This is part of my ongoing series Pitching a VC.
Last night I attended a DealMaker Media (whom I love because they always host such great discussions) panel on raising angel money moderated by Dan Gould and with panelists Rob Hayes (First Round Capital, more seed or A round than angel), Scot Sangster (with OrganicStartup and the best spokesperson for Tech Coast Angels that I have met to date), Tom McInerney (TGM) and Jarl Mohn (who invests on his own “account” and whose track record is truly humbling).
I recently wrote a post on angel financing covering the topic of convertible notes but I realized I was thinking about the issue more from investor perspective and a very narrow topic of how to price the round.
This post is for those who want to raise angel money. My goal is to describe how, with whom, how to find them, how much to raise and at what value. Definitionally not a short post (sorry for letting you down, Ari ;-). So if you’re casually reading and don’t really care about angel financing – abort now! I’ll make my next posting shorter.
If you really want to know about the topic I hope this will be worth your time.
1. Good idea & plan: You must start with a good idea and a PowerPoint deck (my outline is here, scroll down mid way). Jarl Mohn says he hates seeing PowerPoint. I get that. But some people will want to see it. So you need to do one and have it in your back pocket ready to whip out your presentation or your laptop at any moment and go through it in case you’re asked or in case you’re not building the rapport you hope to just verbally. It is also the best thing to send in advance see here.
2. Team: You need a team. Very few people fund individuals. I won’t say never but having a team validates that you can attract people to the cause. Better if they’re full time rather than moonlighting but take what you can get.
3. Product: You should build a product or a prototype. I’m a software guy so I’m sure there are cases where building isn’t feasible. But for most businesses it is. In most cases if you can’t get a prototype done you’re probably not an entrepreneur. That’s OK. 99.8% of people aren’t. But there really are very few excuses in this day and age for not having a prototype.
I know you’re not a tech guy and haven’t done anything other than an HTML course you once took, but if you’re inspirational and a leader you’ll find somebody to moonlight for free to get your prototype built. If you can’t do wireframes, learn how. If you don’t know what wireframes are you should. Go research it. You cannot be just a biz dev type, salesperson, marketing genius or whatever and divorce yourself from product. Great companies are built by having great products. And a great product starts with the founder.
4. Market validation – This one is optional but important. At an angel round you can get away with no market validation. But if you CAN find a way to even get your 0.1 release out the door and get some customers using it, or friendly people piloting it then at least there is some validation to the product and some people to speak to about their experiences.
If you can’t get product released and validated then do user studies. Poll people on the problem you’re solving and get their feedback on why they’d want your product and their willingness to pay for it. One great company, AppFolio, filmed all of this user interaction and made the DVD available to me. Granted, it was for an A round (not angel) but anyone could easily do that for angel rounds. Stand out from the crowd. Differentiate. Do more than you are asked to do. And you’ll actually learn more more from the process than you’d imagine.
This is a much debated topic. For some reason in last night’s discussion it descended into a discussion of “hairy” dentists and pig farmers (details below).
Here’s a breakdown. If you can raise your money from higher on the list, the better. But in the end money is money and better that you raise some and get going than wait too long and lost momentum. Quick caveats: having fewer investors (3-5) is better than many investors (10-15) and PLEASE make sure you hire a great lawyer who has experience in doing start-ups to avoid pitfalls that will make VC harder down the line. Also, make sure that your investors are accredited.
1. Professional angels / former entrepreneurs / seed funds – In Silicon Valley there are people like Ron Conway, Jeff Clavier, Mike Maples and many more. In SoCal we have Crosscut Ventures, Matt Coffin, Mike Jones, Klaus Schauser, etc. They exist in every town. They are people who built and sold companies and have a bit of money. They have advice to share. They know that the money they invest may be lost. Their time is too valuable to call you every day wondering if you spent their $20-$100k wisely. They know all the VCs for intros. Their name alone is enough to get meetings set up. They are calling cards. They are full of wisdom. Find out how to meet them in the next section. They are your best bet. They might be as hard as raising VC. They are not for everybody. Don’t be despondent if you can’t get their money. But if you can, you should.
