Why do so many people choose banks over Venture Capitalists/Angels?

STBR

I've been pondering this for a while now.

I've heard so many people say "Oh I'd start such a business if I just had the money" or "I would but I don't want to lose my house to the bank".

A man I know [not very well] in California recently received a little over 1 million USD in his first round of funding [2 VCs and some angels] for his new web startup, and he had to give away less than 10% of the company.

I may be missing something, but to me it seems like a lot of Irish would-be entrepreneurs are barely aware of VCs and the like.

leahcim

There isn't much appitite in Ireland for tech startup investments. Over the last 10 years people with money were only interested in property investments. Even the banks won't talk to you unless you have some colateral.

A few years ago the Limerick brothers who helped start http://auctomatic.com/ were in the media talking about how they had to leave Ireland before anybody woud take there idea seriously. They had to go to San Francisco to get investment.

http://www.irishtimes.com/newspaper/frontpage/2008/0327/1206144779850.html

Limerick teens sell software firm in multimillion deal

TWO TEENAGE Limerick brothers have shared in a multimillion-dollar payday following the sale of their fledgling software company, Auctomatic, to publicly quoted Canadian firm Live Current Media. JOHN COLLINS reports

Patrick (19) and John (17) Collison are two of the four main shareholders in the US-registered company. The sale price is thought to be in excess of $5 million (€3.2 million).

"I can't say how much the purchase price was, but I have become a millionaire," said Patrick, a former BT Young Scientist of the Year winner.

It is understood two large US internet companies bid against Live Current Media, driving up the price. Patrick and John's partners in the firm are British citizens Harjeet and Kulveer Taggar.

Auctomatic provides web-based software for heavy users of the eBay auction site which enables them to manage inventory more efficiently. The service launched last summer.

It received backing from private US investors, including Chris Sacca and Paul Buchheit, former executives of internet giant Google.

Patrick won the BT Young Scientist of the Year competition in 2005 for his development of a new programming language, Croma, which simplifies the way web applications can be built. He then began study at the Massachusetts Institute of Technology in the US, but deferred his place to concentrate on the start-up.

The Collison brothers established a company in early 2007 in Limerick but were unable to secure funding from Enterprise Ireland or other early-stage investors.

They successfully sought funding and support from influential Silicon Valley incubator Y Combinator, and relocated to California last summer. Y Combinator had three months previously backed a similar UK-based start-up by the Taggar cousins and, on the investor's suggestion, the two firms merged.

Patrick will become director of engineering with Live Current Media in Vancouver. John will remain in Limerick to finish his Leaving Cert at Castletroy College but plans to spend this summer working for the new owners. "I'm thrilled," said John. "I might buy a car. Then again, I might have enough money for that, but not the insurance at my age."

Live Current Media, formerly Communicate.com, had a turnover of $8.4 million in its 2006 financial year and has a market capitalisation of $57.69 million. It owns internet addresses such as perfume.com, cricket.com, brazil.com and karate.com, which will now be developed using Auctomatic's software.

© 2008 The Irish Times

I think if you have a good technology idea the place to be to get the right people behind you is San Francisco.

http://www.crunchbase.com/ is a good site for reading about what ideas are getting investment and who is investing.

STBR

leahcim wrote: »

There isn't much appitite in Ireland for tech startup investments. Over the last 10 years people with money were only interested in property investments. Even the banks won't talk to you unless you have some colateral.

A few years ago the Limerick brothers who helped start http://auctomatic.com/ were in the media talking about how they had to leave Ireland before anybody woud take there idea seriously. They had to go to San Francisco to get investment.

http://www.irishtimes.com/newspaper/frontpage/2008/0327/1206144779850.html

I think if you have a good technology idea the place to be to get the right people behind you is San Francisco.

http://www.crunchbase.com/ is a good site for reading about what ideas are getting investment and who is investing.

Thanks for the reply.

