New England and New York angels unite to fund startups

The angel groups of New England and New York joined forces to help startups get funded. Initial results: 2x as many startups are being seen by 2x as many investors, in 1/10th the time.

Entrepreneur Pain Points

You would think that the marginal effort to raise money from a second angel group is much lower. Won’t the second group take all the hard work you did from the first group and only need to ask a few more questions?

Sadly, no.

Instead, each angel group has their own subtly different questions and process. This makes the entrepreneur answer the same questions over and over. They have to create hours creating slightly different versions of documents. This costs the entrepreneurs precious time they need to run their ventures. This is bad for everyone!

Angel Investor Pain Points

All this back-and-forth isn’t valuable for angels either! The longer it takes us to assess a startup, the fewer quality investments we can make each year.

This problem crops up when we lead deals too. If a deal needs more money than we can put in, then there is a lot of work we have to do to help our entrepreneurs close the round. Knowing how hard that is discourages some groups from leading deals. Fewer people leading deals means few great deals getting done. That’s bad for investors, founders, and the economy.

Our Solution

The new Northeast Deal Sharing process addresses many of these issues.

  • Saves deal leads time by making it easy to share a deal with their peers in seconds.
  • Increases dealflow by providing angel leaders a curated list of vetted deals.
  • Save investors time by sharing only deals with a lead investor ready to share & coordinate due diligence.
  • Saves entrepreneurs time by accelerating connection to more investors via the curated list. We speed funding by setting new norms around sharing diligence.

We run it on simple tech (Google Sheets!) we built ourselves for no money.

Is it perfect? Hell no. There is a lot left to improve.

Is it a leap forward from what we had? Yes.

Results

Since switching to this system more deals are raising money from more investors and in less time.

Since New England and New York agreed to merge our processes and share dealflow, 2x as many startups are being seen by 2x as many investors, in 1/10th the time.

What’s Next

Right now we’re shaking out the merger of the New York and New England systems. A few months from now will add more deal sharing groups. Those groups can focus on geography, diversity, sector, etc. We also need to strengthen norms around being respectful of the entrepreneurs’ time.

Want in?

If your angel group is interested in participating, let me know.

Gratitude

My thanks to all the angel leaders, and the Angel Capital Association, for their hard work! A non-exhaustive list includes:

Thank you everyone!

A canvas to help Business Services teams innovate

If you work in a business services company (consulting, accounting, legal, etc.) and are in charge of evaluating ideas for innovation, most of the tools you’ve heard of don’t work. The same is true if you are trying to quickly show junior staff value each of your service lines offers to your clients and to your firm. So I created the KISS (Keep It Super Simple) Canvas for Business Services.

Template (click to view Google Sheet version)

All of the key information you need to do a basic assessment of an idea’s potential, or to communicate your business model quickly, fits in one page. Some highlights:

  • For the Client (in Green)
    • What clients you’ll sell this to and if they represent an economically interesting opportunity.
    • How committed the initial clients are to embracing the innovation.
    • The value proposition for each key stakeholder at your Clients’ organizations.
  • For your company (in blue)
    • The value proposition to the key stakeholders in the business units (BUs)
    • The level of commitment from that business unit to champion this innovation.

Example (click to view Google Sheet version)

The Story It Tells

For the client: A set of current clients who build and run renewable energy facilities have a problem. If we can solve that problem, there are a much broader range of clients with similar problems, so there looks to be a sizable market opportunity. Clients’ senior managers spend too much time and capital when screening sites, hurting project IRR (internal rate of return). The innovation addresses this challenge by eliminating poor sites quickly and cheaply, increasing the IRR for each site. While there are lots of alternate ways to solve this problem, the proposed software+consultant solution gives clients the best of both worlds. They get better data quickly, and when there is a question that software can’t answer comes up, consultants with deep expertise are a click away.

For the consulting firm: One business unit is already committing staff to test this idea out, and if it works there are a lot of other business units that could benefit from it. Partners in the firm are losing work to competitors that can do it faster and cheaper. A software site screening tool tied to the firm’s consultants would get them in the door earlier on projects, increases margins at the early stages, and streamline and win more the intensive work on the projects later. The firm could use some of the existing software solution on the market, but doing so would not increase the productivity of their workforce and drive their margins.

