lie, they cheat, they get distracted, and they produce really lame structures,” says Wujec. “And of course there are teams that have a lot more ‘ta-da’ structures, and, among the best, are recent graduates of kindergarten.” “Design truly is a contact sport. It demands that we bring all of our senses to the task, and that we apply the very best of our thinking, our feeling and our doing to the challenge that we have at hand.” – Tom Wujec Wujec says that business school grads are taught to seek out and execute the one correct solution their challenge, while kindergartners practice the iterative prototype and refine process, much like the methods of lean startups. The kids would build, test and repeat until they found a structure that worked, and most times, he says, they built the tallest and most interesting structures. Another interesting fact uncovered by these experiments is that incentivizing the teams didn’t improve their structures, it actually made them worse. When Wujic offered the winning team a $10,000 software prize, not a single group was able to create a standing structure; however, when we returned to the same students later, they understood the need for iteration, and produced structures well above the average height. What startups can take away from the marshmallow challenge is that bigger teams and higher incentives are no substitute for having the right skills and the right process in place. Wujec found that larger teams performed increasing worse than smaller teams, and incentivizing them with a reward did not make up for the fact that they were not using the right process. As Wujec adds, every business challenge has its own “marshmallow,” so consider bringing some kindergarten-minded people onto your startup team. Photo by Flickr user John-Morgan . Discuss
Volcanoes, Boot Camps, and Other Opportunities for European Startups
The grounding of flights in and out of European as a result of the Icelandic volcano Eyjafjallajökull has been a powerful reminder of how much of our global economy relies on air transportation. As we wrote yesterday , the volcanic ash not only impacted the airline industry, but the tech world as well, disrupting business and conference travel alongside product deliveries. European startups, particularly reliant on quick transportation from country-to-country, may be feeling the consequences of restrictions on air travel even more so. Mike Butcher argues in a Techcrunch Europe article , “It seems that Europe’s startup economy has been running partly on the spread low-cost airlines for the past 5 years, and without airlines the startups, along with the whole of the general business sector, are going to be badly affected.” Sponsor It’s unclear how much the volcanic eruption will further challenge business development, or if it will spur innovation and opportunities, particularly around virtual conferencing and alternative transportation planners. Jame Andrews, co-founder of Loco2 , a site promoting sustainable travel, remarks, “Thanks Iceland volcano for helping us to prove the market for alternatives to flying!” Jacek Kelski, founder and director of f3fundit , a blog and business portal aimed at helping support European entrepreneurs, argues that the major hindrance in Europe remains “investor readiness.” According to Kelski “there are definitely a lot of good ambitious companies out there. There is a lot of activity all over the continent.” But while there seems to be a lot of startup activity, Kelski is less optimistic about investor activity. “We’re seeing very little if any VC activity in Europe at the moment, and the majority of funding is coming from angels and larger corporates.” To help, f3fundit are holding a “Next Top Startup” competition. Ten finalists will take part in a boot camp June 16 and 17 in Barcelona, Spain, where they will work closely with a team of 25 mentors. One of the companies will be crowned the “Next Top Startup” and win a €25,000 prize. Kelsi hopes f3fundit.com’s competition can help provide both the cash and the support for some of the startup community. Hopefully, European volcanic activity will cooperate. Discuss
Are Windows of Opportunity Quickly Narrowing for Startups?
Earlier this week, we reported on the fact that the first quarter of the year saw venture capitalist investments drop from the end of last year , but start at a higher rate than the beginning of 2009. In the article we mentioned the boom and bust cycle that is found in economics, which in America has been marked by the dot-com bust at the turn of the century, and the financial crisis of recent times. These two downturns are part of a cycle of ups and downs seen throughout history, but could they be getting shorter and more frequent? Sponsor Peter Bodine, managing director of Allegis Capital , recently guest blogged on Entrepreneur Corner over at VentureBeat and provides an interesting angle on the current state of venture valuations and how it could signal a quickening boom and bust cycle. As he sees it, the high prices recently placed on a few startups echoe those seen before the dot-com bust. ” Blippy , only four months old, is reported to be worth about $38 million. Quora , a massive user-created question-and-answer site that is still beta-testing , was estimated at roughly $86 million in its most recent round. And the buzz is that Foursquare will be worth at least $80 million after it completes the round it’s currently negotiating,” writes Bodine. “There is a lesson in all this for startups. If you are demonstrating noticeable success, seek additional funding now, not later.” Bodine anticipates a drop in VC funding this summer, a time he says is a common slow period for VCs, and warns that startups late to the game could “miss the action” and end up competing with more companies later in the year. The summer is a popular time for incubators, and many companies exit these programs and seek funding in the fall and winter, so Bodine suggests going after capital now if your startup has any measurable progress. VC, M&A and IPO numbers have been suffering in the last few years with the economic crisis and have been difficult to forecast. M&A numbers broke records in the first quarter of 2010, but IPOs continued their near non-existent levels. VCs raised their lowest amount of funding in an opening quarter since 1993, but invested a healthy amount . One could call this atmosphere unstable, but I’m not so sure that it will collapse again in the middle of the year. Following the dot-com bust, the VC market steadily climbed back to the levels we saw in 2007 and 2008 before the housing failure, and I wouldn’t be surprised to see similar gradual growth throughout 2010. It is unlikely that the yearly figures at the end of 2010 will be impressive in comparison to earlier years, but this year should be an improvement over the lows seen more recently. There are certainly risks involved with founding a startup and seeking funding in this economy, but hey, what would startups be without taking a few calculated risks in hopes of being rewarded? Photo by Flickr user garymalkn . Discuss