I can appreciate what you're saying about lack of interest in tech, but to me it seems the only place people think you can get capital for anything is a bank!

Either that or go on the "Dragon's Den" where the investors seem to take a ludicrous amount of shares for the money they're giving in return.

And you're 100% right about SF. Personally I'm moving there myself for this exact purpose in not so long [although I would wish to be moving to Cali. regardless] - to be at the tech hub, to be able to raise finance, to meet the right people, etc.

And yeah crunchbase is probably the best place on the web for this, I'm a long-time reader.

kenbrady

There is a fairly healthy VC angel network in Ireland. It would be on par with most other countries given our population size.
Most companies aren't suitable for VC/angel investment. The ones who are due quiet well. Look at the EI website for a list of companies who have raised investment.
Bank are quicker and easier to get money from. That is why most people go for them.

stepbar

I've the greatest amount of respect for them pair of lads. The problem is we need more of them and sadly we don't have them.

leahcim

I've the greatest amount of respect for them pair of lads

So do I. They are an inspiration. I remember Patrick Collison on the Late Late Show talking about how frustrating it was trying to find somebody in enterprise Ireland to even understand their idea not to mind give them any investment.

If you were going to try and get an angel investor involved in your project there is an event called first tuesday (AFAIK held the first tuesday of every month) where people go and pitch their ideas, I don't know how often they successfully match people with investors see http://firsttuesday.ie/

If you want to do some networking and maybe met an interested investor then there are the http://www.opencoffee.ie/ meet ups.

I've never been to either so I've no idea how good they are.

kenbrady

https://www.businessangels.ie/
and
http://www.dbic.ie/index.php?page=aib_seed_capital_fund
are pretty active and invest in a good few companies.

The hothouse.ie also have their own Venture panel that meets each quarter to look at investing in ex hothouse.ie companies. I'm sure other enterprise platform programmes have similar networks.

EI used to match any amount of funding you raised. This was then limited to 200k. Now they are very quiet about committing to anything.

Spinnaker

Facts: www.ivca.ie

TheCostumeShop.ie: Ronan

Personally i think the mind set in Ireland isn't really suited to Angel investors and VCs. Yes some VCs will take 10% of the equity if they believe its a sure thing and the entrepreneur has a good track record in that particular field, but in general VC's and Angels expect a 50% stake which many find difficult to swallow. The way the would be entrepreneur looks at it, they put in all the sweat and hard work so they hate giving up ownership/ profits. The way the investor looks at it their small contribution and experience is more likely to be the make or break difference.

Ireland itself is a relatively small economy, in the US when you get it right you make hundreds of millions, its just a bigger potential upside. Here you tend to make less unless its a very international product.

Even the dragons den, i think the pressure of the situation and authority the investors have in the situation (by being on TV), makes them more likely to get the deal than if it was a normal VC / Angel process.

STBR

kenbrady wrote: »

Bank are quicker and easier to get money from. That is why most people go for them.

I understand what you're saying, but if you need a fair amount of capital I don't think it's really worth risking your family home, etc. unless you're almost 100% sure of success.

TheCostumeShop.ie (Ronan) wrote: »

in general VC's and Angels expect a 50% stake which many find difficult to swallow.

Ireland itself is a relatively small economy, in the US when you get it right you make hundreds of millions, its just a bigger potential upside. Here you tend to make less unless its a very international product.

Even the dragons den, i think the pressure of the situation and authority the investors have in the situation (by being on TV), makes them more likely to get the deal than if it was a normal VC / Angel process.

50%? That seems astronomical. Maybe not in the sectors you're involved in, but certainly in web startups.

Well the friend I have in the US got his funding for a web startup, which could just as easily run from Ireland as it could from the US, yet I highly doubt he would have gotten many investment offers if he were here.

Yeah the Dragon's Den seems like a pretty ridiculous idea to me.
I can't understand why so many people would want to pitch on it.
Sure, you get some publicity, but I'd still rather pitch to private, hand-picked, angels/VCs and then publicize the company myself.

