Thoughts from Angel Investors
I attended ASTIA’s Doing It Right last week in the role of advisor. One panel, I sat in on featured several Angel Investors, and I wanted to pass along their advise and comments.
The panel included
- Sam Angus: Fenwick & West (Moderator)
- JoAnne Miller – Golden Seeds
- Ann Nigam – Sand Hill Angles
- Sue Preston – Clean Energy, CalCef Angle Funds
- Wendy Robinson – Harvard Angles
A key takeaway is that not all angel investors are created equal: they may invest in different stages of company development, they have different requirements in exchange for thier investment, i.e. board seat, and different expectations. Some angels are individuals and others are parts of institutions or limited partners.
Golden Rule #1: Know your angel investor. Just as you would when approaching a VC, research your potential angeles. If you are a bio-tech company do not approach an investor that is clean tech focused. Golden Seeds for example only invests in women backed start-ups.
All is not as dismal as it seems, several of the panelists indicated that people are not afraid to write checks. Investors are looking for new opportunities given current market conditions. Angel investors spent most of last year supporting existing portfolio. There’s been a significant upturn in optimism. The situation doe not necessarily make it easier to get money – if you/your product/your service is not proven, may have to jump through more hoops than before.
Stepping stones to VCs
Most angels expect they are a stepping stone to VC investment. They are looking for a big return on their investment, so lifestyle companies (companies that produce enough to make a nice living for founders) do not offer the returns they seek. These types of companies will typically not be considered.
They realize there are 3 strategies for funding beyond initial angel round:
- Profitability (life style companies)
- IPO – market on life support at present
- VC round – most angles focus on this section
To make it to the next round if a company can show profitability or meets milestones, its that much easier to get funding (risk is reduced for investors).
Exit requirements different for VCs and Angels
It is important that companies seeking angel and vc funding understand these differences. But a fundamental truth is that all investors look at the money.
“If you can’t sell higher, buy lower” may be the new mantra for investors.
Investors want validation of the business model, but each type of investor is looking for something a bit different:
Napkin deals are so 1999, and just having an idea is no longer sufficent.
They want traction – having customers and including voice of the customer in the pitch is key. (Note these investors are not seed stage investors)
Some seed stage investors are looking for companies with the ability to scale (show that in plan) looking for potentially 20x returns – again difference between a profitable life style company and one that offers a “bang” at the end.
The money that the entrepreneur is requesting should be tied to key milestones identified in the plan.
NOTE: One entrepreneur said she could not get an angle to listen to her pitch, but she was having no trouble finding VCs to chat with, although the amount of capital she required was well below what would interest a VC. One of the panelist responded that she (entrepreneur) needed to be careful – the VCs may not be interested in investing but picking her brains. They may have a similar company in their line up that is struggling with similar issues, and are looking for new solutions.
There’s that little thing called RISK
Entrepreneurs need to show they understand their risks, and how they will address it.
For the investor, there are 3 primary types of risk:
- team
- technology
- market
Most investors will tell you that they are willing to take on one or two of the three, but never all three. Market risk is the big unknown, and generally always out there. If the team is solid, than the risk is with the technology, or vise versa – but rarely both. The entrepreneur will prove the market and risk, and the investor will validate this assessment. The entrepreneur needs to show that they have thought about the different types of risks and what they have done to take them into account. I developed a template that I use with companies, that helps lay this out.
How do you approach this rare breed?
Everyone was adamant that if you wanted to be taken seriously, you need an introduction, do not approach cold! Use your networks, angle investors are social folks (generally) so the entrepreneur should not have to strain to find someone to make that connection.
All agreed that the practice of some angle investors to charge entrepreneurs was crap. The same mentality applied to “head hunters” entrepreneurs could hire to make the introductions. This relationship cannot be forced or bought, it is not hard to make connections, but it does require some homework. Research that the angle investors invest in your type of company – this site is a good resource.
Another plus would be to show that an advisory board was in place (not full of family and friends) but people with connections and skills critical to the success of the company. If an angel knows someone on the board, even better as they can reach out for an assessment of the company.
Here’s a good read fromVenture Beat on approaches
So you have an Angle on board – how to engage
I was a bit surprised at the diversity of responses, given that one reason you should carefully pick your angel is not only for the funds, but what they can offer in terms of expertise and connections. However, here’s some of the responses:
Some take an Advisory Board position, no Board of Director position
Some require a Board of Director position. Others only required a board seat if the investment passed a certain dollar threshold, say $250k.
Some require the company to be physically close, others not so much of a requirement.
Golden Rule #2: Communication is key, even if not required, regular emails to your investor stating what is happening is welcomed, let them know the good with the bad. If the bad ever hits, they have advanced warning – never let them be surprised. They may be able to help mitigate risk if they are aware of it ahead of time.
So what’s hot now?
- consumer retail
- bio pharma
- bio teck (big exits, risks understood)
- clean energy – especially energy efficiency (lighting, solar, smart grids)
