Investor Relations – Dan Rosen

Startup Hero – Colette Courtion of Joylux

Colette Courtion founded Joylux (www.joylux.com) in 2016 after she became a mother and experienced both the joys of motherhood and the consequence of incontinence that results from childbearing. She had previously founded a skincare company and decided to apply some of the technologies that help skin look younger to a more intimate health problem—sexual health—that not only is the result of childbirth, but also menopause. Colette brought a meaningful change to the conversation of intimate women’s health—no small accomplishment for a startup.

Taking a page out of the playbook of Clarisonic and Sonicare (both from last-generation Startup Hero David Giuliani), she decided to go to market through a professional channel of doctors who performed vaginal rejuvenation procedures. With the usual problems facing a startup, there were ups and downs, but she persisted, building a great team and wonderful investor base. (Note: I am an investor, so not entirely unbiased!)

Joylux was recognized by the Angel Capital Association as last year’s most innovative company. Despite the many hurdles of starting a women’s health company, Joylux was beginning to get a lot of traction. Then came the pandemic.

With the help of CFO Peter Weiss, they quickly strategized about what they would need to do. As Courtion shared, “There is an advantage of being an ‘older’ entrepreneur. I was there for the dot-com bust of early 2001 and saw what happened to Lehman Brothers during the 2008 crash. In order to survive, I knew that we needed to move early, fast, and make hard decisions.” Just like there is no immunity from the COVID-19 virus, there is no immunity to the economic result either.

She and Peter put together a plan and sat down with the management team to discuss. “We laid out the stark financial reality and shared the numbers. We asked that everyone first take a salary cut and then we discussed what roles we had to eliminate,” Courtion said. “We asked them to consider what they could do financially to help the business survive, gave them overnight to consider, and then we talked the next day. I’m proud to say the management team was thoughtful and creative. They came back with deep cuts—perhaps deeper than we might have done without their input. The key was that we came together as a team—everyone had ownership—for a plan to help the business remain strong.”

The salary cuts were substantial. Senior management led the way with 50% cuts. But in one case, they recommended actually raising an employee’s salary. She was a phenomenal employee but would have suffered massively because her comp was commission-based, so they decided to change her comp model. “That brought us loyalty, as well as an even stronger commitment to the business.”

Before COVID-19, Joylux had 15 employees; they cut to 9, and 2 contractors agreed to lower their number of hours. This was all done prior to PPP (Payroll Protection Act), which did not come through until more than a month later.

“After we cut expenses, I posed the following question to the team: If we could start over, what would you do differently?” Courtion said. “Each team/department went off and discussed what they thought we should do. A week later, they came back and presented what they would do, with the entire team participating.” Turned out to be more than just how the company should pivot in response to COVID-19—they implemented changes that had been put off because they were too busy, changes that made Joylux a stronger business.

“The silver lining to COVID-19 is that it has given us a perfect opportunity to test things that might affect the near-term, top-line revenue, but will be better for us long term and make Joylux even stronger. We put in place a new way to do business, shifting from a wholesale business model with professional doctors to a more D2C business model,” Courtion said.

Like Sonicare Toothbrush and Clarisonic, the core strategy prior to the pandemic was to engage the professional channel, i.e. Ob-Gyns and urologists, for product validation and endorsements, but COVID-19 caused a pivot to a more direct-to-consumer focus. This was necessary while the pro channel was closed due to the quarantine. Courtion added, “The professional partner is still vital to our business, but how we engage with them changed. We quickly put in place a telehealth-like program to help them refer patients to the Joylux site for sales during the period their offices were closed. Being direct-to-consumer is allowing us to be much more creative. From telehealth opportunities to testing a membership business model, COVID-19 may turn out to be our catalyst for major growth.”

I asked Colette how she communicated the changes to her shareholders. First came shareholder Zoom calls to communicate the changes, followed by weekly email updates. She was particularly proud of her shareholders’ response. Although it was painful to do so, Joylux also decided to reopen the previous priced round from 2017. With the idea of raising $500K, they asked shareholders to each add $5,000 to their investment. In fact, most shareholders did more than their pro rata, and the company raised over $1.2M. That, along with another $200K from the PPP, gave them the cash cushion they needed.