What this Canvas Does Not Cover

This tool does not worry about 10,000 other things that matter, but are not critically important at the start. Marketing, sales, revenue models, and partnerships aren’t covered because most business services companies only want innovations that leverage their existing systems and partnerships.

This tool has proven to be effective at allowing junior staff to run initial screens of idea submissions. This saves senior people time to work on the most high-potential ideas.

Get your own copy of the KISS (Keep It Super Simple) Canvas for Business Services.

How to Accelerate Valuation Growth in Services Businesses

Private Equity firms that own professional services businesses have a challenge with growing valuations. In a services-based business it is hard to increase revenue without increasing headcount. Margins shrink as hiring, training, and retaining talent becomes progressively more difficult. Meanwhile, all of the company’s intellectual property is locked in the heads of employees, meaning that when the employees leave the building, so do the company’s assets. These factors keep exit multiples for service businesses low, often ten times lower than comparably-sized software companies.

Digital Transformation allows you to increase exit multiples.

  • Launch customer-facing products that grow revenue and margins
    • Create a premium product that increases the value of core services
    • Offer new value to remain competitive or even leap ahead of competitors
    • Generate high-margin revenue with exit multiples ten times higher than service revenue
  • Digitally enable employees to increase productivity and performance 
    • Embed the employees’ expertise in applications to ensure continuity
    • Make repetitive tasks faster and more accurate
    • Standardize and facilitate processes

But how? Some companies create innovation divisions… only to discover that the high-risk approach needed there is incompatible with the company’s failure-averse culture. Other companies buy into an enterprise platform just to learn they are costly, take years to generate results, and disrupt the core business.

The right answer for most services businesses is targeted digital solutions that solve pressing problems now. This approach lets you get wins on the board quickly, building momentum to effect larger and larger culture change to facilitate ever greater innovation & impact.

If you or someone you know is struggling with these issues, PixelEdge can help. Learn more.

Operationalize Your Startup

About The Workshop

Startups don’t die from laziness. They die from working really hard… on the wrong things.

You’ve launched your venture… now what? The financial lives of your team depends on you. When do you raise money? From who? On what terms? Is it time to hire or keep your burn low? Should you pivot to a new market or stay the course? The pressure to make the right decisions is intense. But you don’t have to do it alone. In this workshop you’ll learn and use practical tools that will give you confidence and guide you to better decisions as you build your company. This workshop is great for entrepreneurs who have generated revenue and are ready to expand their operations!

Prework (Due Before The Session)

  1. Read this article to learn about the VIRAL framework.
  2. Create a free entrepreneur account on the Abaca website.
  3. Do an initial VIRAL assessment of your company using Abaca’s tool. When you do it, pretend you are a cynical investor who demands extensive proof before they consider any milestone complete.
  4. Write down what the lowest-scoring, incomplete milestones are for your venture. If you are willing and time allows, we’ll talk about those milestones and what it will take for you to achieve them during the workshop.
Paul G. Silva Profile Picture (headshot) 2021.JPG

Your Instructor

Originally a computational physicist who spent many long nights at a particle accelerator, since 2000 Paul inspired thousands of people to innovate, help hundreds of startups launch, overseen investments in 50+ startups and held leadership positions in the national angel investor community.

Co-Founding Corporate Innovation Division

I am delighted to announce that I have joined forces with Ali Usman and the incredible team at PixelEdge. Ali and I have been friends for over a decade, mentoring countless entrepreneurs together. I’ve personally watched PixelEdge launch incredible products for startups and big companies alike. They launch on time, build right, and achieve product-market fit! 

My role is co-founder of the new Corporate Innovation division where we help mature, services-based businesses increase their valuations and impact by 5x through digital innovation. Our recent client is a billion-dollar sustainability consultancy where, in six months, we’ve launched four products to save lives, fight modern slavery, and mitigate global climate change. 

I mean… wow. This is the kind of impact you can have when you have a product studio like PixelEdge and a large company client with the resources and commitment to innovate to solve problems that matter. I am excited and honored by the opportunity to build out this new division of PixelEdge and help more companies embrace the power of innovation.

