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Startup discussion

Posted: June 21, 2012 1:55 a.m.
Updated: June 21, 2012 1:55 a.m.

Bob Aholt speaks to the SCV Startup group at The Chip in Santa Clarita on Monday.

 

Content is king, said a member of Pasadena Angels, a nonprofit that offers early-stage startup ventures working capital and business expertise.

Speaking at SCV Startup’s meeting in Santa Clarita Monday night, vice chairman and applicant screener with Pasadena Angels, Bob Aholt, said he is more concerned about the content of a presentation than the polish of the presentation itself.
“Less than 1 percent of startups get money,” said Eric Arndt, SCV Startup’s founder.

Investors are looking at the finance side, but they’re also looking at the potential for success of a startup company, Aholt said, advising the local technology startup groups as to what investors are looking for when selecting startup companies to support.

“We expect that three to four of every 10 companies will fail,” he said.

Ideally, investors are looking for a business that will provide a 10-time return rate, he said, meaning, for example, a $100,000 investment will eventually yield a $1 million return. Investors hope for a return within three years, but know realistically their money may be on the line for five to seven years depending on the startup business model.

Aholt, who also serves as an adjunct professor at the University of Southern California and a board member of Network for Teaching Entrepreneurship, said out of every 10 companies who receive an infusion of investor cash, only two to three will return the investment.

Combined with the failure rate, writing those checks to invest in a startup is a big risk for the individuals who serve as angel investors.

One or two startups might even produce a return equal to three times the original investment, Aholt said, but investors hope one of the company’s they invest in turns out to generate 10-times the amount of the original investment.

And while business plans are necessary, angel investors are initially more interested in the business concept and potential for success.

“Of the more than 3,000 pitches I’ve read, I’ve only read maybe a dozen business plans,” he said.

There’s no magic for success either. Pedigree doesn’t matter. People with Harvard degrees don’t succeed any more than the general population, Aholt said.

Pasadena Angels sees 20 to 40 applications seeking seed money a month, but brings in only six to seven companies to make their pitch. The organization’s investors only fund 10 to 15 startups in any given year, Aholt said. Average investments range from $250,000 to $1 million, but have ranged higher.

The key ingredients in a presentation pitch are finances, team resources, market size and product, he said.

Describing views of a market as top up, bottom up and sideways, Aholt said investors of startups look at how big the market is (top up), the price of acquiring the greatest number of customers (bottom up), as well as how big a startup’s competitors are (sideways).

Investors also know entrepreneurs need to make a reasonable living so they can remain heavily focused building their company, and the investors do expect to help with a salary for the first year, he said.

Operating expenses are less important when reviewing a presentation because investors know those can always be managed in a different way, but expenses should be relative and not out of bounds with the progress or success of a startup, Aholt said.

The key for a startup is to figure out how to create value for their product or service, and to then focus all its efforts on securing revenue and obtaining customers.

For the entrepreneur,  Arndt, the owner of Valencia-based TimeshareJuice, advised participants to look for more than just money. Chip Meyer, owner of The Chip, agreed. Investors invest in companies they know something about, he said.

“Find a value-added investor,” Arndt said. “Find someone who can do more than write a check — someone with the expertise who can help you build your business.”

As for building a startup, focusing resources on building and selling your product are critical. Everything else can be contracted out, said Arndt.

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