“The business is doing very well. We lost 60% of our revenues overnight, but with the team’s quick shift to D2C, we have more than made up for it. We are seeing strong year-over-year growth, which is unprecedented for most businesses today. I am very proud of our team.” Asked about the future, Courtion added, “Even if the recovery is slow—12 to 18 months or longer—we are really optimistic about the future. We will attract new customers with a wider net.” Joylux has done best case/worst case modeling and believes that they are in a category (female sexual health) that will continue to grow. “COVID-19 will pass, but the need to treat these symptoms won’t,” she said, ending the discussion on an optimistic note.

How Angel Investors Survive the COVID-19 Economic Crisis

Blakiston Owl: We need the wisdom of an owl in times like these. (c) Rosen Photo

Author: Dan Rosen

To: The Angel Community

After publishing my companion piece, “How Startups Survive the COVID-19 Economic Crisis,” I have received a number of comments about how this impacts angels and angel investing. Here are my thoughts.

Unlike VCs, who have a fund to invest and collect a management fee for investing their fund, Angel Investors invest their own money and are under no pressure to invest in any company or at any time. Our decisions to support a startup are totally our own. As in previous market downturns, there will be some themes that help us through our investment decisions during the COVID-19 pandemic and the resulting economic crisis.

Angels have limited funds. And many of us already have extensive portfolios. We quickly will be (or already are) in the position of getting funding requests from many of our portfolio companies for new rounds of funding. Some will make it, and some won’t – even great companies with fabulous ideas will fail when the cash dries up, and sometimes Angels alone can’t provide sufficient cash to carry them through.

For Angels, this is a good time for both investing and tough love. Great companies are often started in market downturns. I believe this is because only the most dedicated entrepreneurs (the ones that feel absolutely compelled to create their new company) will leave a stable, good-paying job in the middle of a downturn.

My friend and colleague, John Huston of Ohio TechAngels, commented on the last two recessions: “One strong recollection I have of those periods is that CEOs (with a strong BOD) who most effectively & frequently communicated their parsimonious plans to use the emergency funding were helped and survived.” An inexperienced entrepreneur might neither have the experience nor the tools to manage their impending company crisis; we as knowledgeable Angels and mentors and board members can draw on the experiences we have faced as investors in those previous cycles. It is our hour to shine and help our startups survive and thrive!

Here are my rules for Angels during this downturn:

Stay in the Game. I know that our public equity portfolio is way down, but, most likely, you aren’t bailing out while the stock market is down. Same is true of Angel investing. Stay in the game. Keep reviewing companies, meeting with entrepreneurs, etc. And be prepared to invest in both some of your existing companies and some new ones.
Be highly selective. Most Angel investors are always selective, but this is the time to turn your filter even higher. Funding is even more limited than it was a few weeks ago. There will be lots of great opportunities, both in your existing portfolio and new ones. So, take your time and invest with care. The funding requests will vastly exceed your ability to invest!
Work in a group or a team. Angel groups (or groups of Angels) can help a lot, both in terms of assessing deals and in making sure that there is a sufficient pool of capital and expertise to help companies succeed and thrive. In stressful times like these, this is even more important. The Alliance of Angels has survived the 2000 (dot com crash) and 2008 (mortgage crisis) downturns, with a group IRR of over 20%. Angels and the startups they support can really benefit from that institutional wisdom.
Be ruthless. All Angels investors have their favorite companies. We want them to succeed. This is the time to step back and realistically consider the probability of success with limited financing. Advise your existing companies to conserve cash and focus on how to help their customers. (See my companion piece.) You may think you are helping by keeping a portfolio company alive, but make sure that their plan is reasonable to actually survive – tough love. Some of your portfolio companies will not survive – even great companies will die from running out of cash and runway. But it is likely that some good ones will come through this crisis even stronger and give a better return than you expected.
Multiple financing rounds. This is a time to avoid companies whose plans require multiple rounds of financing with large cash needs before they can turn cash-flow positive. I’m not saying to sub-optimize the outcome of great companies. But for at least quite a while, it is likely that cash will be tight, and it will be difficult to raise money. Companies that are frugal and can make the most out of the Angel cash have a much higher probability of giving you a return.
Deal terms matter. This is a time for resets. Both Angels and entrepreneurs need to reset expectations. The world will recover, but it is likely to take a while, so make sure that the terms on which you invest are in synch with the market and the projected future. Resetting valuations to match today’s reality is a must. If you agree to too high a valuation, the company will have trouble both attracting enough investment now and, particularly, more investment at the high post-money valuation later. Watch for other terms, like liquidation preferences, that can lower your return. And, for a less experienced CEO, do not be afraid to have some protective provisions, e.g., the company can’t exceed its budget without the approval of the investors or investors’ rep.
Be careful, but not greedy. As Angel investors, we invest for the future and to give back. It is OK to be careful, ensuring that the return you get is commensurate with the now higher risk you are taking. But don’t be greedy and ask for large multiple liquidation preferences, too much of the company, or asking the entrepreneur to throw all their energy into the company without retaining a big enough stake. This is a time when we want a “rising tide to raise all ships.” We are in this together.
Exits. In the short term, not many exits are likely to occur. Unlike VCs, Angels can do well with modest exit valuations (provided that the initial valuation was in line with reality). Entrepreneurs can also do well with a modest exit. Make sure the entrepreneurs in which you invest are on the same page – look for early exits, even if they are more modest. You want entrepreneurs who want to be rich, rather than becoming a king!

