ANGELS ALL AROUND US–STARTUPS AND ANGEL INVESTORS
November 8, 2012
A Forrest Firm Q+A with Jess Eberdt, TempusDurham
The Forrest Firm works with a host of businesses, from startups to mature businesses, providing risk management and legal advisory services to businesses across an array of corporate legal issues such as corporate acquisitions and divestitures, employment law, commercial real estate, contracts, and intellectual property.
In the course of servicing our clients, we often field questions pertaining to angel investors and other sources of capital, specifically, what are the attendant considerations for obtaining outside investment. For questions like these, we turn to a longtime friend and advisor, Jess Eberdt. The former CEO of one of the Research Triangle’s greatest homegrown successes, Parata Systems, LLC, Jess has partnered with Doug Townsend to form Tempus Durham, a downtown Durham-based consultancy focused on preparing companies for proper alignment for potential investment, management needs, and exit strategies.
We sat down recently with Jess to discuss some of the considerations that entrepreneurs and executives need to explore to attract capital that may be critical to their future success. In today’s Forrest Firm Q+A, we’ll focus on angels and startup companies.
James Forrest: “Jess, thanks for joining us today. Tell me about the current startup landscape in ou
r area, as well as what you’re seeing in companies’ ability to attract investment.”
Jess Eberdt: “Well, it’s not that complicated, at least to me. There are just a few things—big things—that companies need to address, and it begins with having what I call an external base of understanding. Basically, when you’re a small startup company, the biggest and most important thing to be able to answer is, what need is our company meeting?
You need to be able to describe your value, especially in your ability to scale or rate the opportunity you see in the marketplace. What’s the level of problem or need that your product or service is solving? I see a lot of new offerings out there that I’d characterize as the type of idea that a founder or inventor might view as cool stuff or cool to a small group of people that’s been exposed to it. Unfortunately, many haven’t gotten a real analysis of the market they intend to serve. So, what’s the market?”
James Forrest: “So, this external understanding has to be fueled by potential customers?”
Jess Eberdt: “That’s right. I see a lack of analysis out there as to ascertaining the size of the market. Sometimes there’s no answer when I ask this question, or they just have a small amount of data to back up their market assumptions. Often, the business proposition has not been properly analyzed, so that you can have that proper external understanding—through the eyes of your prospective clients or customers, competitors, and the marketplace as a whole—of what you’re trying to achieve. Just as important to understanding the problem is learning the size of the problem. How big the problem is determines many things internally, including the scale of your own capacity and operations to deliver solutions. On top of that is another key factor—what’s the acuity—the urgency—of the marketplace problem? How fast can you reasonably expect people to pay you to solve it, based on how your customers prioritize their needs for solutions?”
James Forrest: “We hear a lot about bootstrapping as the best way for entrepreneurs to achieve their goals, because owners keep control over their destiny, first of all, as well as move forward with less complexity. Do you agree?”
Jess Eberdt: “Well, that’s certainly typical to think bootstrapping is good for most cases, but this is a myth that needs dispelling. What I see in most cases is companies keeping their capital requirements unrealistically low to stay within a bootstrapping framework that isn’t good for their long-term prospects. You’re right, in that they do it too often because it’s easier, but it’s almost never the better way to go.
Companies need to be raising money much of the time, for the simple reason that you always need more capital than you think you do. That’s just a fact of business life. Thus, in addition to that lack of external understanding of customer and marketplace drivers, companies also lack that level of internal understanding of how much capital they need to pull off their business plans and ramp up to sustainability.”
James Forrest: “We often hear that one of the first areas of evaluation for angel investors is that of the management team currently executing the business plan. Tell us what you see in these situations.”
Jess Eberdt: “Of course—evaluating the strengths and limitations or outright weaknesses and capabilities lacking in management teams are paramount to long-term success of the company and the angel’s actual investment. They want to know who’s behind the idea and all about them.
Often, the founder may be someone with great technical savvy with the ability to translate a wealth of experience and acumen within a particular area into the next great technology or product. We see that a lot in the Triangle area. For example, some of these very bright people are engineers or tech wizards, and while they know their offering backwards and forwards, they are short in many of the areas needed for holistic management of a business.
They don’t have an understanding of markets and their constant shifts, nor their customers, and they often struggle with how to sell and market their products. And, as you’ve probably seen yourself, many times they don’t have what it takes to operate any kind of business on a day-to-day basis. This is when conversations can get tough sometimes—you’re dealing with people’s dreams here.
We have to make people aware of their options, and running a business doesn’t necessarily have to be one of them moving forward. I have personally steered several young entrepreneurs toward stopping and doing something else with their time, instead of wasting a few years of their lives when they didn’t have a chance of success. There are other ways to succeed with an idea—selling it, licensing it, or bringing in a seasoned management team with a track record of success in launching successful ideas into sustainable enterprises.
James Forrest: “So you reject the notion of the ‘nobility of failure?’”
Jess Eberdt: “That’s correct. I don’t believe in the merits of failures for failure’s sake. Look, we all know that we all grow and learn so much from our failures. I just don’t believe in entering a failure that’s predetermined. Don’t mistake the badge of failure for perseverance. You simply need to pursue the right option for your business.
When I’m working with young companies, I help them in a few ways. First, I try to connect these entrepreneurs (where and when appropriate) with people who can help them, including my team at Tempus Durham and other key advisors. I also help them to understand the externalities that will shape their success and help them have a holistic understanding of what it will take in the day-to-day mechanics of running a successful business around their ideas for products and services. Then, after they’ve built this base of knowledge, I help them brainstorm regarding the next best step for the business, which can include potential capital investment. We discuss at length how a capital investment may impact their company (both good and bad) over the long-term.