How to Win the Hearts of Investors

To me investing in early stage entrepreneurs is kind of like dating with the hopes of finding the girl you are going to marry.  Like a marriage, there is no turning back once you put money into a deal and while it can be very rewarding, it also requires a long-term commitment of working with the person you invest in.

Like my dating philosophy (when I was younger of course) my goal is to 1) Take a quick look at as many options as manageable 2) Spend time with the options that catch my eye 3) Marry the investment that win my heart.

So how do you win mine and other angel investors’ hearts?  Friday I closed a seed round, alongside Gabriel Weinberg and a handful of other investors, which clearly demonstrates what I and other angel investors are looking to marry.

The company is a modern Indian dating site called myZamana.  It was founded by Ashish Kundra.  I fell in love with myZamana because of the entrepreneur.  What I saw in Ashish was 1) someone who was adaptable, 2) approached entrepreneurship in a very methodical and calculated manner, 3) had a clear understanding of the core assumptions the business model and 4) of the right time to raise money

Adaptability – Too often entrepreneurs fall in love with an idea and due to human nature cannot let go of that idea.  However, rarely is an idea perfect from the start and sometimes it is just a bad idea. Ashish had originally founded a company called Mobibolt, which was funded by Launchbox Digital in 2008.  After leaving Launchbox Digital he raised a small amount of Angel funding. After several launches and multiple iterations on Mobibolt, however, he saw for himself that there was no path to success. Rather than running down a dead end, he chose to change course entirely and, with the support of the original investors, used the remainder of the money to build and test a new concept entirely. This open-mindedness and willingness to change paths is critical for successful entrepreneurs.

Methodology – More and more I am starting to see a difference in first time entrepreneurs that come out of the accelerators versus other first time entrepreneurs.  These accelerators force entrepreneurs to focus and attack entrepreneurship in a very methodical and unemotional way. In addition because they are surrounded by a dozen or so other companies that are doing the same thing, this process becomes human nature.  Over time it becomes like breathing. They do not even know they are doing it, but it is what is keeping them alive. 1) They test their ideas and look for customers and market feedback that is quantifiable. This allows entrepreneurs to remove themselves from their products and look at them objectively.  This is a key ingredient to good decision-making. 2) They tend to better understand the importance of maximizing their limited resources. Simply put, they learn not to waste money because the accelerators do not give them much money.  Ashish clearly was frugal. On top of his very modest personal standard of living, he prioritized his spending to effectively test his idea. To me this also shows commitment and a willingness to sacrifice in order to increase the likelihood of success.

Core Financial Assumptions – Ashish did not present a 20-page business plan.  He had a small pitch deck and more importantly, had a financial model that clearly defined the core assumptions of the financial model.  He had defined and understood each of these variables.  Just as importantly, he understood where he was and where he needed to be regarding these variables. This provided me confidence that he was focused and knew what he needed to do to be successful.  The alternative to this, which I usually get, is a P&L statement and hockey stick revenue forecast based on one or two customers (if any).  More importantly, the key variables are usually buried in the model and I cannot tell what is important and what is not.  Which means I assume the entrepreneur cannot tell what is important and not.  With Ashish, I asked him, what if you only reach a conversion rate of X. With one keystroke he knew the impact.

Timing – Ashish did not go out and raise money as soon as he developed the idea.  He waited.  He validated his core assumptions–not completely–but with enough certainty that he reduced the risk of the business dramatically, which meant less risk for investors.  Less risk for investors leads to high valuation, which leads to more ownership for the founders.  Good entrepreneurs maximize their own returns by raising money at the right time.  I respect this understanding and am more willing to invest when I see this in entrepreneurs. 

Angel and Venture Capitalist often say they invest in entrepreneurs, not ideas.  This is confusing and little misleading to entrepreneurs.  What is really being said is that good entrepreneurs are adaptable, use a methodology and financial modeling to develop and perfect ideas and because of this process, these same entrepreneurs leave the bad ideas behind. Coupling this process with the right time to raise money maximizes the investors and entrepreneur’s returns. 

That is what makes investors fall in love.

Steve Welch

Entrepreneur & Angel Investor

Check on my new book on Entrepreneurship

Angel investors and entrepreneurs are not Wall Street bankers.  This distinction is obvious to you and me, but apparently not to Washington. The new Senate Financial Reform Bill, which is likely to be voted on this week, lumps the two together as one group. If allowed to pass in its current form, this bill will destroy the way in which our society helps entrepreneurs turn their crazy innovative ideas into viable job creating businesses.

