Roundtable Recap: October 14 – Professional Investors Do Not Invest In $20 Million Markets

At today’s roundtable we had some intensive discussions around market sizing and its impact on financing. You have heard, I am sure, that venture capitalists only invest in very large market opportunities – $500 million to a billion. But you have, perhaps, heard less specific discussions on what angel investors are looking for.

Well, some angel investors are looking for exactly the same thing as what VCs are looking for. Mike Maples calls it Thunder Lizard Hunting. In other words, these are angels looking for billion dollar opportunities as well.

But there are others – many others – who are looking for smaller opportunities, playing in the sweet spot of $50-$100 million market opportunities. These are areas that may be gaps in the portfolio of large companies, and are perfect for M&A deals in 3-5 years after building enough validation and $10-$20 million in revenue. By definition, the capital investment needs to be relatively low such that the investors and the entrepreneurs all make a healthy return on investment. Nicola Corzine of the Band of Angels Acorn Fund discusses this at length in our interview with her.

So, please note the TAM Analysis is a vitally important aspect of building any financing strategy. As I take you through today’s roundtable pitches, you will see this come up over and again.

First up today was Chak Onn Lau with Foldees, a Malayasian crowdsourced greeting card company. Chak has been able to get a couple of distributors in Singapore to buy his greeting cards designed by a community of artists, but is struggling to find a steady, repeatable model. He is also struggling with the pricing structure, because until he can get to volume printing, the cost per unit is way too high.

Well, my advice for Chak is to focus steadily on a worldwide list of greeting card distributors using Telewebsales and Sales 2.0 methodologies – in other words, don’t invest in travel and in-person sales, but try to close as many deals as possible by phone and the web. [On this point, I recently did a great interview with Dave Fitzgerald, EVP of Sales and Marketing at Brainshark, who describes his Sales 2.0 process in detail. I highly recommend that all of you read the discussion. While you may not have the budget to spend $500k on Sales 2.0 technologies, there are many nuggets that will help you build an efficient, repeatable sales process.]

Chak’s budget is very low. He needs to generate enough profit so that he can grow organically and build his business systematically, and without expecting a lot of outside financing.

Then Raymond McGlamery pitched the O-Port, a guitar and drum accessory company based in Houston, Texas. Raymond has built a nice business through efficient distribution deals and will do about $250k in revenue this year. Raymond is wondering why he cannot attract financing.

I asked him several times what exactly is his TAM (Total Available Market). To be very specific, I am interested in bottom-up TAM, not some big industry number of billions of dollars. I want to know how many customers exist out there who would be likely buyers of the O-Port products, at what price-point, and what does that add up to? Is that a 20 million dollar market? 30 million dollar market? 300 million dollar market?

Well, I could not get a clear answer. What I did get was that in four years, O-Port was going to be a $10 million company. Okay, what percentage of the market does that represent? 10%? 25%? 68%?

Without a crisp analysis of these numbers, investors cannot assess the market opportunity and their potential for making returns.

Next David Sarna with Hendon, Stamford Hill & Co. presented Bokér/1 – perhaps the most compelling of today’s presenters. David is an expert in IT capacity planning and has already sold a company to Computer Associates in this arena. Today, he sees the opportunity to do a Cloud capacity planning company. He thinks, that with $1M in investment, he can make this business successful. He is willing to give up 33% of equity for this $1M investment.

I feel that it is not at all necessary to give this much equity up at this stage of the game.

David should use his credibility in capacity planning and convince a dozen customers to pay him consulting fees to solve their capacity planning problems. He should then bootstrap his product development by using the consulting fees. Again, referring back to the Finisar case study I often teach on this topic, bootstrapping using services is a very effective way to build companies.

Yes, I am sure David’s venture is eminently fundable within a few months. The question I am encouraging him to explore is whether or not he SHOULD take money just because he can get it.

Ladies and gentlemen, ownership matters!

Lee Wright then discussed Ma Mi Skin Care, a skin case company that was completely all over the place. I asked her not to spray and pray, and focus on her core, differentiated products – stretch mark and c-section mark removal creams for new mothers. There are 110,000 monthly search queries looking for ‘stretch mark(s) removal’. This is her core market. Through SEO and mommy blog PR, Lee can tap into this market. But she needs to drop her tendency to “expand”. Now is not the time to expand. Now is the time for laser sharp focus.

I started doing my free Online Strategy Roundtables for entrepreneurs in the fall of 2008. These roundtables are the cornerstone programming of a global initiative that I have started called One Million by One Million (1M/1M). Its mission is to help a million entrepreneurs globally to reach $1 million in revenue and beyond, build $1 trillion in sustainable global GDP, and create 10 million jobs. In 1M/1M, I teach the EJ methodology, which is based on my Entrepreneur Journeys research, and emphasize bootstrapping, idea validation, and crisp positioning as some of the core principles of building strong fundamentals in early stage ventures. In addition, we are offering entrepreneurs access to investors and customers through our 1M/1M Incubation Radar series. You can pitch to be featured on my blog following these instructions.

You can listen to the recording of this roundtable here. Recordings of previous roundtables are all available here. You can register for the next roundtable here.

