This post will replay some of my thought process prior to investing in CardMunch. I’ll attempt to discuss not just the standard checklist features (“Is beta built?” “How much revenue?”) but also the intangibles that led me to jump in.
At startup presentations, I initially have interest in probably 1 in 4 deals, but in most cases any infatuation goes away after a little due diligence on the team and market. In the end, the actual hit ratio ends up much lower—in 2010, I’ve invested in 12 deals out of 237 seen, i.e., 5% of the deals I’ve seen, and I’m only counting the ones that came to me via a filter, such as angel group presentations, incubator demo days, and recommendations from angel friends. So, 95% of the time, fear/apathy/conservatism trumps excitement/greed for me.
Even with those twelve deals done in 2010, half of the time I still had a few minor reservations while I was wiring out the funds. However, in those other 6 deals, (or just 2.5% of deals I see) when I look deeper, everything I see gets me MORE excited—and that is the case with CardMunch. Different people have different steps they consider, but for me, Card Munch checked out on all of them. So, here’s how I approached reviewing the CardMunch opportunity, and I include rough weightings on the factors.
There are just 3 inviolate areas for any investment: 1) A large, addressable market; 2) a capital efficient business model which can create good margins; and 3) great people. The first two I don’t even have to consider carefully—you can normally disqualify a deal that doesn’t cut it in less than a 2 minutes. But most everything else takes some time. My rough weights are as follows:
10% Product: (with at least a beta product up and testable)
60% People: Who is the team? (Past experience, past SUCCESSFUL experience, technical chops, hunger, humility, coachability, advisory boards) Do I believe the CEO? Do I like them?
10% Distribution: Who’s leading sales? Can they sell at the Startup (as opposed to Big Industry Leader) level? How will they reach customers? Also pricing, sales cycle, staffing requirements, etc.
5% Operations: Is this scalable? Tested technology? Dependable outsourced vendors?
5% Social proof: Who else is investing, and do they bring anything besides money?
5% Price and Terms
5% Everything Else
PRODUCT (10%): What is CardMunch?
CardMunch solves the business card problem, allowing super-easy and accurate transcriptions of business cards. (The best description of the business card problem can be found on the blog of first investor and co-founder Manu Kumar.)
After going to an app on your mobile phone, you simply snap a picture of the card on the phone camera, and within an hour all contact information contained on the card has been uploaded, verified as 100% accurate by humans, and synched to your phone contact list. You can see the user pitch here , and the investor pitch here on AngelList.
In this case of CardMunch, it was easy for me to understand the product, because I had been an active and enthusiastic user of this app for two months before investing. Looking at the stacks of old, unfiled business cards on my desk, I also viscerally understand the problem, CardMunch’s value proposition, and the target audience, i.e., people like you and me.
Once I know what the product or service does, I ask myself if the product creates something useful and distinctive. This question keeps me on sector focus: for example, it stops me from considering companies related to fashion (may be distinctive, but of questionable utility) or the restaurant industry (definitely useful, but you can take away any single restaurant or chain and you still aren’t lacking for choices). CardMunch can offer a way to easily and inexpensively save time and accurately solve my business card problem, and I can do it at anytime from anywhere? Yes, CardMunch gets through the first round with zero deductions, and I’m trying hard to rule things out.
Addressable Market (It’s really binary…it’s either big enough to grow to a minimum of $20mm EBITDA, or I’m not pursuing it further)
Normally I’d scrutinize the projected addressable market of an item. A new advancement in luge sleds might be useful and important for a luge athlete, but would flunk the addressable market filter. In this case, the potential is evident—all business people with cell phones who exchange business cards. I don’t need to study it any more before checking off this box.
Capital Efficient, High Margin Business Model (Also binary) OK, I admit that I would have passed on Google and Twitter had I had the chance to invest, so this might not be the smartest rule, but it’s what I need for my own discipline. The company has to have a reasonable plan in place to make money. In this case, CardMunch is already making revenues with a high-value service that hooks its users into using it over and over again. CardMunch can work on either of a SAAS subscription or a pay-per-use model. As in the classic “give away the razor, sell razor blades” example, CardMunch gives away a free version of the app along with a number of free trial usages, and then continues to make money through the lifetime of the client.