2. Existing tech or industry executives - Do you have strong relationships in your industry? Do you work in the comedy industry and know all the venue owners or comedians? Do you work as a civil engineer on water projects and have great access to wealthy project developers? The key to getting money is that the people writing the check trust you. Trust is best earned close to home where people already know your work. Make sure these people understand the nature of early-stage angel investing.
I still prefer angel route 1 (above) but this is the next best option in my mind. Don’t worry if they can’t help in your daily business. There are other ways you can get help. Surround yourself with great advisors or other entrepreneurs. Join local organizations like OCTANe, TechStars or Launchpad LA. If you’re really an entrepreneur you’ll find a way to network with the right people.
3. Professional angel associations – This one is the source of much controversy. Some angel groups have a reputation for slow decision making processes and not enough value add. I’ve been to panels where people feel that some angel groups ask for onerous terms that make the VC round more difficult – this came up at last night’s panel.
I can’t really speak generically to this because the Tech Coast Angels / Pasadena in SoCal have produced Green Dot, MyShape and many other successes. And each town has their own group. I can say that you should do your homework to find out the reputation. And just like with VC’s – it is as much the partner your working wit as the group more broadly.
So I don’t think you can say a group like Tech Coast Angels is good or bad. They have great people and probably some duffers. Scott Sangster has made a good case for himself at the two events I’ve seen him speak at recently and I know that people love Bryce Benjamin and say he’s hands on / helpful.
4. Hairy dentists / Pig farmers – I told the story last night how when I set up my first company the seed investor was a pig farmer from Ireland. That is a true story. It helps that my first company was actually founded in Ireland! but the point is the same. He was a very nice guy but zero value add. And whenever I needed to round up signatures for future fund raisings it was difficult to track him down / get him to care. The pure delays due to admin if I would have had 3-4 pig farmers would have killed me.
I don’t know where the term “hairy dentist” came from last night, but it was a funny euphemism. I think it stands for those people who have money but not the sophistication to understand the world of early-stage tech funding. When I write an angel round check I always tell me wife, “let’s assume that money is lost.” So goes angel investing. I don’t think that hairy dentists really expect that. They have an expectation that the IPO will be in 3 years and they were in at the ground floor. If all goes well from day 1 they’ll love you. If, like many businesses, you go through some rough patches, hairy dentists can make life more difficult. But none more difficult and … option 5.
5. Friends, family & fools - I know everybody likes to start by thinking of the 3 F’s, but I dont recommend the first 2 F’s – unless it is your last option. Keep your friends you friends and your family your family. If either are sophisticated then I put them in buckets 1-3 but usually they are not. F&F makes it hard to call it quits when you should. It makes it hard to do downrounds to survive when necessary. It is even harder to ask them to re-up if you need more cash quickly. And it makes weddings and bar mitzvah’s a whole lot less fun.
How to find them
The biggest question that I get asked is how to find the angels I outlined in steps 1-3 above. It is really easier and should be a test of your entrepreneurial chops to figure this out but I’ll give you a cheat sheet.
1. Find local deals – Look at which deals have been done in town. All deals – especially (but not only) those that got venture funded. Lists are available everywhere. In LA we have www.socaltech.com but in every market there’s some sort of database. There’s obviously things like www.crunchbase.com and Venture Source, Venture Wire and many others.
2. Find out who funded them – Contact the management teams. Take them for a coffee. Ask them for advice. Not just funding but learn their story. Take no more than 30 minutes to respect their time. Approach companies that aren’t yet extremely well know. Example companies to avoid would be people like Twitter, Mint.com, Boxee, BillShrink. All are great companies – probably too busy for a lot of random approaches. Make sure some of the questions you ask are, “Did you raise angel money? From whom? Who did you talk to that didn’t fund? What were they looking for? How much do they like to invest? Have they added value? Anyone angels you know that you didn’t fund?” Most important question – “do you know any other early-stage start ups that you recommend I talk with?”