We are in a challenging period. It is natural to want to pull back. As an Angel investor, this can be a good time to both maximize your current portfolio and find some new fantastic deals with fantastic teams at reasonable terms.

How Startups Survive the COVID-19 Economic Crisis

Author: Dan Rosen

To: All angel investors and their portfolio CEOs

Being trained as a scientist, and having lived through several investment cycles, I’ve been asked to share my perspective on the financial impact of the COVID-19 pandemic on startups.

I firmly believe that the human and societal impact of COVID-19 will be extreme, even though we are at the early stage of this pandemic. If we, as a society can pull together, enact social distancing and other means of delaying the spread of this virus, we can come out of the other end of the tunnel. Most people really don’t understand the concept of exponentials – it is not in human nature to grasp what this means.

As a scientist (a biophysicist at that), this kind of modeling is something I was trained on early in my career. At this point, suffice to say, that we cannot prevent COVID-19 from spreading and our best hope to minimize the impact is to (a) lengthen the time it takes to effect a substantial portion of the population; and (b) prepare for the impact that will have. The key right now is to ensure that our medical system is not overwhelmed by this impact.

In 12-18 months, I expect that we will have a viable treatment for those with the disease, a working vaccine and that a large enough percentage of the population will have developed immunity through recovering from being exposed to the virus. The combination of the herd immunity and a vaccine for the most vulnerable will potentiate the impact, provided that we can wait it out through mitigation measures in the meantime.

I went through this detail because the depth and timing of the disruption will have major impact on the startups we support and fund. A deep and shorter disruption might actually be more severe for both our society and our companies, so let’s pray that our remediation response works.

For startups, this will be a particularly difficult time. In the recessions of 1982, 2000, and 2008, funding for startups dried up. While many have heard me say that great startups are often created during market downturns – sometimes, easier said than done. So here are my suggestions:

