Angel Investing – The Most Underrated Skill: Access to Buyers

Posted on Sep 19, 2010 | 20 comments


This is the fifth & final (I promise!) article in a series on what it takes to be a great angel investor (and why this should matter to entrepreneurs).  Part 1 – Access to Great Deal Flow – is here.  After that it’s domain experience, access to VCs and deep pockets.

5. Access to buyers – I saved the least obvious for last.  Most people think that being a successful investor is about finding the right deals and nurturing the teams through the difficult times to come out with a great company.  That’s certainly the most important part of the success.

But I’ve come to the view (only after being in the industry for a few years) that the best investors influence their end-games through well cultivated relationships with eventual buyers of their portfolio companies.

Imagine that you funded Larry & Sergey, Chad Hurley & Steve Chen, Mark Zuckerberg, Mark Pincus or Evan Williams.  Or eBay / PayPal, Salesforce.com, Skype, etc.  Imagine the kind of relationship you’d have with these folks and your ability to discuss their needs as well as your portfolio successes at which they should be looking.  Or imagine that you were colleagues with any of these individuals before becoming an investor.

To me it’s no wonder why Ron Conway will likely always continue to perform well.  He’s backed so many of the Silicon Valley’s young elite tech professionals.  He knew them when there were young and accessible.  He gave them early breaks.  People don’t forget.  Plus he’s been around the senior captains of industry his entire career.  He’s bound to be able to help a company or two at the time of a sale.  And he’s been involved in so many that he knows the way the end-game works.  For most entrepreneurs it will be the first time and also will have such a profound impact on their future financial situation that it’s hard to objectively handle the exit process in the way a seasoned pro can.

The is even more so the case with big-name VCs.  Imagine the positions of Sequoia (Google, YouTube), Kleiner Perkins (Zynga, Google), Accel (Facebook), Union Square Ventures (Zynga, Twitter) and so on.

I’m obviously only naming a small fraction of their investments since I don’t feel inclined to research them all and many other great venture firms have this kind of access.  But let me put it this way – investors who have buyers’ ears are less likely to have zeros (they can bury good technology and still try to recover their investments) and are far more likely to architect winning M&A deals.  In a world with less IPOs this skill matters greatly.

It’s no wonder only the top VCc have great returns and the industry overall has very average (often not beating the S&P 500) ones.  It’s hard for me to imagine that angel investing outcomes judged 10 years from now will have a drastically different profile.  The best angels or angel funds will do tremendously well.  I suspect many will match the S&P 500 or worse.  And key driver of success will be the ability to help companies exit to the right buyer and importantly at the right time.

My own firm was involved with the sale of our portfolio company BillMeLater (an online credit company – think PayPal but for credit) to eBay for $1 billion in October 2008.  Not exactly the easiest time to be selling a credit business as the finance world around them was melting and the company was negotiating its credit facilities if it were to stay independent with the likes of Citibank.  I wonder what this company would look like in 2010 as an independent?

But to understand how super-angels and not just VCs get in on this act check out Aydin Senkut’s record.  60 deals, 16 already acquired (by Google, Twitter, eTrade, Intuit, Microsoft).  I don’t know which ones Aydin played a more assertive role in brokering relationships but I can imagine.  I guess what I’m saying is that startup investing (whatever the stage) is not a stock picking job.  It’s an active job throughout the entire life of the portfolio company.

I remember 3 years ago when I lived in still lived in Silicon Valley and I was on the board of advisors of an early-stage, super-angel / early-stage VC backed startup.  It was my neighbor so we talked about the company almost nightly after we put our little kids to bed (such is life in Palo Alto!).  We talked about her desire to sell the company for personal reasons rather than raise a large round of VC.  I agreed to help.  One of her early-stage investors, Jeff Clavier, played a very active role.  He was meeting with Yahoo! on a regular basis for a variety of reasons and Jeff was able to make sure it was a conversation point.  Ultimately Yahoo! didn’t buy the company but having them on board as serious potential buyer helped our ultimate sale.  I remember feeling grateful that Jeff had that access.

Look at the corporate roles / boards occupied by Jim Breyer (Wal-Mart, Marvel, Dell), Marc Andreessen (Facebook, eBay, HP) or Reid Hoffman (Mozilla, Zynga & obviously LinkedIn).  Think about their ability to drive business development, c0-investment or M&A decisions.  If not directly through firms on which they’re on the board – indirectly through the relationships they form operating at this level.