3. Social Networks / Search / Blogs – Obvious, huh? I’m surprised at the number of people who aren’t good at tracking down relationships in social networks. LinkedIn is the obvious starting point not only because it maps out so many relationships but also because you can tell a lot about work history, references, etc. Obviously Facebook has much info. Looking at whom I follow in Twitter can give you some indication of my likely network (although Twitter is more difficult because some people follow too many people and some people follow people they’re interesting in rather than people they know).
But the more powerful and seldom used research in Twitter is that you can go to a person’s’ entire Twitter history and see what they’ve Tweeted. Based on the text this is a good indicator of who they really know. Sound creepy? Maybe a little, actually. But this is all public information that has been Tweeted by people who KNOW this is public information. I think it is a legitimate research tool; however, I would never considering bringing up something you read in a person’s Tweet stream with them when you see them. It creeps people out.
There are more sales oriented tools like JigSaw that tech savvy people hate but sales savvy people love. Basic search engine research can give many clues and if people do keep a blog and you want to meet the person then many clues are obviously there.
My Summary on getting access will be to tell you what most people don’t want to hear. Most people are lazy. When you want to find out information about who knows whom it is really not difficult. The information is publicly available. You need to make it an effort by researching on the web and going and doing 50 coffee meetings with people. Most people are not action oriented. Most people are not obsessive. Most people don’t love networking. Most people are not entrepreneurs.
How much to raise?
Impossible to define an actual number. My experience tells me that most individual angels like to write $25-50k checks for companies they really don’t know well. More professional angels seem to like to do $75-100k. Somewhat the amount you raise will depend on your needs, how much you’ve raised in the past and how much you think you can raise quickly enough. If it’s your first ever raise, many people try to go for $100-$250k because there are less people to ask for money. You can use this to get more product out the door, pay some staff and get your customer traction. Most larger angel rounds are in the $500-$750k range. Obviously harder because you either need a large anchor ($250k) or you’re talking about 10 x $50k people / 5 x $100k. If you’re less experienced I’d probably set a max of $250k on your first raise – but I want to emphasize that every situation is unique. I just wanted to provide some guidelines.
At what value?
Again, every situation is different. If you’re three s***-hot kids from Stanford, Caltech or MIT you might be able to push valuation higher. If you’re like most people and you’re a hard-working individual but not with the 0.1% credentials you may need to be more humble. The hyper connected people in Silicon Valley or big cities might push for convertible debt (see my post here if you haven’t).
I am always an advocate of setting a price. Why? Because I believe that getting the best possible angels around the table is far more important than ultimate valuation. The majority of really good angels want to see the round priced and it also make a decision easier to know what your money buys rather than some vague notion of a discount to a VC round. The post I mentioned covers all of this.
Most Venture Capital “A” rounds (as of 2009) seem to start around $3 million pre-money and may go as high as $5-6 million pre-money if you’ve made a lot more progress or for some other reason the deal is “hot”. But A rounds also get done at $2 million pre-money. Not everybody will want to raise VC money (in fact, see here that I think most should not). This makes your angel pricing slightly less relevant but my guidelines still largely hold.
If you do plan to raise VC you want to be sure of 2 things in your angel round:
1. Your angels are happy when you do the VC round because it is a “step up” in valuation if possible
2. You don’t make it harder to raise a VC round because your angel round was priced too high.
You might feel proud that you talked angels into a $9 million pre-money, raised $1 million and therefore only gave away 10% of your company. But … if you then can’t raise your VC round then how clever was it? When VC’s see over priced angel rounds they often don’t even want to spend the time with the company. They see it as a hassle because nobody wants to have to go back to your cousins, brothers or your hairy dentist and tell them that the mean VC is pricing your company lower since they over paid.
Angel rounds tend to get done in the $750k – $1.5 million range in my experience. If you raise $500k at $1.5 million pre-money then you’ve given away 25% of your company, which is about the norm. If you raise $250k at a $750k valuation the same goes.
If you finished, bravo. I probably wouldn’t have. You probably really do want to raise angel money. Sorry it was so long. I wish you good luck in your fund raising endeavors.