Survive. This is pretty obvious. If you don’t survive, there is no upside. So all of the strategies below are about survival. It is time to put aside the wonderful plans to become a huge company with world-beating products. None of this matters if you don’t survive.
Cash is king. Startups don’t generally die for a lack of ideas. They die because they run out of cash. Put in place a plan to conserve cash. Be aggressive in this plan; early action will be much more impactful than later action. Have at least 12 months of cash on hand, because it is likely that is what you will need. Even if the COVID-19 crisis resolves itself much sooner than that, the turmoil left in its wake will persist, particularly for startup.
Forget about raising money. Angels will continue to invest, but expect smaller rounds, at lower valuation, in companies that don’t require large amounts of cash. For existing portfolio companies, the sudden downturn in the market, coupled with the disruption of almost all business as usual will cause fundings to stall. While VCs and angel investors might have cash to invest, the pullback will trigger a triage mode (as it did in previous downturns), where investments will be in select companies. Even some good companies won’t get financed. Assume that this pullback will last till after the COVID-19 crisis is over and add a few months to that for them to get back on their feet. M&A will dry up; if you were in discussions last month, expect that nothing will happen until this crisis ends. If you are lucky, you might get your existing angel investors to help carry you a bit, but expect it to be really costly and only if you have a plan to make the money last a long time. And, as I believe is always prudent, communicate well with your shareholders, giving them the bad news and the good.
Revenue is likely to be curtailed. If you are counting on contracts in the pipeline to close, you shouldn’t. Most big companies, government clients, and especially small and medium businesses will also go into survival mode. Unless you are supplying a product or service that they consider absolutely mission-critical, you should expect that revenue will be deferred for at least 6 months and probably longer. If you existing contracts have cancellation clauses, expect that some will be exercised.
Opportunities. If you have a way to shift some or all of your business to be part of a solution to the COVID-19 problem, stay alert to do so. For example, even as GM is closing plants, they are looking at how to make ventilators and respirators. While there will be great economic dislocation that effects small and large businesses, there are still some opportunities, especially for direct to consumer businesses. People are sheltering at home and online a lot. If you are selling something that will make their lives better during this difficult period, there are opportunities. Examples might be things like online learning or classes, online consulting, or even things that bring a smile in these difficult times. Similarly, any product or service that makes working from home easier will have a ready market (if your customers can find you online).
Downsize. While this is a really difficult decision, survival is the single most important thing. Many companies will have to pare back to the essential. Salaries will need to be slashed (as they were in 2000 and 2008), if companies will survive. I’ve already heard from several of my portfolio companies that they had company-wide meetings and agreed to 50% salary cuts, and cut non-essential staff. While the pandemic will certainly curtail travel, make that a policy. Cut all contract help that can be cut. Cut marketing and sales spend until the your customers are back to work and buying once more. Again, any step that cuts your burn early on, will have a lasting impact on the later cash balance and your cash horizon.
Non-equity cash raise. Look for sources of cash that are non-equity. Think of ways to get government grants. Explore the SBA programs that have been put in place to help small businesses. Be creative about finding sources of cash to stay alive, including potentially doing some short-term deals that help the immediate crunch. These are things that you would never have considered doing three months ago.
Stay alert for the inflection point. As with almost all things in life, this too will pass. It is hard to tell what the country and market will look like when this is past, but if your company is alive and flexible, there will be great opportunities. Watch for it, since none of us can predict when it will happen.

Hope this is helpful. Comments appreciated.

JOBS Act What does it mean for angels

I have been asked repeatedly over the last several weeks: “What does the JOBS Act mean for Angels?” In this and other future blog postings, I will give my perspective.

First, what is the JOBS Act? It stands for Jumpstart Our Business Startups Act; it has nothing to do with earlier jobs stimulus efforts other than sharing an acronym. It is a regulatory reform act and does not have any tax elements. The full text can be found at: http://www.govtrack.us/congress/bills/112/hr3606/text (There are other pending legislations that address how to stimulate early-stage company investment through tax incentives.)

Broadly speaking, the JOBS Act is intended to provide more capital to startups that fuel the growth of our economy. It does the following:

Removes some of the most onerous provisions of Sarbanes-Oxley Bill from emerging growth companies. The argument is that, while large, publicly traded companies needed the extra oversight and transparency, it was never intended to cripple the ability of high-growth startups from tapping the public markets.
Brings the Securities Act of 1933 into the 21^st century by recognizing that markets and communications have changed.
Potentially allows for the revitalization of Reg A filings as a way for smaller companies to raise money from public markets.
Enables “Crowdfunding” a way that very early stage startups can get many small investors to stake their company early in the lifecycle of the company.

Much of the attention to the JOBS Act has been focused on the Crowdfunding part, so I’ll address this in this posting. However, the largest impact is likely to be from the other provisions, which will modernize and simplify the operations of Angel financings, small IPOs, etc. I’ll address those in future postings.

Crowdfunding (Title III of the JOBS Act)

In the past, startups were typically initially financed by “friends and family.” There are legendary stories of entrepreneurs mortgaging their homes to start their businesses, and then reaching out to their family, friends, and associates to get the company off the ground. As the original Senate bill said, the decline in home values has caused much of this source of early-stage capital to dry up.

