There they gave a great 30 minute presentation about how prospective angels should find deals, work with portfolio companies, and approach angel investing in general (I won’t spoil their grand finale, but suffice it to say that the last five minutes of their presentation should be mandatory viewing for every past, present and future angel investor on a monthly basis.)
But don’t take my word for it, listen for yourself:
Roger Ehrenberg, one of the smartest and most active angel investors in New York (and a member of Angelsoft-based New York Angels) recently led a $1.25 million angel financing of Domdex, an exciting new company in the Internet marketing space. In this interview from the DailyDeal with Mary Kathleen Flynn, Roger discusses the new breed of serious angels, and why they can be a viable alternative to traditional venture financing. Disclosure: I was one of the angels who participated in this round.
A great write-up of the sage (and virtually unanimous) advice from the participants has been posted on VentureBlog by August Capital’s David Hornik (host of the annual Lobby conference.) Here’s the distilled summary of his summary:
It’s a small community — if you screw one entrepreneur, you’ll be out of the angel business because entrepreneurs talk (Conway)
Angel investing is about learning on the job, which means that you can plan on screwing up your first 10 deals at least (McClure)
If you assume that the money is gone once you’ve invested it — that it is like a lottery ticket — then you will have a better time angel investing (Buchheit)
Work with other angel investors so that you can get the advantage of their expertise (Zurich)
There is no rational way to arrive at valuation, so don’t be overly concerned about getting it right (Graham)
Don’t worry if the idea seems crazy — if it didn’t seem crazy, it would be too late to invest as an angel (Graham)
The lifeblood of angel investors is deal flow — you need huge deal flow to find enough stuff that is worth investing in (Ravikant)
The best deals come from other angels(Ravikant)
Don’t be afraid to throw a little dynamite into the status quo and see what comes out of it — often times interesting stuff emerges (and sometimes nothing does) (Dearing)
The Rule of 12 — you need to invest in 12 companies to have statistical diversity — invest in fewer than 12 deals and you run the risk of them all failing (Maples)
Like in the movie “Oceans 11,” you want to pull together the best team of angel specialists there are out there — it increases the likelihood that the company will succeed (Maples)
Help bring your entrepreneurs together so that they can learn from one another (Poler)
By being a connector, you will see the most interesting stuff and work with the most interesting people (Senkut)
Angel investing is all about the syndicate — you can lead if you want to but it can be lonely until others join in the syndicate (Clavier)
Angel investors need to distinguish themselves from others with money – what do you bring to the table? Contacts. Experience. Advice. (Young)
Only invest in stuff you actually know something about — otherwise you’re just buying a lottery ticket (Young)
This is an overview of all the tools on the “My Groups” tab. It covers the Deal list, Group Document Vault, Group Messages, Events, and Member tabs.
2) Deal Tools:
A basic overview of the tools we provide on the deal level. Each deal has a dashboard, documents vault, message forum, and a deal history tab. This video will give you a quick tour.
3) Investor Community:
An introduction to the last of the top level tabs, the Community. Definitely the place to start if you’re looking to find deals or to find new co-investors from the Angelsoft investor community at large.
Recently, Scott Shane, a very smart and decent guy who is a professor of Entrepreneurial Studies at Case Western Reserve, has been highly visible around the web blogging and commentating in support of his recently published book, Fool’s Gold: The Truth Behind Angel Investing in America.
His main thesis is that ‘people’ have a very misleading view of that rare creature known as an “angel investor”, and that angels are far less numerous, generous, and active than ‘everyone’ thinks. In support of this he has extensively research the subject, pulling together all of the available statistics on the field, from the Angel Capital Association, the Center for Venture Research, and even us at Angelsoft (which we’ve been happy to provide.)
As I read his book, and many of his subsequent blog postings and commentaries, I am alternately baffled, bothered and bewildered by his conclusions. First, let me say that his research is legitimate and (as far as anyone, including me, can tell) accurate. So I am not disputing his facts. What I object to, however, is that he sets up straw men to demolish, in order to make lurid points that I believe lead his readers to draw inaccurate conclusions on the state of angel investing.
Take, for example, his contention that angels in America invested “only” as much money last year as venture capital firms. Is the fact of “angel investments = vc investments” accurate? Yes (to the best of our knowledge.) But phrasing it as “only as much” somehow implies that someone is maintaining it is much more. Hunh?
