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Confessions of an Angel Investor

This week's Web roundup: What one angel investor really wants from entrepreneurs, why deal-worthy Net startups face litigation risk, and more

Confessions of an Angel Investor

It's been nearly a year since Micah Baldwin sold his SEO consulting company and decided to become an angel investor. Having met "a lot" of entrepreneurs and investors of all stripes, he writes in his blog that he's "developed a short list of five requirements I judge every investment opportunity against:"

1. The company must "have a real leader/CEO. If it's a first-time CEO, do I think s/he can handle the rigors of building a business." Among the necessary qualities leaders possess is whether they "engender trust," are "confident," are "risk aware," and have enough "presence" that others will follow them.

2. The company needs "a real revenue path/exit strategy." He says he must "see the future of the business, not be enamored of the product/service/people."

3. He wants "to be able to provide support of the company, either through people I know or advice I can give or work I can perform." As a result, "I will only invest in companies that I can be helpful" in. This means, "If you are looking for investment, and your company doesn't touch online marketing, search marketing, publishing, or anything else that I have a connection to or interest in, then you are barking up the wrong tree."

4. Avoid offering convertible debt, since "it's a no-win for the investor in that if you make money or a larger round, I get my money back with a little interest, and if you are failing, I get worthless stock." Offering convertible debt means "they clearly want me for my money, and that causes Rule No. 3 to fail."

5. He only wants to invest together with other "quality" investors. If certain investors he trusts "said I should invest in something, I am going to listen. The converse is also true."

In pitching Baldwin, "Fail one (rule), and I am probably not going to invest. Fail two, and I am 100% out."

Litigation: Hollywood's New Way of Saying "I Love You"?

Hollywood studios are becoming increasingly aggressive litigators against Internet content sites—Viacom (VIA) has sued YouTube (GOOG) and Universal (GE) has gone after Veoh—says intellectual property attorney Andrew Bridges of Winston & Strawn in an interview on Lightspeed Venture Partners' site. He sees "a parallel between being a litigation target and being deal-worthy. Hollywood is hit-driven both in its content and in its deal making. Labels and studios don't want to waste time doing deals with insignificant companies, and they aren't likely to sue companies they consider insignificant. When a company gets enough traction, it will attract the attention of both the dealmakers and the litigators at about the same time. For that reason, companies with disruptive business models who want to do deals with Hollywood need to accept a certain amount of litigation risk."

Reducing Risk: More Investors Putting Less Money Into Early-Stage Companies

The $11.9 billion invested in 24,000 ventures during the first half of this year represents a 6% dollar decline over the same period the prior year, according to the University of New Hampshire's Center for Venture Research. The fact that the number of investors involved in these deals increased 8%, to 140,000 suggests that investors are bunching up more to decrease their individual risk. According to Jeffrey Sohl, the center's director and professor of entrepreneurship, "reflecting this trend is the decrease in the average deal size by 4% over the first half of 2006 and an increase of 10% in the number of investors per deal."

Is Worth $300 Million-Plus?

A recent ad deal with Microsoft (MSFT) means the content-sharing site "could easily justify a $300 million to $400 million purchase price," argues Valleywag. It also says Digg (BusinessWeek, 8/14/06) is rumored to be close to being sold in that price range to a major media company, but allows that "acquisition talks fall apart all the time."

David Gumpert is a journalist who blogs reports regularly about the business of health and has written a number of books about small business and entrepreneurship, including Burn Your Business Plan! He writes his What Entrepreneurs Need to Know columnevery other week.

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