I watch some of the firms that I have personally respected for years create close corporate relationships and I know why their successful.  I’m typing this from SFO right now after just attending an executive offsite set up by Motorola and some of their largest retail customers.  As busy as I feel looking at new deals and working with portfolio companies I can tell you that this activity is one of the most valuable.  I got the chance to speak to several customers about their business issues and also a chance to position some of our investments with them.

And as with VCs the same goes with angels.  Are you able to drop your portfolio companies directly into the SVP of product management at the right buyer?  Or the CEO?  The angels who will drive the best returns will.  Think of investing as lifecycle management: sourcing, coaching, funding (through others) and exiting).  I think the top decile excels in all of these.  And if you’re an entrepreneur you should look for investors that play across the entire spectrum.

As I’ve said many times, investing shares many of the same characteristics as gambling.  People don’t often win by accident.  The best players control their outcomes and play at tables stacked in their favor.  Have fun with your angel investments.  If it’s a casual hobby no big deal like dropping some cash on a fun Vegas weekend.  But if you’re going to play with real dollars, make sure you have the skills for the big leagues.

And if you’re an entrepreneur taking money from angels, super-angels, micro VCs, VCs or whatever we want to call early-stage investors make sure you push beyond their brand names and try to understand from other entrepreneurs how these investors fare in helping companies across these important stages of the startup lifecycle.

  • http://twitter.com/cliffelam J. Cliff Elam

    This was a good ending to a good series. This last post was particularly poignant to me because my first venture (non-super-angels) and the second (*cough* Softbank *cough*) would have been better served by better connected people with deeper pockets.

    Third time's the charm they say. I'm going to be very careful next time.

    -XC

  • http://david-noel.com David Noël

    Excellent finale, Mark. Great post, as always.

    With only 12 venture backed IPO's and 270 acquisitions in the US in 2009, it's crucial to pick the ones that know their way around on “the other side”.

  • http://bothsidesofthetable.com msuster

    Thanks for chiming in. I think many entrepreneurs only find out who is active after they've taken money. It's worth all entrepreneurs networking hard amongst themselves to share this kind of info – about angels & VCs. We all need to be active.

  • http://bothsidesofthetable.com msuster

    For sure. Thanks for adding some data. Luckily 1 of those 12 IPO's was from my fund! ;-)

  • http://david-noel.com David Noël

    Congrats :)

    (forgot to mention the source: NVCA 2010 yearbook)

  • Russ Dollinger

    To be able to choose which investor will be able to help on the back-end implies that the entrepreneur has lots of choices. If the bird is in the hand, most would suggest taking it now and then adjusting later. How would you suggest an entrepreneur handle the situation of an investment offer from someone that can help now but not later?

  • http://dreamtigerco.com/ Dan

    Mark, wouldn't you agree that very few investors would in actuality possess all five of the qualities listed? Including VCs? If so, I wonder if your series is not as much about requirements for single investors, as it is about requirements for investor syndicates. Maybe the real lesson is that angels should not go it alone, but find the right partners… even in the seed round.

  • http://hdemott.wordpress.com Harry DeMott

    I did certainly enjoy the last part of the series here. Unless the company you invest in is gushing cash and paying it out as dividends to the holders – which is extremely rare – you have to get out to realize the return. I would argue that having a great company with a great team, a great product, and in the right market at the right time will do more to get you bought than any relationship – but the relationship can never hurt, and in edge cases it can absolutely push it over the top.

  • http://www.victusspiritus.com/ Mark Essel

    Instapaper'ed and KnowAbout.it'd the entire series for future reference and recall. In the world of M&A, relationships to buyers is not to be taken lightly.

    It's a wonder any upstart entrepreneur focused on Macgyvering a product together from rubber bands and EC2s can get their head around all the major implications of their early investors, and first round leads. It's a miracle to get any outside funding before nailing early traction, and every heroic founder fund raising cycle begins and ends with perfecting their pitch to potentially hundreds of professional investors.

    There's a meta pattern between the legendary leaders that aren't necessarily billion dollar company builders. It's not that their styles overlap, but that they are extremists in a way that most folks can't quite fathom or stomach.

