Tuesday, January 8, 2013

Perspectives on Angel Investing - Part 3

Below are a few ideas that I am contemplating whereby angels can take advantage of these trends to increase their returns.

Angels should consider structuring deals that result in a return of all or portion of their investment, once the company has raised a predetermined amount of capital – a twist on “venture lending.”  The angel retains upside in the company while having new cash to invest in other start-ups.  This also balances the appetite for risk the VC wishes to take on with the lower risk the angel has enjoyed.

Early stage valuations should and probably will go down when professional firms become more involved with early stage deals.  Angels typically act from emotion and pay too much, while VCs don’t work towards the lowest possible valuation since they have liquidation and valuations protections that angels don’t.  Angels valuation need to be much lower than VCs

As a rule of a thumb, angles should invest in either 1) spaces in which they are experts, or 2) in people that they know well and believe in.

Angels and firms specializing in early stage ventures will have a distinct advantage if they can achieve the following:

o Build a reputation for being supportive and fair to founders
o Obtain access to and maintain a strong deal flow
o Develop processes that allow swift deal closure
o Sound investment discipline
o Develop a close relationship to a strong advisory board that can help make investing decisions, asses the founder(s), and can help the portfolio companies long term.
o Allow successful portfolio companies high quality intros to more money
o Be flexible with exit terms or with dividends
o Offer the founder(s) strong personal unconditional support, and an open, peer-to-peer relationship even when you don’t all agree.

I can’t stress how important this last bullet is and how often investors make founders life miserable with or without knowing it.

Crowdsourcing? I have been asked if it’s a viable option. In my view, the jury is still out.  It may evolve into a more effective way to raise money for legitimate but orphaned initiatives such as experimental drugs and medical treatment. This is because many of the financiers will be close to the problem and will have emotional reasons for being involved. Or as we  already saw, for gimmicks.

In current investing environment, Angels should always consider investments in companies that can demonstrate organic growth and the ability to bootstrap at some level.  These businesses are inherently less risky and require smaller angel investments.

As I advised above, I have made many angel investments and have a few general rules that you may learn something from.  First, I only invest in payment related ventures.  It’s what I know best, and I am in a position to offer advice to my portfolio companies.  Also, I tend to include a good level of venture lending in my investments.  In this way, I get my investment back sooner while retaining an equity position as the business continues to grow.  Regardless of style, angel investing is a privilege and it is fun.  Following a company in the very early stages is very rewarding – just mentally write off those funds and don’t set your expectations too high.

Sunday, December 30, 2012

Perspectives on Angel Investing - Part 2

I feel that it is becoming increasingly possible for angels -- or groups of professions that focus on early stage investments -- to make satisfying returns.  I believe we are seeing more and more of this. More groups are emerging which possess the ability to really assess the single most important factor of success – the skills of an entrepreneur .   

These groups have the intuition to determine if the entrepreneur or founder has the ability to withstand the roller-coaster of emotion and abuse typical of a start-up.  Angels need to assess whether founders will be able to adjust to new situations, attract and hire strong team, have the people skills and relentlessly focus on building the company and create real substantial value . . simply to know if they are winners.

Sunday, December 16, 2012

Perspectives on Angel Investing - Part 1

I read an unusually interesting article by financial advisor and former venture capitalist, Andy Rachleff, regarding advice to would-be angel investors.  The gist of the article was that few, if any angels make any money on their investments.  I somewhat agree with Mr. Rachleff, but have a different view as to the future of this important financing resource.  There is little doubt that the system is broken, especially when you consider the low returns tolerated by angels.  In essence, angel investors take the same risks as venture capitalists.  By virtue of their structure and organization, however, VCs enjoy far more protections, and subsequently make more money.

Thursday, July 26, 2012

First Steps in Raising Capital (Part 4)

The Fourth article in a special 4-part series.

6th Advice – Focusing on terms rather than valuation:

Delay agreeing on the key terms of the deal until the discussion nears conclusion.  The funding process can take a long time, and if your company’s value has increased, you will not get a better price. On the other hand, if your company decreases in value, be prepared to negotiate under harsher terms. 
  • Most companies in their first venture rounds are not profitable and somewhat risky.  The longer the process, the safer it is for the VC.  Long processes, however, can erode your resources and decrease your leverage.  Keep the momentum going!

Saturday, July 21, 2012

First Steps in Raising Capital (Part 3)

The third article in a special 4-part series.

4th Advice – Know your VCs like you know your family:

Do your homework on the VC firms, including the individual partners you will be working with:
  • Research the companies they have invested in, and learn if and why founders or CEOs have left their positions.
  • Which of their portfolio companies has had successful exits and why?
  • Speak with founders from the VCs current portfolio of companies and listen carefully to what they don’t say.  Are they pleased with the VC?  Founders won’t say everything they think or feel about current investors.  It’s like marriage; there are some things they will not  talk about.
  • Ask the partners for references, it’s expected and very important. They will all have fancy resumes. Scratch below the surface to know what they’ve really done.
  • Get to know the partner you will be working with.  They will have a lot of influence on the quality of your life for the next few years. Don’t cut corners on this one!

Tuesday, July 10, 2012

First Steps in Raising Capital (Part 2)

The Second article in a special 4-part series.

2nd Advice   – Generals Rules of Engagement:

VC's are looking to invest in projects that have some traction and have been validated by others: well-regarded angels, key partners, serial entrepreneurs, etc.  VCs also like “hot” deals that other reputable VCs are pursuing.  You are much more likely to close a deal quickly and cleanly if you have more than one fund ready to give you a term sheet (and the other funds know about it.) Here’s how you get there: 

Monday, July 2, 2012

First Steps in Raising Capital (Part 1)

The first article in a special 4-part series.

One of the most critical and least rewarding experiences as the founder and CEO of a startup is the exhausting process of raising your first round of capital.  The later rounds are easier, or at least more related to performance. When raising money, there is quicksand everywhere, and it's not always easy to spot things that will bog you down.

There’s no “right” or single way to raise your first round.  There’s no school to teach you.  Unfortunately, the only way to learn is through a potentially expensive process of trial and error.  In order to help people avoid some of these swampy entrapments, I would like to pass along a few tips based on my experiences taking in venture capital.