I think the Dragon's Den mentality has just been instilled in everyone because of TV. A family friend told me about a business idea a few weeks ago and then followed it up with "I'm thinking of applying to the Dragon's Den for money" -- yet the idea of private investors [who would be far more experienced in this field] had never even crossed his mind.


Also, thanks everyone for all the other replies.

TheCostumeShop.ie: Ronan

SirDarren wrote: »

50%? That seems astronomical. Maybe not in the sectors you're involved in, but certainly in web startups.

Thats exactly my point, it does seem a lot but it comes down to it do you want to own all of a small company or half of a big one. It applies to webstart ups too, obviously the equity varies with the capital and potential return.

At a 10% investment stake for say 50k, given that 90% of businesses fail in their first five years, one would require the company to turn over 9 million in profits in those 5 years to turn a risk factored in straight 20%pa return on investment.

Turning 50k into 9 million is no small feat, and for an investor to show enough interest to help a company get to this level, frankly they'd need more incentive than 20% return.

I'm not saying "vulture capitals" or angels are the best way to go, but if you fail they walk away on the money used to fund it - banks will expect personal guarantees which you pay back regardless. Also banks won't help you at best and at worst will cause you no end of hassle pull in credit terms when you need them most.

kenbrady

TheCostumeShop.ie (Ronan) wrote: »

but in general VC's and Angels expect a 50% stake which many find difficult to swallow.

VC do not expect 50% of the company. 50% means they are the biggest shareholder in the company.
VC want to get in early and support the team. The team grow the company and it is then IPO or trade sale.
If the VC was to own 50% it is too much of a risk and not enough incentive for the founding team, employees to work harder.

leahcim

I would say the three most important factors angel investors consider when investing in startups are first and foremost the person or people behind the idea, followed closely by the idea itself and thirdly the amount of money the founder has invested.

I would imagine it would be very difficult to convince an investor to put their money behind a project when the management team is not experienced or the management team have nothing to loose if it all goes pear shaped.

Most of the startups on Crunchbase.com that get investment are projects that are already up and running (they have proven the idea works) and need investment to grow or the founders had already done it before (or worked in a lead role in a company that has done it before) and investors know they have a track record.

Ireland just does not have the opportunities for individuals to gain the experience tech investors require.

I'd say the best chance of making it work from Ireland is to try and grow it yourself and then when the idea is proven and is in need of funds to scale; investors might invest.

TheCostumeShop.ie: Ronan

Lads think about dragons den or the American version "Shark tank", they rarely give out deals for small stakes. Ok not always 50% but far close to 50 than 10.

Axwell

leahcim wrote: »

I would say the three most important factors angel investors consider when investing in startups are first and foremost the person or people behind the idea, followed closely by the idea itself and thirdly the amount of money the founder has invested.

The foremost important factor for any of these type of investors is how much money they are going to make from it, plain and simple return on investment. I would say after that its equally product and person, they need to like the product and know they can get it to market and they must also like the person so they know they can work together and the person will work hard on the product.

As Ronan said on Dragons Den and Shark Tank the offers are always in the 25-50% region. A major reason is when people come on they value their ideas/buisnesses way to high and offer a small stake. Yet the ideas in most cases are just that, an idea without proven sales and without the person realising the cost of advertising and marketing, legal fees and setup costs. The only way on any of these shows that a person gives away a lower stake is that their idea is so good they have people fighting over each other to be part of it in which case they hold all the cards. Unless you have proven sales or a product that is 110% going to succeed then its always a risk for an Angel or VC and they have to cover that risk by asking for a higher stake.

A web startup is no different than any other business in the sense it will still need huge amounts of marketing and advertising to get it out there and known to bring traffic to it. Theres also development costs the same as with a product and obviously ongoing support and research and expansion so its really no different.

Out of interest Sir Darren what is the web startup this person setup??