    Whether it's:

    - customer service like Paul English, Tony Hsieh, Richard Yoo/Dirk Elmendorf/Patrick Condon, Jeff Bezos, unstoppable technical drive & recruitment Sergey Brin/Larry Page, Mark Zuckerberg, and Bill Gates

    -visionary design discipline and marketing panache like Steve Jobs, Kevin Kelly (Wired), Chris Anderson (TED), and Seth Godin

    - or telling a story worth listening to with opinionated technology design like Yukihiro Matsumoto (Ruby), David Heinemeier Hansson (Rails), Brendan Eich (JavaScript), John McCarthy (Lisp), Charles Bachman (DBMS), Edgar F. Codd (RDBMS/SQL), and now Eliot Horowitz/Dwight Merriman (MongoDB), Damien Katz/Jan Lehnardt/Noah Slater/Christopher Lenz/J. Chris Anderson (CouchDB), and Terry Jones /Esteve (FluidDB)

    The legends of tomorrow are blazing a trail by capturing the attention and imagination of application developers.

  • http://bothsidesofthetable.com msuster

    If one has choices then best to understand the relative value of your choices. If one doesn't have choices then there is no decision to make anyway. Obviously. You take the money.

  • http://bothsidesofthetable.com msuster

    Very few people possess these skills which is why:
    - very few angels make great sustained returns over time
    - very few VCs make substantively greater returns than the S&P 500
    - very few entrepreneurs make money

    We read all the successes in the paper and soon we will watch it on the big screen. But the reality is very different for most. My overarching message is … don't think you can be an amateur angel investor and make a fortune on a sustained, long-term basis.

  • http://bothsidesofthetable.com msuster

    I agree with your comments but it is uncanny how the best VCs protect their investments from being zeroes! And in those rare cases you find some bidding wars – it certainly helps to know whose ear to whisper in.

  • http://dreamtigerco.com/ Dan

    “- very few entrepreneurs make money”

    A truth that does not often get mentioned in the rah-rah super-angel blogosphere, unless I'm reading the wrong ones.

  • http://giffconstable.com giffc

    I agree with you Mark. Having folks who can back-channel m&a interest is really useful. You always want to be bought, not sold, and the right investors can create competition (and ideally urgency) in a deal without the company waving a “for sale” sign around.

  • http://twitter.com/tisal Tricia Salinero

    Great series – thank you. Across the 50+ deals I have done, I would say that 70% of the time the buyer “knew” of the seller, whether through relationships, competition, or otherwise. Encouraging your investors to do this type of outreach is paramount to a successful deal.

  • http://www.investinginvestment.com Donchicongo

    I can't agree any further. Angels financiang can be very risky if you don't have access to the buyer. Again, as an entreprenuer looking for business, you need to keep your eyes wide open to avoid falling victim of fraudsters in the disguise of business angels.

    Thanks for sharing.

    Cheers!

  • http://hdemott.wordpress.com Harry DeMott

    Absolutely. Being in and out of those offices – and on calls and in meetings

    with those people help immeasurably. Just knowing who is interested in what

    can make all the difference in the world.

    I once had an outdoor advertising company with a prominent board

    member/investor. While the company was operating (and almost failing) he

    didn't do a whole lot but I give him all the credit in the world for 2

    things. First, he brought in a friend as CEO who turned around the

    operations of the company and second, when it came time to sell – he

    negotiated a fantastic exit for the company based on knowing a PE firm that

    was looking to expand in media. I wouldn't necessarily invest with this guy

    again on the operational side – but he's the reason we had a success in the

    end.

  • http://twitter.com/abouldin Andrew Bouldin

    @Mark,

    Mark, I am loving reading through all of the blog as well as watching TWIVC weekly. I am a recent MBA grad and now VC associate. Do you have or will you please post a list of your top (~5-10) books. You often reference what you are reading as part of a blog post or show, but I couldn't find a list anywhere. That would be a great guide and I'm sure the comments below that post would offer more insight as well.

    Thanks!

  • dave davison

    built to flip may be a harsh way of saying the same thing, but in these days of liimited IPO exits, finding buyers who MUST HAVE the product or service or talent resident in a startup is a very attractive way for investors and startup teams to have an early and successful exit.

    great viewpoint.

    dave davison

  • http://lmframework.com/blog/about David Semeria

    Mark, to pick up on what giffc said, companies are bought, not sold. Surely, you're talking about selling here?

    I can't believe that a fast-growing, cash-generating, super-sexy webco has less chance of being bought just because its investors don't sit at the high table.

    Clearly, what you're saying can do no harm, but at the end of the day, I think FB's 500 million users, or Zynga's cash flow would speak more loudly than anything else….

  • Pingback: What Angel Investing & Florida Condos Have in Common | Both Sides of the Table()