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:
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:
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!”
———–
Here is a Red Herring interview with Alan from last year, explaining why he has such faith in the early stage technology community.
Recently, in the flurry of the Angelsoft 3.0 launch, Fred Wilson wrote a lengthy, thoughtful, and generally positive post about the platform in his blog A VC. One of his readers, writing under the nom-de-blog of T. R. Teller, wrote a pretty harsh attack on either the platform or the whole concept of angel investing (it was a bit hard to tell the precise target of his ire).
In the interest of responding to, and clarifying, some of the points he raised, I answered his post in some detail. Fred has suggested that my response was worthy of a full blog post on the Angelsoft blog itself, so here is what I wrote:
T.R, let’s try to look at this calmly, since we are all ultimately on the same side here, trying, as I wrote in Angelsoft’s mission statement, “to get more smart money into more good deals.” I clearly understand your frustration with the challenges of getting early stage companies funded, but let me try to respond specifically to each of the points that you’ve made:
Oh, I’m sure that more than 98.7% of the deals presented to you are “unfundable.”
The essence of a free market economy is that sellers may offer anything they want for sale, at any price the feel is appropriate, and buyers may buy, or not, anything that is offered for sale at a price THEY feel is appropriate. In a free market with perfect information, if no buyer is willing to purchase something on offer, then by definition the price is “too high”. The inverse is that if there are ready buyers but not enough product, someone will step in and offer products until the market clears.
Historically, the angel funding ‘market’ has been highly IMperfect. I’ve likened it to an investor and an entrepreneur running around a football field in the middle of the night wearing dark sunglasses and earmuffs trying to find each other. With Angelsoft, for the first time we have actually managed to create a more perfect market: there are over 11,000 accredited investors who are taking the time to participate in angel investment groups precisely because the WANT to invest. Why else would they be here? At the same time, with the Angelsoft ‘Community’ we have provided a way for an entrepreneur to place his or her plan, completely with summary, video, et al, directly in front of these investors.
Logic, and the theory of free market economics, say that if 11,000 willing buyers can look at the presentation of a plan and decide not to invest…yes, it probably IS “unfundable by objective, economically-motivated angel investors”. (Note that it may still be fundable by friends and family members, or by strategic investors, all of whom are motivated by something other than pure, stand-alone risk/reward economics.) Bill Payne (one of the most respected angels in the country, and an Entrepreneur in Residence at the Kauffman Foundation for many years), has written a good post on what kind of things make a deal ‘fundable’.
My guess, in fact, is that a full 100% of deals that come your way are, strictly speaking, “unfundable.”
Not at all! I have personally invested so far in two deals that I found through the Angelsoft Community, and have brought half a dozen others in for screening to the angel group to which I belong.
One of the things that is not intuitive at all is how the economics of angel investing work. While most entrepreneurs wouldn’t begrudge an investor an annualized return of, say, 25% on his or her invested capital, given the risk of early stage investment, the surprising, and probably terrifying, fact is that in order to achieve that kind of return, angels need to target getting back 30 times their money on each deal! While I’m sure that seems virtually sociopathic, I’ve written an explanation of angel economics that may prove helpful in understanding it.
I mean, why would an entrepreneur with a demonstrably fundable idea go to some wannabe angel network for small change, especially when you’re wasting 99% of your time saying “No Thanks” to the 99% of crap your nervous-nelly network of near-anonymous plungers has deemed “unfundable.”
It is a question of supply and demand, and what other options are available. If an entrepreneur can personally fund his or her idea, then there’s no need to seek angel funding. Likewise if he or she has a well-heeled family or circle of friends who are willing to provide financing. But if the idea requires outside financing, things get quite a bit tougher. Banks are not in the risk-taking business, and will simply not provide startup financing. Venture capitalists fund an even smaller percentage of companies seeking funds (MUCH smaller: last year, VCs in the US funded about 1200 startup and early stage companies; angels funded about 50,000).
So the question of “demonstrably fundable” may not be quite as clear-cut as it may appear on the surface. If no professional (or semi-professional) investor, having seen the proposal, is willing to fund it, I think that in a free market one would then have a hard time describing the plan as “demonstrably fundable”. I think it’s pretty hard to describe investors as “nervous nellies” unless you compare them to something else. I’m assuming that you would not invest your own money in a “hot prospect” from Nigeria that arrived via email, so would that make you yourself a “nervous nelly”, compared to someone who was naive enough to do so?
As for the “near-anonymous” comment, that is a function of each angel group. My own group, New York Angels, proudly lists our members on our website (including folks like Esther Dyson, Gideon Gartner, Josh Kopelman, and other well-known investors), as do many other groups.
I mean, if you want to throw figures at me showing how you’re investing millions and closing a dozen deals EVERY WEEK, then I might admit your method is interesting. Then I might admit your group isn’t a bunch of total posers.
I’m a little confused by this one. How on earth could anyone, angel or vc, possibly look at enough deals, or do enough careful due diligence, to close a dozen deals a week?? I don’t know of anyone or any entity in the history of investing that has had that kind of bandwidth. Our own group, New York Angels, has invested about $35 million during the past six years, and closed about fifteen deals this past year. I, personally, have invested in over 70 startup companies so far. I think it would be pushing things to call us ‘posers’.