Angel investors are individuals that invest in early stage businesses that often consist of not much more than a folding table, a couple of computers and lofty aspirations. However, it is these early stage investors that often invest in companies five years or younger and help get high growth business off the ground.  Apple, Google, Facebook and a thousand other high growth businesses you have never heard of, all got their start because angel investors took a risk along side entrepreneurs.

It is these types of business that lead in both innovation and job creation.  In fact a recent Kauffman foundation study found that between 1980 and 2005 every single net new job created in the United States came from a company 5 years old or less.  It  is clear that one of the keys to job creation in our country is to ensure that early stage entrepreneurs have access to capital.  This is why many of our political leaders and candidates are trying to craft policies that support angel investors.  In fact, gubernatorial candidate Tom Corbett is proposing an angel tax credit for Pennsylvania angel investors.

With such clear understanding that entrepreneurs and angel investing are critical to economic growth and job creation, you would think our leaders in Washington would be doing everything possible to promote this type of bottom up economic development.  Unfortunately, we are seeing another example of top down Washington economic policy.

In its current state, Senator Dodd’s Financial Reform Bill would make two sweeping changes to the way in which angel investors and entrepreneurs can operate.  First, the bill would redefine who would be qualified to be an angel investor.  Currently individuals with either $1 million in investable assets or $250,000 in income qualify as accredited investors.  The new bill would change this to individuals with $2.3 million in assets or $450,000 in income.  According to the Kauffman Foundation, this would eliminate 77% of accredited investors.  This single handedly would reduce the amount of capital available to early stage businesses and stunt our much needed job creation.

In addition, the new bill would require any company attempting to raise angel investment to seek SEC approval, which would take up to 4 months.  As an active angel investor myself, I can say with certain that companies in this stage can rarely wait four months for funding. They will simply be forced to close up shop. Yet again this is another example of government bureaucracies getting in the way of the thriving entrepreneurs that this country needs to unleash, not restrict.

Angel investors and entrepreneurs had absolutely nothing to do with the financial meltdown of 2008, and no one believes they pose a systemic risk, so why are they being lumped together with Wall Street Bankers?  Proponents of the bill say that Washington is trying to protect people from risky investments.

Yes, angel investing is risky, and starting a business from scratch is even more risky.  However, it is this calculated risk taking that has allowed the United States to be the most innovative society in the world and has provided us a standard of living the world has never seen before.  If Washington insists on completely eliminating risk from the marketplace they will also eliminate entrepreneurship and innovation and this, in turn, will eliminate job creation in the process.

As a society we need to be looking for ways to increase capital to early stage businesses.  We need to be trying to find ways to lower the bureaucratic burdens place on our entrepreneurs.  The Financial Reform Bill goes against both of these principals, and punishes us all by restricting our entrepreneurial spirit as a society.

Steve Welch

Entrepreneur & Angel Investor

Author of “We are all Born Entrepreneurs”

This campaign has certainly been a life-changing experience. The more you engage in the debate over the direction of our great nation, the more you appreciate the importance of the fight, and the need to fight even harder. However, it has become clear that fighting in this campaign will do more harm than good, which is why I am announcing the end of my candidacy.

While I am withdrawing from this campaign, I am not withdrawing from the fight. I simply believe I can promote the ideas that I am so passionate about – those of a small, decentralized government and personal responsibility – in a more constructive manner by helping other candidates who agree with this philosophy.

There are difficult and important decisions that are going to be made here today. As someone who has been outside the political process, I wanted to share with you what I have witnessed during my eight months on the campaign trail.

Ordinary Americans want to trust their government again, and are looking for leadership that will ensure our great nation honors the sacrifices of those who have come before us, and leaders who will work tirelessly to provide the same opportunities we had to those who will come after us. It is the party that wins the trust of the American people that will be the majority party for years to come.

For us, the path forward should be very clear – we must send leaders to Harrisburg and Washington that live by the principles that everyone in this room holds so dear. And we must be able to communicate why these values should matter to every American, and why the concept of centralized power in Washington will in the long run fail the very people it claims to help.

We have a unique opportunity in 2010 to bring this party back to its core values. To elect a Senator like Pat Toomey, a business-owner who has been on the side of reason, logic and the American people his entire career. We can elect a Governor like Tom Corbett who has worked in the private sector and run his own business, who has fought corruption and the structural problems that plague Harrisburg.

Here in Chester County we can send Jim Gerlach back to Congress and ask him to champion the ideas of the party and lead the way to restore trust in government.