Crowdfunding has precedence. People have contributed small amount of money (via the net) to charities, arts, etc. The music and theatre industries have tapped their fan base to ask for money for new works.

The difference with these precedents and Crowdfunding is the purchase of equity, which has been highly regulated. In the US, only accredited investors (a person with over $200k of annual income or over $1M in net worth; see http://www.sec.gov/answers/accred.htm for the full definition) could invest in highly-speculative private shares. The accredited investors were thought to be sophisticated investors, who could do appropriate diligence on the company and assess the risks. In general, Angels and VCs are the primary investors in this category.

There is still a raging debate on the advisability of allowing less sophisticated investors to enter this asset class. On one hand, the optimists say “why should only the very wealthy be allowed to buy early shares in a company like Facebook?” On the other hand, the pessimists would say, “this is a recipe for fraud; charismatic fraudsters will prey on the unsophisticated investors getting them to invest an amount of money that they can’t afford to lose in companies that don’t really exist.”

The devil will be (to some degree) in the details. The Act calls for a 270 day period for the SEC to write the rules. It also includes some safeguards:

A company may only raise $1M in a year from Crowdfunding;
No investor may invest more than $10,000 (or $2,000 if the investor has an income of less than $100k);
The investment can only be through a registered broker or funding portal;
A degree of public transparency by publishing the terms of the deal, the basis of the price, cap table, etc. that Angels would typically study;
Take steps to prohibit “bad actors” from issuing securities using Crowdfunding to help prevent fraud.

This is an experiment that marries the internet, social networking, and modern communications with selling private securities. It could work, it could fizzle, or it could be a great vehicle that tests the innovative spirit of fraudsters. If it works, it could cause thousands of flowers to bloom startups in all parts of the US will have access to capital. If not, we can hope that the SEC regulations will limit the amount of fraud.

Impact on Angels

The simple answer is none of us know exactly. But there are certain things I believe to be absolutely true.

First and foremost, Crowdfunding will only INCREASE the need for angel financing. Very few of our high growth companies will get by on just Crowdfunding. If this is a successful experiment, then more companies will need follow-on financing from Angels.

But, the question is “will angels be willing to invest in a company with potentially hundreds of new, unsophisticated shareholders?” Will the cap table be screwed up? Any good, sophisticated angel knows that valuation is a key to success. My biggest fear is the following scenario:

Company X at the concept stage has a charismatic CEO with a great vision. He posts a plan and video on a funding portal asking for $1M with a $20M post for common stock at $1 per share. (We all know that it is possible to write a business plan the justifies this!)
The company then spends the money and makes progress toward a product. It now seeks angel financing for $2M.
We assess the company, like its prospects, and agree that it is a worthy investment, but assess the appropriate pre-money valuation to be $2M (not $20M) for preferred stock.
The previous Crowdfunding investor now see their shares valued at less than 10 cents on the dollar. They are very angry.
This is widely reported in the press and the entire asset class takes a hit.

We have a lot of work to do on Crowdfunding.

Crowdfunding

Crowdfunding is about to be approved by Congress and signed into law by the President. For those unfamiliar with the concept, you can read Wikipedia (http://en.wikipedia.org/wiki/Crowdfunding) or simply put it is raising money for startups, typically via the Internet, in small chunks from people who may never meet with or diligence the company. Crowdfunding has been used in some non-profits for years and has been successful in Europe for the last two or so years as well.

Most existing investors in this early-stage asset class hear of crowd funding and have the immediate reaction: “Won’t this lead to massive fraud?” Today, investments in unregistered securities require that all investors be “accredited” so that they are assumed to understand the risks in these investments and ensure that sophisticated investors carefully vet deals to ensure that there isn’t fraud.

But, times change. Some VCs and Angels have become fabulously wealthy and famous by investing in early-stage companies, and the media has made a big deal about this. Think Google, Facebook, and even Microsoft. And, in our current economic malaise, creating high-growth, innovative startups is seen as a way out of the mess. But many innovative startups fail in trying to raise money. Angels do their part (see many of my previous posts). But many believe that the need is greater than sophisticated (“accredited”) Angels can finance.

