Meet the Angels!

Filed under Raising Capital, Venture Capital and Start Ups on March 2, 2012

Last night I attended “Meet the Angels!” sponsored by MIT Enterprise Forum of the Northwest. This Venture Lab event was moderated by Rebecca Lovell, Chief Business Officer at Geek Wire. There were panelist from seven local angel investor organizations:

Alliance of Angels
Keiretsu Forum
NW Energy Angels
Puget Sound Venture Club
Seraph Capital Forum
WINGS
ZINO Society

A description of each of these organizations and their representatives at the forum is included below.

The panelist were all given the opportunity to introduce their organizations and then took questions from what appeared to be nearly 200 attendees. Here are some of the takeaways I left with.

Of the approximately 600 thousand businesses formed each year, only 5% receive angel investor funding and less than 0.5% receive venture capital funding.
Looking at the 5 angels that provided complete reporting (there is a spreadsheet below) deals were up 34% in 2011 over 2010 to 133, dollars invested were up 44% to $64.3 million and the average deal size was up 7% to $483 thousand.
Based on very limited data, it appears that 20-25% of applicants make it to the screening process, about 50% of the ventures screened get to present and 50-67% of the presenters get funded. That would mean your chances of being funded by any given angel organization is around 5-8%.
99% of angels are not part of a group.
The duration of the process can range from 3-6 months between presentation and funding.
The biggest variable is due diligence. You can manage that variable by being prepared. Get a due diligence check list from the angel or another source and make sure you have the information necessary and create a drop box for file sharing.
The due diligence will cover:

Do you have a sustainable competitive advantage
Is you IP protected
Corporate governance and other legal entity issues
Financials
Market
Competitors
Management team
References

Not all angels will be expert in or even familiar with the due diligence process and this will effect timing. There also needs to be a lead angel that will step up to the plate and manage the due diligence process and negotiate the terms sheet.
Alliance of Angels provided this list of “must haves:”

Prototype Demo is the new PowerPoint
Market traction
High growth/high volume market
With a long lead product, LOI with large customer

Seattle ranks 4th in startup density (startups per population) and 2nd in valuations http://www.geekwire.com/2012/chart-seattle-ranks-fourth-startup-density-valuations
As you might expect, the angels discourage high A Round valuations. They cautioned that not only will you chase people away, but that if you are behind your pro-forma financials, B Round financing will be that much more difficult and the angels and owners will suffer.
Do not ask angels to sign NDAs prior to due diligence. You’re saying you don’t trust them.
Angels want to own 20-30% of the company. This is one way they will back into a valuation.
The angels suggested boot-strapping the business as long as possible and use angels at an inflection point i.e. going to market.
You will lose some control when you accept angel funding. Find angels you can work with. The term “noses in, fingers out” was used to describe the angel approach to involvement in company management. You had better believe that all depends on how you’re doing against plan.
When the VCs move in, it’s a much different story. This is a full-time job for them.
The team

Has to be people the angel can work with.
Has to understand how to get the product to market
All engineers, not a good team. – All family or all family and friends, not a good team.
Can the team execute? All the nice words on the investor deck depend on this.
Get a sales guy early.
Owners should always feel the team is never good enough. Build a stronger team than you’re comfortable with.

Who is your next key hire? This is a question that is even included on one angel’s due diligence check list. Don’t screw this one up on your use of funds.
Pre-money valuations will not be based on discounted cash flow off your pro-forma financials. Angels understand that they will be wrong.
The best source for valuations is the last similar deal.
Your financials will demonstrate that you understand your markets and your business with the quality of the assumptions you make and that you can plan by the depth of your analysis.
The entrepreneur/team needs to demonstrate self-awareness:

Know what you don’t know
Recognize your mistakes early

Business plans had mixed feedback. One angel felt he could read into the CEO by reading the business plan. Another felt the investor deck was the business plan. I would suggest that it’s pretty hard to put an executive summary or an investor deck together without a plan and impossible to make it through due diligence without one. Contact Meadow Creek for help or check out this Venture Lab event http://www.mitwa.org/events/venture-lab/creating-successful-business-plan-your-start
Reasons why companies fail in screening:

Inability to communicate
Sloppy deck

Final thoughts from the angels:

Build a stronger team than you’re comfortable with
Don’t cut corners early on
Look at the team’s core skill set, what can you do versus what you think you’re going to do
Building companies is a team sport
Clear vision, does it align with the team and investors
Know what you don’t know
Don’t quit your day job too soon