Let’s make sure we support principled candidates who represent the Republican values and those of the American people; candidates who can bring new people into the fold because of their honesty, integrity and willingness to make the tough choices that lay ahead; candidates who will focus on the problems we face, not the petty politics that drag us down; candidates we can build the party around because they lead with a compass.

I want to thank you for all of the hard work you have done, and all that you will do in the coming elections. I look forward to joining you in restoring the faith and confidence of voters in our principles, and making sure that the American Dream is available for all of our children, just as it was for us.

Having spent the last 6 months talking with voters throughout our area, I can tell you that they are equally frustrated with both parties. People want to change the way Washington is working. They detest the backroom deals that have absolutely nothing to do with effective policy making and everything to do with special interests and ensuring that politicians get re-elected at the expense of moving our country forward. Whether it’s the infamous “Bridge to Nowhere” or the sweetheart deals that were cut in the Senate to force passage of healthcare legislation, Americans are sick and tired of earmarks and pork barrel spending.

The result of this process is centralized power where Washington bureaucrats make decisions not based on merit, but based on politics. Sadly, this approach has destroyed the confidence that many Americans had in our system of government.

It is time we take serious measures to restore our confidence in government once again. It is time we put an end to the pieces of Washington that clearly exist for political gain. At the top of this list should be an end to earmarks.

Proponents of earmarks claim that they represent only a small percentage of the federal budget. While this may be true, it ignores the detrimental impact earmarks have as the root of runaway spending. Perhaps Congressman John Kline of Minnesota, who recently swore off earmarks entirely, put it best when he explained, “In order to secure funding for a transportation project in my district . . . I was forced to vote for a bloated $286 billion transportation authorization bill that included the infamous $223 million ‘Bridge to Nowhere.’” While the “Bridge to Nowhere” was never designed to benefit many people, I’m sure it would have earned a lot of goodwill from the few Alaskans that it would have affected.

Let’s be honest about this. Not all earmarks fund “Bridges to Nowhere” or “Mule and Packers Museums.” But even if an earmark is going to a worthy project, good elected officials at some point will have to choose between supporting their local funding or voting against legislation they know to be flawed, at the peril of those very projects. Earmarks are at the root of the problems with big-government, and fuel a process that favors those who believe in using their power for political gain.

Over time, too many elected officials begin to think Washington is the solution to all of our problems, which is the very mentality that has lead to massive intrusions in the free markets and runaway government spending.

The shocking election results over the past several months show that voters are sick and tired of politics as usual in Washington and are looking for real leadership. The individuals who provide this new leadership will find that they not only will earn the trust of voters, they will have handed back power to the American people. After all, isn’t this where it belongs in the first place?

In the movie Shawshank Redemption, the character played by Morgan Freeman cautiously defends his friend, Brooks, after he has acted out irrationally. Realizing that his friend has become institutionalized, Freeman notes “The man has been in here 50 years…this is all he knows.” Freeman goes on to say while most of us hate big institutions at first, “then you get used to them, enough time passes you get so that you depend upon them.”

The institution that has rightfully come under great scrutiny lately is our federal government. Over the last decade, we have all watched the federal government grow dramatically in both size and scope. To put this in prospective, while the federal budget represented 33% of GDP in 2000, it is projected to represent 45% in 2010.

While it is easy to proclaim that the government is too big and as a result needs to be shrunk, these are empty words until we address the root cause of the problem.

Democrats will blame Republicans, and Republicans will blame Democrats. The simple truth is that this explosion of government occurred over a time when both parties were in control, and this cannot be simplified into a partisan issue.

Though the problem is very complex, it also contains a simple truth – the walls of government are being built each day by the very people that depend on them. This is why politicians on both sides of the aisle continue to make decisions not based on ideology, but on what centralizes power within the federal government. These decisions have the unintended consequences of continuing a cycle where political leaders accumulate more power, making it more difficult to replace them. This centralized power in Washington unfortunately also leads to more influence and government spending, further distorting our free market system.

Only in Washington could we see misguided policies such as bailing out the automotive industry, and then turning around and creating a program like “Cash for Clunkers” for people to buy cars from the very companies that are now government-owned. This is only one outrageous example of many where the government has grown in scope and continues to interfere with free markets.

In fact, during 2009 approximately $3.3 billion was spent in Washington lobbying elected officials, $19 million which came from bankrupt GM and Chrysler. I am sure it is no surprise to hear that the average elected official who voted for the automotive bailout received almost twice as much in political contributions than one who voted against it.