What we and the facts all agree on, is that LAST YEAR ANGELS INVESTED $26 BILLION IN US COMPANIES!! Who on earth is claiming it is anything higher than that??
Meanwhile, in a recent blog post on Small Business Trends, Scott opines that so-called “active investors” are a myth, because even among the cream-of-the-crop angels, the self-reported average time they spend with their portfolio companies is a miniscule 41.9 minutes a week [gasp!] Once again, I can confirm his facts, but substantively disagree with his conclusions!
I’m one of his “cream of the crop” active angel investors. I’m the Chairman of New York Angels (one of the largest and most active angel groups in the country, with 22 deals this year alone), have 70+ companies in my personal portfolio, and spend my full business time on angel-related activities. That said, it would be absolutely correct to say that there are some (indeed, many) ventures in which I have invested on which I spend less than 41.9 minutes per week. And the problem with that is??
I’m not running the business, the entrepreneur is! The last thing he or she wants is me looking over his or her shoulder and micro-managing the company. If that’s what I need to do, then I shouldn’t have invested in this venture in the first place.
Think about it this way: if, after pulling together an investment round of half a million dollars for a company (including corralling the investors, structuring the deal terms, and doing due diligence analysis, all for no compensation, and then investing $100,000 of my own money), I followed through by serving on the company’s Board of Directors (which would be active involvement indeed), kept updated by asking for and reading weekly management reports (which is way more than most CEOs want to provide), referred the CEO to a dozen high-level sales and business development prospects from my network during the year, and then introduced them to five top-tier venture capital firms for potential participation in a follow-on investment round…would that be the kind of “active” angel investor you’d like to have?
I think the answer from any entrepreneur I’ve ever met would be “yes, in a heartbeat!”
Now, let’s look at my time involvement post closing:
You can create a deal in Angelsoft by sending or forwarding an email to your drop-box email (newsubmissions@YourGroupName.angelgroups.net ).
Remember these simple rules to maximize your use of the drop-box email:
The subject of the message will be the Deal Name.
The files attached to the email (up to 10MB) will go in Documents.
The body of the message will be posted under Messages.
This will speed things up, and allow you to start tracking ALL your deals in Angelsoft.
For a more advanced option, you can also add ::referral source to the subject line, to indicate the person or organization who referred the entrepreneur to you. For instance, if a company named ABC General was introduced to you by Sam Smith, then the subject line should be: ABC General::Sam Smith.
Angel investor groups have a reputation of being extremely guarded about their activities. As most of you know, we’ve spent the last 4 years helping to make the activity of this hugely valuable sector of our economy more transparent. As part of these efforts, we’re building Group Profiles for all of our 450 angel investor groups to help them network more effectively and to help entrepreneurs make intelligent choices about whom to apply to.
You can see our current wireframe below:
If you take a close look at the screenshot (click on it and expand it to full-size), you can see that we’re encouraging our angel investor groups expose some very sensitive information about themselves. Obviously, our highest priority has ALWAYS been to protect our groups, so we decided to send them a survey to get a sense of how open they were to this idea. The survey asked if they would be willing to show this information and if so how valuable it would be to their members, prospective investor partners, and to entrepreneurs.
The response was somewhat surprising: An overwhelming number of our groups thought this information would be valuable not only to their investors and fellow group managers, but ALSO to entrepreneurs. I’ve linked to the original survey and the response details, but combining the response, you get numbers like these:
Of the 60 angel investment groups that replied, a staggering 62% felt that even the most sensitive data would be valuable to entrepreneurs and only 19% wanted to hide this information from them. If you discount the 4% that didn’t even want to share this information with their own membership, only 15% wanted to keep this information specifically from entrepreneurs.
Obviously there is now a raging debate here about how accurate the survey is, so we’d like you to chime in. Are angel investment groups realizing the value of transparency, or are these results meaningless? We’re obviously hoping for the sake of the angel industry that it’s the prior!
We’re sending out the survey to our entrepreneur community tomorrow and will post those results then.
In a pithy but perceptive post on O’Reilly ONLamp.com several years ago (which has, in some quarters, achieved almost iconic status), Derek Sivers wrote the following, which I think is an excellent way of clarifying why angels and VCs put much, MUCH less stock in “good ideas” than do the entrepreneurs who submit them:
“It’s so funny when I hear people being so protective of ideas. (People who want me to sign an NDA to tell me the simplest idea.) To me, ideas are worth nothing unless executed. They are just a multiplier. Execution is worth millions.