I mean, please do let me and everyone know if that’s the case — you’ll likely see higher quality entrepeneurs try their luck with your screwball process!
While I’d certainly agree that the process is far from perfect, calling it ’screwball’ might be going a bit far. At Angelsoft we’ve tried to make it as streamlined and rational as we can. What suggestions would you have for us to improve it?
But as it is, you’re all talk, no walk.
I think that’s unfair. Simply looking at the stats shows that over 11,000 investors are participating and actively looking for investments, and have reviewed deals over 100,000 times. According to the most recent statistics from the Center for Venture Research, angels in the US last year invested $26 billion, into mostly early stage companies.
For all the investors in your network, you don’t represent real capital, you haven’t proven investment acumen, you don’t have impressive returns to show off, you don’t have success stories you can point to. You even admit you barely expect to break even.
It’s important to remember, as others here have noted, that Angelsoft itself is not a network; we are simply a software platform that services networks of angels. But that said, given the numbers above, I think it’s pretty clear that the 412 organized angel groups using Angelsoft clearly represent real capital. The metrics and risk of early stage investing are such that, as I previously noted, fully half of all investments fail. Nevertheless, according to a study released last year, angels investing through angel groups have been averaging a 27% internal rate of return on their investments. Compared to just about any other form of investment, including bank deposits, stocks and hedge funds, that’s actually quite good. As for the ‘break even’ mention, I think that might be a misunderstanding of the context. Most angel groups are not-for-profit as a group, and operate at breakeven. Their goal, however, is to help their members make a profit on their investments, which, as the statistic above shows, they usually do.
You’re not investors, you’re a social club.
Again, Angelsoft is neither an investor itself, nor a group, we’re simply a software company. But for the angel groups who use the platform, social discourse is in most cases absolutely one of the reasons that members join. But since there are a lot better clubs to join, there’s no reason for accredited investors to join angel groups unless they really want to invest [grin].
I mean, for all these reasons and more, most capable entrepreneurs wouldn’t even acknowledge an angel outfit like USV as anything more than glorified bloggers/lookie-loos.
To be clear, USV is Union Square Ventures, one of the most respected professional venture capital firms in the country. They are not an angel group; Fred Wilson, a partner at USV, was simply writing an objective blog post about the Angelsoft platform…which he doesn’t even use!
Why in the world would they take AngelSoft — or any of your dubious peers — any more seriously?
It’s precisely because there are so many sites which purport to ‘connect’ entrepreneurs with investors that we have released Angelsoft 3.0. Now, for the first time, entrepreneurs (and everyone else) can look at real, live statistics on the system. They can see that over 11,000 accredited investors and venture capital firms are actively making use of the platform to review and collaborate on funding deals. That’s why (we hope) they will take us seriously.
T. R. I hope this answers the points you’ve raised, but I’d be happy to continue the conversation either here in blog, here in the Angelsoft blog, or directly by email. Thanks for raising taking the time to comment!
Paul Graham, the entrepreneur-turned-investor behind the ground-breaking YCombinator, has written what may be the most useful, unvarnished, searingly-honest essay on raising money for startups. It should be mandatory reading for every early stage company, and indeed is so good, and so true, that we’re considering making reading it a click-through pre-requisite for submitting a plan through Angelsoft.
His major points are that fundraising is hard, hard work that goes against just about everything that is inherent in being an entrepreneur. It takes longer, costs more, and is more fraught with difficulty than you could possibly imagine. Investors are indecisive, subject to peer pressure, and difficult to nail down.
The odds of getting funded are much, much more difficult than any entrepreneur realizes: Paul quotes David Hornik of VC August Capital as noting that the odds of his funding you are between 0.125% and 0.4%, which in our experience is absolutely typical for venture capital firms as a whole. The angel investing side is somewhat better, particularly for early stage deals, and our statistics here at Angelsoft (derived from tens of thousands of pitches delivered to over ten thousand investors) show that over the past several years organized angel groups have funded 1.32% of the deals that submit to them. But that still means the odds of your getting funded, even by an angel, are worse than a staggering 70:1 against.
Nevertheless, Paul’s essay provides excellent advice for both the mindset and actions that will give you the best chance of succeeding with your startup. In particular, pay close attention to the concept of ramen profitability. Get to there, and the world will seem an entirely different, and more hospitable, place.
The Houston Chronicle writes that even though overall angel investing has increased 15% to 12.6 billion in the first half of 2006, the percentage of that money that went into early stage companies has dropped from 48% to 40%. The funding gap continues to grow though they are optimistic “the funding environment for new entrepreneurs is unlikely to get any worse”.
They give 2 reasons for this:
VC coming into the deals after angels are pushing into even more mature deals, and some of these ange groups are beginning to act more like VC funds.
Angel groups springing up all around the country allow angels to get beyond the sub $500,000 investment fairly easily
John May, from the Angel Capital association, disagrees stating that many of the smaller deals just don’t get reported.