While we have quietly been going about our lives, we have a government that has entrenched itself. We must now take the steps to change this. It will not be easy, but the reward is well worth the fight. To do so, I believe it is time we revisit term limits.

We must return to our Founding Fathers’ notion of citizen legislators, not career politicians. Previous attempts to move this agenda forward focused on 6 year term limits enacted immediately. This attempt in the mid 1990s to change the way Washington works did not succeed for two reasons. First, many people did not feel 6 years was enough, noting that it takes time to bring about change and understand the complexities of our government’s problems. Second, the fact that an overwhelming majority of Congress would effectively be voting themselves out of a job was insurmountable.

Due to these shortcomings, I believe we can make 2 straightforward changes to the term limit platform which can help bring them to fruition. We should first double the limit to 12 years, allowing for 2 full Senate terms, or 6 terms in the House of Representatives. In addition, there should be a “grandfather clause” excluding all sitting legislators. While this is not a perfect solution, I believe it provides the best chance of enacting this needed reform. These changes can help ensure that we have elected officials who will focus more on the needs of the nation, rather than the needs of government which is the source of centralized power.

83% of Americans support term limits, because they know it will create a churn of leaders, which will provide a continuing flow of fresh ideas and individuals with outside perspectives, which we need now more than ever.

This will get at the root cause of the problem. It will create a completely different mentality and dynamic within Congress. It will allow us to have political leaders that are looking to tear down the walls of government, as opposed to those who are propping them up in an effort to centralize more power in Washington.

America has some of the best doctors, hospitals and pharmaceutical companies in the world. The problem is that health care costs are sky-rocketing.

The plans being debated in Washington will only make matters worse. Much worse.

Despite the claims of an “open and transparent” government, Democrat leaders are meeting behind closed doors to force through their version of health care reform. No matter what your opinion of this complicated issue, we can all agree that such a momentous task as this one should not be rushed.

Perhaps the only thing more troubling than the process by which this landmark legislation is being handled is the substance within it. Almost every economist agrees that any true reform must contain costs and work to reduce spending on what is an unsustainable curve. The real debate is about how this can be done.

I believe that the proposals being debated by Congressional Democrats will do nothing to contain costs, and will only succeed in exploding our deficit further.

There are policies we can enact rather quickly, in a bipartisan way, that would help lower the costs of health care and improve access to quality care.

As is often the case, our elected leaders are ignoring some commonsense, reasonable reforms at the expense of radical and unsustainable policies that will bankrupt our children, and cripple our ability to compete in the marketplace. There are ideas that would not result in a catastrophic increase in deficit spending, and that have a track record of achieving meaningful reforms.

Competition is the keystone to open markets, which leads to increased productivity and quality, and a better standard of living. Why not allow purchasers of health insurance to compare and contrast all available plans? Currently, we are only able to purchase health care plans that are available in our respective states. Pennsylvanians can’t get a plan provided in New Jersey, even if it is more affordable and provides the ideal coverage the customer wants. The creation of state health insurance exchanges would provide consumers with the information and options they deserve to make the best decisions for themselves and their loved ones, and to purchase plans available across state lines.

True health care reform must include tort reform as well. It is clear that many primary care providers practice defensive medicine for no other reason than the fear of litigation. This is an unacceptable waste of resources and care. It is time that we encourage states to provide alternative means to address medical malpractice claims, such as health courts or medical expert panels.

While leaders in Washington are looking at ways to create a new, trillion dollar entitlement program, it would be far wiser to allow Americans more freedom to use their hard-earned money that they have set aside for health care costs. Many individuals and families invest in Health Savings Accounts, which allow for tax-free contributions that can be used for qualified medical expenses. Why not allow these individuals and families to use these successful investment vehicles to pay for health insurance premiums, and without penalties? This would empower individuals to take more responsibility and ownership over their health care, and make all of us customers, not merely policy-holders.

I believe if the Pelosi-Reid health care bill is passed, we are marching down a dangerous path that will be very difficult to turn back from: a growing national bureaucracy that will eat-up billions of dollars, and will still leave countless Americans without access to the best health care in the world. Everyone agrees that we need reforms, but we cannot bankrupt future generations and ignore solutions that work.

We don’t need polls to tell us that Americans are not happy with Congress’ agenda. Scott Brown’s win in Massachusetts was a clear signal that Congressional leaders better change the focus of their policies.

Let’s hope Congressional Democrats can hear this message behind those closed doors.

