Before the Internet, entire industries emerged that helped investors find “good” entrepreneurs; trade shows, print publications, and an army of investment banking connectors who helped investors and entrepreneurs find each other (for a chunky fee of course). You can spend half your career (and life savings) at trade shows and more often than not all you would have to show for it would be extra airline miles and a desk drawer full of name badges.
Today’s investors rely more than ever on their personal filter of trusted referrals and connections with friends. Tip: trust is not earned swapping cards at a trade show booth. Just because you shake hands with an investor doesn’t mean he’s ready to give you a giant check. This traditional process of finding entrepreneurs needed to evolve, and in some senses it has. Thanks in large part to the Internet, investors are buried in new business plan submissions.
As of this writing, there are over 37,000 business plans on AngelSoft.net, over 100,000 plans on FundingPost.com, and over 6,000 plans on FundingUniverse.com. Sounds great for investors, right? But let’s take a closer look at the math: If an investor tried to review all these plans for 30 minutes each it would take over 34 years reading non stop for 8 hours a day, 5 days a week, for 52 weeks a year.
Where’s the Brita water filter for business plans when you need it? Out of those 143,000 plans described above, how many are actually high quality, better to digest, “investor-ready” ideas? Investors are thirsty for exciting opportunities, but they’re not quite ready to wrap their mouths around a fire hose. As for the entrepreneur looking for a leg up, blasting your business plan out to several thousand investors with the click of a button is about as strategic as buying a Powerball ticket.
The Internet has created a massive pool of investment opportunities, which has shifted the real problem from an issue of quantity to throughput and yield. Adding another 140,000 business plans to the un-harvested fields of internet “pitch farms” will not increase yield any more than it already has. Angel investors are already using this huge pool of business plans and their throughput has likely increased by an additional 10 or more deals per month at most.
But while this increase in reviewed applicants should lead to slightly stronger funding candidates, the overall problem is still NOT being solved. In fact, the minimal gains from reading a few more plans each month doesn’t actually increase the number of deals that an Angel group can seriously evaluate or fund. That number (based on their in house resources) remains constant no matter how many ventures are knocking on the door.
The cold fact is that most investors still won’t even glance at a business plan unless it’s gotten a referral from a credible third party. It’s not only about who you know, it’s also about how you know them. Entrepreneurs and business plans referred by others who have proven to be good filters for garbage ideas, often float to the top of the pile. How else do you expect investors to filter through 34 years of reading material? Everything else usually gets dumped into the circular filing cabinet. Today most investment deals come down to personal TRUST, which is pretty hard to create in a virtual world.
Websites like Linkedin are useful tools for examining a person’s work history and experience, but they are not a substitute for one on one interviews and the ability to make an objective investment decision. Characteristics like work ethic, ability to handle risk, verbal skills, and attention to detail are learned through personal interviews, not back and forth emails.
It does, after all, take the same amount of time to read a bad business plan as it does a good one, and even on the top funding websites (though they’d probably dispute it) there’s still not an effective way to filter out all the junk. As an investor, becoming a member of a small Angel group that exposes you to “quality” investments usually costs money (annual dues), and more often than not, you end up doing all the deal review work anyway. So, what are you really paying for? If you’re going to pay to join a social club, join the country version, at least you’re guaranteed a good tee time and some exercise.
Excerpt taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital. In the coming weeks, we’ll be posting even more insightful nuggets from this paper. However, if you’d like to read & download all 33 pages of constructive prose right this moment, it’s sitting on our website: www.dontgosouth.com.