Angel Investors: Taking the Place of Early Stage VCs

With the recent decline in VC investments some entrepreneurs are turning to angel investors, especially the institutional investor type.  One such group in Southern California is the Tech Coast Angels.   Last night’s event was entitled, Raising Money: Calling on Angels.  The panel included:

Bill Waldo - Tech Coast Angels and

Keiretsu Forum

Ash Kumra - Co-Founder & CEO

DesiYou

Gene Alexander – Founder & CEO

MaMoCa, Inc.

So how active have angels been in funding companies?  According to a TCA member, TCA funded 12 deals in 2008 and 2 deals to date in 2009.  Those figures are not exactly encouraging.

Bill Waldo provided the answer to the question every entrepreneur wants to know: what are angels looking for in the companies they fund.  In his opinion, the following are essential:

1. management must demonstrate a clear understanding of the business and industry,
2. the business most have some substance, intellectual property, and have revenue or be close to revenue,
3. the business must be able to be cash flow positive within 6 to 12 months from the time of the investment, and
4. the products or service must be innovative and/or market disruptive.

TCA provided attendees an outline for an informal 30 second pitch competition judged by TCA members.  The stated goal was to cover the following in 30 seconds:

1. name, title, company name,
2. describe the market pain,
3. define the company’s solution,
4. describe the size of the market,
5. explain how the business generates revenue,
6. explain why management will be able to execute, and
7. state what the company is seeking (funding, an introduction to a strategic partner, etc.)

The winner was Calvin Chan of Nuvolo LLC.

The panelists provided valuable insight into some of the specifics of TCA funding practices:

Type of investment	Frequently a convertible note that converts into equity, at a discount, upon the next round of funding.
Board representation	TCA seeks a minority of seats which translates into 1-2 seats on a 5 person Board.
Average/minimum/maximum size of the investment	For TCA, the sweet spot is about $700,000.  The minimum is around $250,000.  The maximum about $1.4 Million.
Ownership of company post-funding	Anywhere from 20-35% on the first round, increasing to up 40% in a second round.

Listening to the pitches, presentations, and responses to audience questions, I compiled a list of take-aways.  They are:

1. in pitches and in executive summaries, follow the KISS principle (keep it simple stupid),
2. quantify results and product/service advantages in dollar/customer terms,
3. in pitches and in executive summaries, talk from the customer perspective,
4. investigate and play to your investor area of interest (e.g. software, IT, renewable energy, or biotech),
5. be able to show that management has skin in the game-using one’s own money to fund is an indicator of commitment,
6. be a known quantity in the investment community before you actually need the money for your company,
7. provide detailed, realistic milestones for the investor to examine, and
8. listen to advice and be coachable by the investors who funded your company.