If you’d like to know more about our new corporate innovation offerings and this sounds at all interesting to you or someone you know, drop me a line and we’ll catch up.

A KPI for Corporate Innovation: The Valuation Index

Leaders of larger companies are under intense pressure to grow their valuation by hitting aggressive revenue, margin, and EBITDA targets. Acquirers pay a valuation premium on recurring, high-margin, and high-growth product revenue. However, the metrics most companies use (ROI) fail to capture the impact on valuation, causing leaders to make choices that slow their valuation growth. That’s where the Valuation Index can help.

A Quick Primer On Valuation

Valuation in this context is the dollar value an acquirer would pay to purchase a company. A simple approximation of valuation is a Multiple (M) of either Revenue (R) or EBITDA (E). M is a market-driven number determined by the “flavor” of the company’s income. Run-of-the-mill consultancies in stagnant sectors tend to get low multiples. Rapidly growing Software-as-a-Service (SaaS) startups have high multiples.

Valuation = R*M OR R*E

A better approximation of Valuation appreciates that a larger companies have many different Revenue (R) streams. For instance, a modern consultancy might have: SaaS (S), one-time fees for use of a software Tool (T), and Consulting (C). Each of these has their own Multiple (M).

Valuation = (RS*MS) + (RT*MT) + (RC*MC)

The Limitations of Standard ROI

Math formula: return/investment

Most Return On Investment (ROI) metrics are excellent for measuring an initiative’s impact on a company’s operations. Example: if a salesperson is expected to generate $1 million/year in sales and cost $100k in salary & benefits, the ROI would look to be about $1 million/$100k or 10x.

The challenge is this doesn’t take into account the desirability of that particular flavor of revenue to acquirers. If they sold $1 million of…

  • Widgets with a 10% profit margin, that would mean the salesperson was basically just paying for themselves. An acquirer would likely not value this at all.
  • Widgets with a high profit margin, but low revenue growth would have some value.
  • Widgets with high margin and rapid growth in sales would be of medium interest.
  • Subscriptions to a rapidly-growing software platform would be valued very highly indeed because they are high-margin and relatively predictable.

The Valuation Index

growth in valuation/cost to develop

The Valuation Index measures the impact on a company’s valuation for every dollar of investment. The formula applies market-driven Multiples (M) by the different types of Revenue (R).

  • SaaS (S): Recurring subscriptions for access to an application that are high-margin, require minimal labor, and generate predictable future income. Multiples tend to be high.
  • Tool Use (T): One-time payments for access to software during a project. This is also high-margin and requires low-labor. Multiples tend to be moderate.
  • Consulting (C): This is a catch-all for labor-intensive service revenue. Such revenue is low-margin and can only scale with increased headcount. This is hard, expensive, and offers diminishing returns. Multiples tend to be low.

Once you start applying this metric to competing initiatives, it can make decisions clearer.

  • Growing consulting/services, while often the thing a consultancy is most comfortable doing, generates the lowest score because it requires scaling up expensive, hard-to-recruit & retain talent.
  • Adding one-time payments for use of software during projects scores moderately well because the software requires little labor.
  • Creating subscription offerings that clients use before, during, and after a consulting engagement scores by far the highest because the company keeps on making money 24/7/365, usually for years with relatively little cost of sales or support.

Credits

The concepts outlined here were co-developed with Jeremie Spitzer.

Gratitude for Baer Tierkel, a mentor to many, now at rest

Baer Tierkel

The world lost Baer Tierkel last week at the age of 61. About 20 years ago I was a kid running my first startup and Baer was one of the early people to join our Board of Advisors. He came to every board meeting with deep insights and deeper belly laughs. I learned a great deal from that man that proved pivotal. The company eventually failed, but not before helping thousands of blind people around the world reconnect with friends and family in ways many had not thought possible. We couldn’t have done that without Baer’s help. He went on to help every student I sent his way, and continued mentoring me on each of my ventures.

I am deeply grateful that this wonderful man shared some of his life with me and my students.

He led a generous and joyful life. May we all live so.

He passed quietly in his bed, with his family close.

Rest in peace Baer.

Love,

-Your old mentee