This segment is a part in the series : Roundtable Recap
. March 25 – A Mixed Bag Of Advice . April 1 – Bootstrapping Tips . April 8 – A Focus On E-Commerce . April 15 – Small Is OK; The Goal Is Profitability . April 22 – The Original Runners . April 29 – Finding The Right Direction . May 6 – Defining Value Proposition . May 20 – Validation, Validation, Validation . May 27 – Is The Venture Worth Your Time? . June 3 – Defining Market Segments . June 10 – Efficient Targeting . June 17 – Online Education Startups . June 24 – Three Startups That Can Hit One Million Dollars . July 1 - Get Your Pricing Model Validated . July 8 - The EJ Methodology . July 15 - A Market Of Late Adopters . July 22 - Bootstrap Using Services . July 29 - Startups In Malaysia . August 5 - Paying Customers =>Validation =>Valuation . August 19 - Niche E-Commerce Is Great For Bootstrapping . August 26 - 85%-90% Of Search Traffic Comes From Organic Search . September 2 - Find High Velocity Channels . September 9 - Open Opportunities In Cloud Computing And Rural BPO . September 16 – 5 Cloud Computing Opportunities for Entrepreneurs . September 23 - Do Not Spray And Pray . September 30 - Investors Don't Fund Broad Ideas . October 7 - Try To Get At Least $2M Pre-Money In Seed Round Valuation . October 14 - Professional Investors Do Not Invest In $20 Million Markets . October 21 - Bootstrapping Comes In Many Flavors . October 28 – Convert Potential Competitors To Partners . November 4 - Premium Lounge Sneak Preview . November 11 - African Tech Entrepreneurs Emerging . November 18 - Not Coming To The Rescue Of Victory . December 2 - Niche Marketplace Businesses Can Be Interesting . December 9 - Where Should You Raise Money? . December 16 - Top 10 Tech Trends To Watch . January 6 - Top 10 Vertical and Social Web Trends For The Decade . January 13 - Top 10 Online Advertising Trends For The Decade . January 20 - Personalization Remains An Open Problem . January 27 - Non-Dilutive Financing Through Revenue Sharing . February 3 - Indian Entrepreneurs Are Maturing . February 10 - When Keywords Are Competitive . February 17 - Indian Company Plugs Gap In Google’s Enterprise Solution . February 24 - VCs, Angels, Incubators, Accelerators – What Are You Doing With Your Rejects? . March 3 - Spotlight On The Northwest . March 10 - Spotlight On India . March 17 - Spotlight On Latin And Central America . March 24 - 75th Session Spotlights The Midwest . March 31 - Microsoft’s $100,000 India Startup Challenge Grant . April 6 - 1M/1M Announces Important Partnership With MAD Incubator, Malaysia . April 9 - 1M/1M Announces Partnership With TiE Chennai . April 16 - 1M/1M Partners With Indian Angel Network Incubator . April 17 - High-Octane Energy In Pune . April 21- Incubators Are Reaching Out To 1M/1M . April 28 - Guerrilla P.R. & SEO Most Profitable Customer Acquisition Strategies . May 5 - Ownership Matters . May 12 - Two Really Cool Companies . May 19, Making Money From Blogs . May 26 - Twitter, LinkedIn - Why Not Affiliates? . June 2 - 1M/1M And Incubators - What We Have Learned . June 9 - Silicon Valley . June 16 - Exciting Companies Lined Up For Microsoft Startup Grant Finals . June 23 - New Assessment Tool For Entrepreneurs . June 30 - Continued International Participation . July 21 - Crowd Sourced Funding Exchanges - An Emerging Trend . July 28 - Investors And Incubators Need To Look At Pre-Incubation . August 4 - How Do You Bootstrap Freemium Ventures? . August 11 - Menlo Park And The Silicon Valley Renaissance . August 25 - How To Use Twitter For Lead Generation . September 1 - Fall Call To Action . September 8 - A View Into Israeli Start-ups . September 15 - Do Your Homework First . September 22 - How Do You Catalyze A Region’s Entrepreneurship? . September 29 - From Poland To Argentina . October 6 - Dedicated To Steve Jobs, Reinforcing Mission To Restructure Capitalism . October 13 - FREE Is Not A Business Model . October 20 - Non-profits And For-profits . October 27 - Check Out Stanzr . November 3 - VCs Are Not Always Right . November 17 - Business Schools And Early Stage Entrepreneurship . December 1 - 1M/1M Premium Company Freshdesk Wins Funding From Accel Partners . December 8 - Three Open Opportunities For 2012 . December 15 - Web 3.0 And Social Dancing; Romania Emerging . December 22 - Free Apps, Ad-Supported Business Models => Dangerous! . January 5 - ERP Galore . January 12-13 - Spotlight On IIT Kharagpur, India . January 19 - Are Media Sites Fundable? . January 26th - Spotlight On Jacksonville, Florida . February 2 - YCombinator vs. 1M/1M . February 9 - Are You Fundable? . February 16 - What’s Happening In Turkey? . February 23 - Microsoft Israel To Offer 1M/1M Scholarships . March 1 - Strategy Gaps Need To Be Plugged . March 12 - Winners Of Microsoft Israel Scholarships . March 15 - Spotlight On 3 Day Startup Tel-Aviv . April 3 - Rendezvous In Bangalore . April 12 - More From Indian Entrepreneurs . April 19 - Tyranny Of The TAM . April 26 - A Rare Women-Only Session . May 3 - Some Wonderful Opportunities With Corporate Partners . May 10 - BlueSnap-Elance Contest Applications Deadline This Weekend . May 22 - Winners Of TechHub-A&N Media Battle Of The Startups Contest In London Win 1M/1M Scholarships