I’m a 60% jockey, 40% horse investor, meaning that I emphasize the management team more than all other factors combined. In 84% of my angel investments, the CEO previously has run a successful startup.
Before I spoke to anyone at the company, a Google search showed me that Bowei Gai, the CEO of CardMunch, is one of those proven winners. Even though he’s still in his twenties, Bowei has already worked at Oracle and Apple, but most importantly for me, also has launched a successful startup, Snapture. Snapture sprang out of insights he had while at Apple on how to improve photos taken on the iPhone.
However, for me the team analysis is less about resume and more about intuition…which leads to discussion of intangibles. (This can’t be overrated. Tom Brady sat on the bench for 2 years in college, went in the 2nd to last round in the 2000 draft, and was a 4th string quarterback for the Patriots…but scouts there promised his “intangibles”, including leadership, were off the charts.)
To me, the intangibles you look for are hard work, humility, hunger, and happiness. I contacted Bowei late one evening via email to let him know I was a happy (and evangelizing) customer who had seen his company’s pitch via AngelList, and I wanted to follow up. Right away I got back an email, showing his delight to talk to a satisfied customer. Mistaking his 917 area code (NYC) for his location, I asked if he could talk early the next morning. He agreed and called back promptly the next morning…when I learned that he was actually in San Francisco, and had woken up early to accommodate my call. That’s hunger and hard work!
We talked about his experience at Snapture, and why he decided to start CardMunch. I learned he had the humility and wisdom while at Snapture to make a big pivot, switching from an expensive hardware add-on to an inexpensive, elegant software offering. Even though Snapture had impressive sales at the AppStore and great reviews, he also began understanding the limits of one-time app sales, and he began to look for ways to get into a better subscription or per-use business model. That quest led to CardMunch During our discussion, while I found myself taken with his strategic grasp of apps and the mobile market, the overall impression I got was of a businessman who conducted frugal experiments, iterated, improved and repeated—a virtual embodiment of the Lean Startup Principles championed by Eric Ries and Steve Blank.
The two others on the founding team are engineers and hackers from Carnegie Mellon. I’ve always passed on teams where I liked the CEO but had reservations about the other key founders. (FWIW, the smallest teams I’ve invested in had at least three people, including a minimum of one technical founder or industry notable.) To me, three engineers on a consumer product can smell like trouble. Could CardMunch’s three engineers (including Bowei) put in place a sales culture, or would they die the typical engineering startup failure, swamping their product with feature overload? The clean UX of the app provided some comfort, but the sales culture was still unknown. However, I had already come into contact with Co-Founder/Engineer #2, Sid Viswanathan, via email followups from my CardMunch sign-up. Sid emailed to encourage this new user to post a review on the AppStore, and offered a place to go with user questions. Good hunger and customer service points there. The Lead Engineer, Sudeep Yegnashankaran, showed that he too kept his ear open for any and all customer hot buttons: while doing my due diligence, I took a return phone call from the company while I was at the squash courts—and Sudeep, upon hearing this, challenged me to a game next time I was in San Francisco. While it may sound corny, this is just the type of personalized, personable touch that makes a total difference in creating client loyalty and buzz. (At my previous company, it was not a sales guy, but the CTO who made the connections that concluded with us winning a $40 million revenue account.) So don’t let the Carnegie-Mellon label fool you—these guys can convert leads to sales as easily as they code Ruby on Rails. Another little thing: it doesn’t escape my eye that their tweets are getting out at all hours of the day, and that any email or voicemail I lob in, no matter when, is instantly answered—and I work offbeat hours to boot. They’ve created a get-it-done culture, borne out by how far they have come in such a short time on a tight budget.
Bowei will lead sales. Because of the success of Snapture, I already inferred that Bowei had good sales skills before talking to him. Not only was the sales material in the angel pitch simple, direct, and compelling, but I know that it takes a lot more than a good product to attract so many great press reviews and product buzz. Just as the PR campaigns he led at Snapture were well-managed (just check out the site and see the press clippings), CardMunch already is attracting attention with a social media presence (e.g., Facebook, Youtube and Twitter pages) and also great reviews from internet thought leaders like TechCrunch, and GigaOm, mainstream media like the NYTimes, and my favorite video review here on Slate.