Explanation:
AWFUL IDEA = -1
WEAK IDEA = 1
SO-SO IDEA = 5
GOOD IDEA = 10
GREAT IDEA = 15
BRILLIANT IDEA = 20
NO EXECUTION = $1
WEAK EXECUTION = $1000
SO-SO- EXECUTION = $10,000
GOOD EXECUTION = $100,000
GREAT EXECUTION = $1,000,000
BRILLIANT EXECUTION = $10,000,000
To make a business, you need to multiply the two.
The most brilliant idea, with no execution, is worth $20.
The most brilliant idea takes great execution to be worth $20,000,000.
That’s why I don’t want to hear people’s ideas.
I’m not interested until I see their execution.”
John May is the Chairman Emeritus of the Angel Capital Association, the official umbrella organization of the leading angel investment groups in the United States. He is a major figure in the global angel sector, having written two seminal books on angel investing, one for entrepreneurs on fundraising, and another for angels on best practices in investing. John serves as the primary East Coast trainer for the ACA’s Power of Angel Investing seminars, and through his management firm New Vantage Group runs several of the most respected andactive angel organizations in the country (which, of course, all use Angelsoft to manage their deal flow and investment collaboration.) What follows is a clarion call to serious angel investors that John issued this week in light of the capital market gyrations.
“Calls have been flooding into me from the press, our investors, and our portfolio entrepreneurs about how to react to the darkening economic environment.Early-stage investors in entrepreneurial companies have always represented themselves as patient investors and supportive partners, not financial engineers. In fact, we angel investors have frequently thought of ourselves as “mentor capitalists.”
So it occurred to me that in this time of political uncertainty, lack of clear direction from economists, and once-in-a-lifetime hurdles, we must stand up and either be true classic angel investors or we should go home. I seriously think that we will look back on this era as one when we stood by our companies and separated ourselves from the quick buck, irresponsible masters of the derivative empire or when we ran and confirmed to the popular press that we were hobbyists and not very angelic at all.
Those of us who believe that serious angels – located in all cities, all states – formed the Angel Capital Association and educated themselves at Power of Angel Investing seminars and told foreign guests that we were part of a movement, must now stand up and support American entrepreneurship like never before.
How can we demonstrate our true colors? Here are just a few action items that come to mind – a short list I hope you will expand and communicate to others in our venturing community.
First, be honest, realistic and communicate.Like never before we need to bring our wisdom and experience to bear and tell it like it is to struggling entrepreneurs. We have a principal-to-principal relationship like no other asset class and we must communicate like never before.
Second, demand stark reality in planning and operations and assume the worst of the coming recession. Do not take half steps. Do not rely on past assumptions of pipeline, financial institution support, and prior partners. Re-confirm relationships.
Third, remember cash is king.Husband current resources, talk to co-investors about capacity to continue support, demand review of current operating assumptions.
Fourth, expand on dialog collaboration with like-minded investors who could partner in supporting current companies in the coming months – syndicating has already becomecommon among angel groups – it may be vital in order to stretch resources. In a time of lack of trust among financial institutions,we need to work alongside fellow sophisticated angels by co-investing in existing portfolio companies.
Fifth, task angels to seek alternatives to growth and to find exits that were ignored, discounted, or unknown before who could buy the company, who could provide support in the short term, and what would happen in a worst case scenario.
Last, angels need to be honest with themselves and not ignore the reality of limited resources available to do new deals even while “protecting our own children.” I suspect in the coming six to twelve months many alluring new opportunities will have to be reviewed in light of the blight of our existing children, and if we meant what we said about being different than hit-and-run financial engineers, we should honestly address current company survival plans before leaping to the next best thing. We may be able to do both – but inward reflection and some “reality therapy” must come first before executing a revised 12-month plan.
We don’t know how bad the upcoming recession and credit crisis will be, but we, of all investors, should use our experience and long-term perspective to help our early-stage innovative company community through these uncharted waters. Let’s stand up together.”
