1M/1M Strategy Roundtable: Professional Investors Do Not Invest In $20 Million Markets

Recap of the 14 October 2010 roundtable by Sramana Mitra

At today’s roundtable we had some intensive discussions around market sizing and its impact on financing. You have heard, I am sure, that venture capitalists only invest in very large market opportunities - $500 million to a billion. But you have, perhaps, heard less specific discussions on what angel investors are looking for.

Well, some angel investors are looking for exactly the same thing as what VCs are looking for. Mike Maples calls it Thunder Lizard Hunting. In other words, these are angels looking for billion dollar opportunities as well.

But there are others – many others – who are looking for smaller opportunities, playing in the sweet spot of $50 to $100 million market opportunities. These are areas that may be gaps in the portfolio of large companies, and are perfect for M&A deals in 3 to 5 years after building enough validation and $10 to $20 million in revenue. By definition, the capital investment needs to be relatively low such that the investors and the entrepreneurs all make a healthy return on investment. Nicola Corzine of the Band of Angels Acorn Fund discusses this at length in our interview with her.

So, please note the TAM Analysis is a vitally important aspect of building any financing strategy. As I take you through today’s roundtable pitches, you will see this come up over and again.

Foldees

First up today was Chak Onn Lau with Foldees, a Malayasian crowdsourced greeting card company. Chak has been able to get a couple of distributors in Singapore to buy his greeting cards designed by a community of artists, but is struggling to find a steady, repeatable model. He is also struggling with the pricing structure, because until he can get to volume printing, the cost per unit is way too high.

Well, my advice for Chak is to focus steadily on a worldwide list of greeting card distributors using Telewebsales and Sales 2.0 methodologies – in other words, don’t invest in travel and in-person sales, but try to close as many deals as possible by phone and the web. [On this point, I recently did a great interview with Dave Fitzgerald, EVP of Sales and Marketing at Brainshark, who describes his Sales 2.0 process in detail. I highly recommend that all of you read the discussion. While you may not have the budget to spend $500k on Sales 2.0 technologies, there are many nuggets that will help you build an efficient, repeatable sales process.]

Chak’s budget is very low. He needs to generate enough profit so that he can grow organically and build his business systematically, and without expecting a lot of outside financing.

O-Port

Then Raymond McGlamery pitched the O-Port, a guitar and drum accessory company based in Houston, Texas. Raymond has built a nice business through efficient distribution deals and will do about $250k in revenue this year. Raymond is wondering why he cannot attract financing.

I asked him several times what exactly is his TAM (Total Available Market). To be very specific, I am interested in bottom-up TAM, not some big industry number of billions of dollars. I want to know how many customers exist out there who would be likely buyers of the O-Port products, at what price-point, and what does that add up to? Is that a 20 million dollar market? 30 million dollar market? 300 million dollar market?

Well, I could not get a clear answer. What I did get was that in four years, O-Port was going to be a $10 million company. Okay, what percentage of the market does that represent? 10%? 25%? 68%?

Without a crisp analysis of these numbers, investors cannot assess the market opportunity and their potential for making returns.

Hendon, Stamford Hill & Co.

Next David Sarna with Hendon, Stamford Hill & Co. presented Bokér/1 – perhaps the most compelling of today’s presenters. David is an expert in IT capacity planning and has already sold a company to Computer Associates in this arena. Today, he sees the opportunity to do a Cloud capacity planning company. He thinks, that with $1M in investment, he can make this business successful. He is willing to give up 33% of equity for this $1M investment.

I feel that it is not at all necessary to give this much equity up at this stage of the game.

David should use his credibility in capacity planning and convince a dozen customers to pay him consulting fees to solve their capacity planning problems. He should then bootstrap his product development by using the consulting fees. Again, referring back to the Finisar case study I often teach on this topic, bootstrapping using services is a very effective way to build companies.

Yes, I am sure David’s venture is eminently fundable within a few months. The question I am encouraging him to explore is whether or not he SHOULD take money just because he can get it.

Ladies and gentlemen, ownership matters!

Ma Mi Skin Care

Lee Wright then discussed Ma Mi Skin Care, a skin case company that was completely all over the place. I asked her not to spray and pray, and focus on her core, differentiated products – stretch mark and c-section mark removal creams for new mothers. There are 110,000 monthly search queries looking for ‘stretch mark(s) removal’. This is her core market. Through SEO and mommy blog PR, Lee can tap into this market. But she needs to drop her tendency to “expand”. Now is not the time to expand. Now is the time for laser sharp focus.

About online strategy roundtables

I started doing my free Online Strategy Roundtables for entrepreneurs in the fall of 2008. These roundtables are the cornerstone programming of a global initiative that I have started called One Million by One Million (1M/1M). Its mission is to help a million entrepreneurs globally to reach $1 million in revenue and beyond, build $1 trillion in sustainable global GDP, and create 10 million jobs. In 1M/1M, I teach the EJ methodology, which is based on my Entrepreneur Journeys research, and emphasize bootstrapping, idea validation, and crisp positioning as some of the core principles of building strong fundamentals in early stage ventures. In addition, we are offering entrepreneurs access to investors and customers through our 1M/1M Incubation Radar series. You can pitch to be featured on my blog following these instructions.

You can listen to the recording of this roundtable here. Recordings of previous roundtables are all available here. You can register for the next roundtable here.

About Sramana Mitra

Sramana Mitra is a technology entrepreneur and strategy consultant in Silicon Valley. She has founded three companies, writes a business blog, Sramana Mitra On Strategy, and runs the 1M/1M initiative. She has a master’s degree in electrical engineering and computer science from the Massachusetts Institute of Technology. Her Entrepreneur Journeys book series, Entrepreneur Journeys, Bootstrapping: Weapon Of Mass Reconstruction, Positioning: How To Test, Validate, and Bring Your Idea To Market and her latest volume Innovation: Need Of The Hour, as well as Vision India 2020, are all available from Amazon.