Here’s Robert Scoble’s interview with Bowei: http://www.youtube.com/watch?v=ZWDgqCYLKzw
For me, no one can sell the company better than the founders and the CEO. To have the CEO embracing sales and leading the charge is the best possible org chart—and if the CEO can’t sell or communicate his product clearly, be it to an investor or a customer, that’s an instant walk-away.
When I invested, CardMunch had a sizable paying userbase…and an even more impressive data entry workforce managed via Mechanical Turk, already trained and qualified for data input within the CardMunch system. Scaling doesn’t appear, either in ops or even customer support, since FAQs and support functions lend themselves to videos…which the company is already doing. Even with Android and Blackberry versions coming online in coming months, CardMunch should be able to handle all of the new volume…which is a good problem to have.
JUST US LEMMINGS–“SOCIAL PROOF”: 5%? (I say 5%, but honestly, this varies depending on the company. The more borderline I am and the earlier stage the company, the bigger the impact this has on me…though it shouldn’t)
No angel should ever fund an investment that he doesn’t think has the power to attract some deeper-pocket investors. And this is where sourcing the deal from AngelList made it easy. It could be easy and dangerous, via AngelList, to join in a “Party Round”, i.e., no due diligence, with no logic to the angels other than name recognition and the bandwagon effect. That doesn’t appear to be the case here. I could see that the three investors preceding me were Manu Kumar of K9 Ventures, Mitch Kapor of Lotus123 fame, and Dave McClure of 500 Startups. With that collection of angels, syndication, engineering, design and, yes, Metrics for Pirates are solidly covered. For my part, I hope I can bring some East Coast connections to the mix, along with the enthusiasm and support of a true believer in the product.
Before going further, I want to send out a hat tip to Manu Kumar, whose post on CardMunch’s value proposition for user and investors was persuasive to me, and whose early involvement assured solid business understanding, which is evident in all aspects of dealing with the company, especially in clean legal docs. Similarly, thanks to Andrew Parker of Spark Capital, whose blog post on “Turkable Problems” first alerted me to the company.
TERMS AND PRICE: 5%
Only once (when I started investing in a company at the B round valuation) have I gone in at a valuation higher than $4 mm. This deal was priced reasonably all around. Otherwise, straight Wilson Sonsini Series Seed docs: 1x participating preferred, very clean.
Other Miscellanea: 5%
Nothing here seemed out of the ordinary either way. I like the competitive positioning (even though there are lower cost competitors) and appreciate the company’s “secret sauce”, although there is no real barrier to entry for others to imitate.
In CardMunch’s case, that edge is literate, live, human workers, with multiple people inputting and verifying. Prior to cellphones, business people had to either type things in themselves (big time sink), buy OCR readers (big upfront costs and accuracy problems), or carry around a big rolodex. With the advent of cellphones and cameras, other competitors came up…but they typically take the less accurate, edit-requiring OCR route as well. CardMunch’s use of Mechanical Turk staffing changes all that. I’m happy that CardMunch is able to charge a premium to (generally) price-inelastic business buyers in return for the benefits of Easier, Quicker, and most importantly, More Accurate card transcription.
I am a fan of the “Early Exit” observations of Basil Peters, but excepting the field of medical devices, which are flippable once FDA approval has been granted, I like a management team that wants to build something meaningful. Let’s call this mission-focus. Sid, when asked about his exit plans, proudly said “Death.” Which I doubt, but I like the chutzpah. Before you make a rabbit stew, you have to catch a rabbit, and before you sell a company, you have to BUILD a profitable company. The CardMunch founders are focused on executing, not dreaming. Go get ‘em, tigers!
So that’s what crossed my mind before deciding to jump in. Below are some links on what Don Dodge, Mark Suster , Will Hermann, Paul Graham and David Lerner think are necessary preconditions for successful angel investing. I’m an old hand at investing—at one point I oversaw or directly managed $60 billion in institutional investments– but I’m still relatively new at figuring out the angel angles, and this is far more art than science. If you know of other good sites that go through an angel’s or VC’s thought process, I’d love to hear about them. Email me or leave a comment.