Hindsight is 20/20, and Don Morrison can think of at least two instances over his long business career when he created something that he could have built a startup around.
First, in the 1970s, Morrison developed an automated inventory control system, while working for a St. Louis men’s clothing business.
Later, as president and CEO, he helped American Eagle grow from one store to 165 stores. In the 1980s, Morrison put together a trend analysis he should have sold to other retailers.
Today, Morrison mentors entrepreneurs and works with the Pittsburgh startup community as chairman of deal flow for BlueTree Allied Angels, while volunteering with Innovation Works, the University of Pittsburgh and Carnegie Mellon University.
“The reason I’m passionate about helping entrepreneurs is to give the students and entrepreneurs the entrepreneurial guidance that I didn’t have,” he says. “Also, the ideas are just so amazing. It really is very stimulating and keeps me going.”
What’s a key principal that investors should follow, based on your experience with BlueTree?
The best advice I can give is something BlueTree really believes in: We don’t invest in technologies; we invest in teams. We invest in the vision of the entrepreneur and whether we feel that he or she has the skill sets to realize that vision by having the right team and executing on the business plan.
Companies don’t succeed or fail on the technology. The technology almost always works. It’s whether the business model works — that’s where companies get into trouble, and that’s when investors get into trouble. They become enamored with the technology, and not with the business model.
What does BlueTree invest in?
The short answer is good ideas. We define a good idea as a company that has the potential to scale from zero to $20 million to $30 million in revenue in three to five years. Why $20 million to $30 million? Because that’s typically when companies get acquired by Google or Amazon or Apple.
Most bigger companies have cut back on their R&D. They’re more in the acquisition mode for strategic investments. That seems to be the model. It’s also an opportunity for entrepreneurs to anticipate what company might be interested in acquiring them, and those potential acquirers can be sources of growth capital through a strategic investment, not necessarily an equity investment.
I also have a consulting business. I was at an accelerator that Ben Franklin runs in eastern Pennsylvania. We met with a dozen teams and one of them was a company (Sustainable Composites) that had figured out how to make material out of recycled leather. Having spent a lot of time in the outdoor industry, I knew people who would be interested and I got him an audience with an outdoor footwear company that led to a strategic investment.
Are you surprised by what’s successful and what isn’t?
You never really know who is going to make it, so the real lesson in angel investing is to have a diversified portfolio. You have to have at least 10 companies or more to stand a chance.
BlueTree used to follow an a la carte model, where you paid annual dues to become a member and then put in a minimum investment for startups you liked. If you didn’t like any, you didn’t put anything in.
Four or five years ago, we did an internal review of our members and found that some of them hadn’t been choosing particularly wisely. So, we changed the model.
We create a big pot of money and we vet different companies, but the ones we decide as a group to invest in, we drag everybody along, kicking and screaming. So, at the end of the year, if we’ve invested in 10 or 12 companies, every member in that fund has 10 or 12 companies in their portfolio. In the long run, it gives our investors better returns.
It’s really leveraging group intelligence, rather than individual. That’s the whole purpose of angel groups in the first place, leveraging the group intelligence.
From the other side of the equation, what’s your advice for entrepreneurs who may need to take on investors?
No. 1, if you can grow your company without other people’s money, if you can bootstrap it, do it — and live long and prosper.
In many cases companies have a good idea — maybe they have protection through IP, maybe they don’t — but they need other people’s money to grow big and grow fast. The advice I give everyone is, choose your partners wisely, especially your financial partners. Because your life can be a living hell if you don’t have shared vision, or it can be a wonderful relationship. The values have to be in line between investor and entrepreneur.
It also doesn’t cost entrepreneurs anything to get world-class advisers on their advisory board. Get a domain expert, get someone who’s good at marketing, get an industry leader — they not only give you great strategic advice for your business, but they can open doors for you when you’re ready to rock ‘n’ roll.