John May
Managing Partner, New Vantage Group, Vienna VA
Chair Emeritus, Angel Capital Association
Alan Patricof is one of the country’s most important venture capitalists and angel investors. He founded the VC fund Patricof & Co. in 1969, which has gone on to become 300-person Apax Partners, one of the world’s largest private equity investors. Three years ago, returning to his roots, he founded Greycroft Partners, an early stage $75 million fund focusing on technology startups (and an Angelsoft user). Throughout this time he has also been an angel investor with his own funds, and continues as an active member of New York Angels. In light of the gyrations in the world’s capital markets, and particularly a Doomsday meeting that Sequoia Capital was reported to have had recently with their portfolio companies, Alan felt it important to put things into perspective.
Here is the full text of a statement that he issued this week, addressed to early stage companies and the investors who fund them:
“The comments made by the partners of Sequoia Capital at their recently held ‘CEO Summit’ have been widely covered by leaks to numerous bloggers. These bloggers have disseminated the details and spread the contagion of the sentiments to the public at large, unfortunately running the risk that the words become a self-fulfilling prophesy. Without challenging the comments, which expressed a heightened degree of doom and gloom for the economic prospects of young start-up companies particularly, I do think it calls for a somewhat more restrained response on the outlook and required action before throwing the baby out with the bath water. Certainly, we are going through a period of enormous economic and political uncertainty. The loss of confidence, primarily in our financial system, as a result of the excess of the past five to ten years (if not longer - we may never know how long some of the flawed practices have been going on) is one of the leading contributors. We are also at the moment looking for leadership on the political front, and both because of very low public support for the President and because we are in the midst of a heated election for his successor, we have no real voice of authority to provide some guidance, reassurance, and inspirational confidence that the bus has a driver who knows where he is going.
Nevertheless, aside from an over-inflated housing boom that had to collapse sooner or later and a complicated financial system that arose in part to fuel this engine, the basic economy was in reasonable shape, with GNP growth and productivity gains supporting a solid, if not vibrant outlook (I know the automotive industry is also going through bad times but it no longer pervades the economy as once conveyed in the expression, “As GM goes, so goes the nation.”)
Advances in technology are allowing companies to make goods and provide services faster and cheaper. The wireless revolution and the Internet have made the dissemination of information easier and more pervasive for the entire world and brought significant benefits to every phase of our economy. That is not going to stop, although it may temporarily slow down. In these difficult times, there will be winners as well as losers (and the former may be fewer in number for a while).
The point is, the financial problems are being addressed, if not a bit belatedly, and some international mechanism will be found in short order for some coordinated policy that will restore order and confidence to the system.
Most young companies, with which we are specifically concerned, are financed with equity capital. That has its positives and negatives; on the one hand, debt is a very small factor in the capital structure of most small companies so loan foreclosures and the interest rate burden are not of prime concern. On the other hand, equity capital, which is provided by private investors, requires confidence in future prospects for reaching profitability and creating a strong market value. Certainly under current conditions it is hard to engender such confidence although history has demonstrated that it is in times like these that great opportunities are created. I have always said, “The best time to invest is when the drums are beating, not when the trumpets are blaring!”
This is surely a time for companies to pay meticulous attention to detail, particularly their cost structure. It is a time to be realistic in their near-term assumptions for revenue growth and take nothing for granted. Raising additional capital to support operations is of course critical, as it is at any time, but this is particularly a time for young companies to be extra cautious in developing pragmatic assumptions of their needs and in focusing on the amount and not necessarily the cost of that capital.
This is not a time to panic, cut off all investment in the future, and burrow into a dark hole. Take a page from the packaged goods industry that the time to gain market share is during tough times when your competitors are weaker in responding. And while this may feel more directly related to portfolio companies, we as a venture industry should not retreat either. It is our strong belief that we can and will continue to make sound investments in excellent opportunities. It is as good a time as ever to start a company with sound fundamentals.
So my point is to heed the caution of the Sequoia comments but to use them only as a strong message to reexamine all cost elements and growth plans and use this opportunity to assure that you are a survivor. Find a way to use this moment to gain your greater share of the market by providing a solution that is needed by others to improve their prospects in the difficult environment ahead. Tighten your belt and live within your means. Although the timing makes this message seem more prescient, it is a philosophy that works for successful companies at all times and at all stages; it is simply put, good business. This is not a time for heroes!”
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Here is a Red Herring interview with Alan from last year, explaining why he has such faith in the early stage technology community.