Thought you would like to hear part of my speech to local Republican leaders about why I am running for Congress. As you’ll see, my passion comes from wanting to make sure that the American Dream is available to all generations, and putting a stop to the excesses and misguided policies in Congress. Let me know what you think!

Unfortunately, it has been the policies (and threat of policies) that have come out of Washington over the past several months and years that have driven jobs out of this country or kept companies from investing here. All businesses know that it is difficult to invest when you do not know what the rules of the game will be down the road; especially when so many of the possible rule changes will be harmful. If the President wants to add jobs, he should indicate that this country will have a pro-jobs environment by doing the following:

1) Show a path to a balanced budget through reduced spending. This will provide job creators the confidence that taxes in the United States will be competitive in the global environment and encourage investment in job-creation.

2) Scrap the current health care proposals and focus on one that bends the ever-rising “cost curve.” Everyone agrees that we need to lower costs and increase efficiencies with our health care system. The current plan will not achieve these critical goals, nor reduce costs to small businesses, where the overwhelming majority of job-creation is found.

3) Make it clear that “cap and trade” will be taken off the table and that the United States will focus our energy policies on ensuring a truly global effort in which all trading partners are playing under the same rules. When I built up MITOS (a manufacturing company in the biotech area) our second biggest cost was energy. The current “cap and trade” policy would do nothing more than drive up costs further for our high-tech sector and push jobs out of the country. He must encourage investments in job-creation by making it clear that the United States’ energy policy will ensure that costs here at home will be competitive in the global environment.

4) Announce the end of his efforts on “EFCA”– the so-called Employee Free Choice Act. The President should clearly communicate that labor in this country is one of our most precious and valuable resources; but, “card check” is unacceptable to Americans. Washington bureaucrats must not force punitive rules on job creators. Putting this issue to bed will provide job creators the confidence they need to be competitive in the global environment and encourage investment in job-creation.

If the President left today’s summit and announced these four policies, the economy would begin a long and steady recovery based on the most important (but recently abandoned) principal that America has a pro-job environment. And, not one of these initiatives would cost taxpayers a dime. Imagine: job-growth through private sector job-creation; not increasing power in Washington, or adding to our nation’s debt.

We can only hope.

Steve Welch

Steve Welch visits where he started his first company, Mitos Group, from the ground up right in the heart of Frazer, PA. Steve started the company in the 6^th District that went on to create dozens of jobs in Chester County.

When President Obama signed the $787 billion “stimulus” bill in February, the unemployment rate was 8.1 percent.  Today it is 10.2 percent.

So far, the government has spent over $158 billion of those “stimulus” dollars. Since then, there are 3.5 million more people out of work.

The White House reports that as part of the $158 billion in “stimulus spending” to date, over 640,000 jobs have been “created or saved” (putting aside the political-jargon that an economy losing 3.5 million jobs can create or save 640,000). That’s a cost of over $246,000 per job. Worse yet, in Pennsylvania, we have spent an astonishing $613,000 per job!

These figures are not the creation of a partisan blog or ideological think-tank. These figures come directly from the White House, available to the public on recovery.gov, and reported by The Associated Press.

No elected official, leader or candidate for office could possibly be proud of this track record. Our faltering economy, which is hurting millions of families, businesses and communities, is the most important domestic policy challenge of our time. How we handle this challenge will have an enormous impact on future generations. But what should be done?

Our approach must be straight-forward, based on sound, common-sense economics and enacted quickly. Going forward, policy-makers must be mindful of the old doctor’s adage, “Do no harm.”

First, bring the “stimulus” to a close. Working as practically and quickly as possible, the federal government must modify the $787 billion “stimulus.” They should honor all commitments made to date, be they grants or promised tax cuts; preserve the extended unemployment benefits; and stop all future spending and borrowing.

This will put a stop to billions of additional deficit spending.

Second, focus the billions of dollars that would be saved on job-creating tax cuts. Congress should drastically cut the payroll tax for newly created jobs, or offer tax-incentives for genuine job-creation.

Third, do not pass another “stimulus” bill.  Only in Congress could leaders think that after a failed $787 billion spending bill should we seek to spend even more “stimulus” money. No small business or household would ever operate that way with their spending.

Lastly, we must stop picking the “winning” or “losing” industry of the moment. This type of economic-patronage does nothing to create lasting jobs and only increases the government’s hand in the marketplace.

This economy is in serious trouble, and the “stimulus” has failed to achieve its goals. Leaders in Congress should admit it, stop the wasteful spending and quickly enact common-sense solutions to revive our economy and restore the American Dream.