So.. the idea of Crowdfunding has gained great momentum. The current vehicle, H.R. 2930, the Entrepreneur Access to Capital Act, as amended and approved by the House Financial Services Committee on October 26, 2011, (see http://financialservices.house.gov/UploadedFiles/hr2930ai.pdf for the original). The amendments are important, since they lower the size of the amount raised. While the situation is still fluid (the House reportedly just passed its bill and the Senate is in draft), it appears that there will be a $1M annual cap on raising money through Crowdfunding. Crowdfunding is exempt from current broker-dealer rules. Other issues, like how companies handle scores or hundreds of investors or allowable fees that Crowdfunding platforms can charge, remain up in the air.

I have heard rumors about this being done in Europe for the last several years, but cannot substantiate that startup companies have been funded this way. Wikipedia reports that “One of the pioneers of crowd funding in the music industry have been the British rock group Marillion. In 1997 American fans underwrote an entire U.S. tourto the tune of $60,000, with donations following an internet campaign” And movies have been known to use Crowdfunding. Any readers with more data?

This is a brave new path for the US. While many (myself included) think that our current SEC regulations that limit investments in startups to “accredited investors” are too narrow and should allow other knowledgeable investors to participate, there is established law and precedent for the investment market. I worry that we might be opening Pandora’s box. Many startups fail and investors that are not willing or able to do due diligence should not be investing in them. It is one thing for sophisticated, accredited investors, like me, to invest in a company and loose their investment. We understand the risk going in. We did our due diligence on the management team, the market, and the technology and reached a positive conclusion. It is quite another thing for someone to “advertise” a deal to the Crowd and have people send them money based solely on the company’s information without any substantiation.

I believe that broadening the participation in the early-stage asset class is a good idea and Crowdfunding is one way to achieve this. I just don’t want some bad actors who use the Crowdfunding mechanism for fraudulent transactions to poison the entire asset class. I think it would behoove both the entrepreneurs that raise money with Crowdfunding and the investment community to find a way to have a trusted platform that verifies that the company is who they say they are and that some investment professional has done due diligence appropriate to the investment.

I also worry that Crowdfunding could lead to some very high priced deals. Investment professionals (including “Professional Angels) have a great deal of experience setting the price for early stage deals. This experience comes from many years of investing, forecasting companies’ success and capital needs, and understanding how exits are likely to occur. Without this discipline, prices might not reflect true value. For example, if an entrepreneur is told by the investment professionals in their community that an appropriate valuation for their company is $2M, but they go to the Crowd with a $10M valuation and raise $500k, what happens when they need to do their next round? After they have spent the $500k, they might approach either Angels or VCs who will then set the price well below $10M. The Crowd will then find that their investment is worth very little. If the Crowd understands that risk, I have no problem with Crowdfunding, but if this isn’t transparent or well-disclosed, I think we could have many disgruntled investors.

I really want Crowdfunding to work. I don’t want a bunch of “mom and pop” unsophisticated investors ripped off.

Angel Investing is Vibrant and Getting More So

Not much surprises me these days, particularly during this mud-slinging political campaign season.

However, Marcelo Calbucci’s Tech Flash post (http://www.techflash.com/seattle/2010/10/have_we_killed_the_angel_investor.html) did. How my posts could be so misunderstood by someone I respect baffles me, especially when that misunderstanding is posted to a widely read blog.

My previous post on Angels forming LLCs for their investments IS entrepreneur friendly, and based on national best practices. Any entrepreneur who has a successful venture with 50 angel investors knows the pain (including excessive legal fees) for getting signatures on every shareholder issue. If a large number of these angel investors are in an LLC, you only need one signature much more efficient and much less costly. This is the practice in many places, including some of the largest angel groups in the Bay Area and East Coast. It is not widely done in Seattle. And it is not a way to get better terms in seed and A round investments; there really is no relationship between the two.

It is a way for Angels to preserve their rights in the face of a VC round that follows. VC’s typically don’t like to have to get 50 signatures, so they reserve certain rights to “major investors” in their term sheets. This typically either washes away or severely limits the investor rights of Angels, once VCs have entered the deal. It is definitely in the interest of the entrepreneurs, Angels, and the company to make sure that a broader base of investors has a say in the future of the company; the trust from shareholders (the owners of the company) that they will be treated in an open and democratic way is the basis of our entire equity system.

Angels who work together to learn best practices make for a much stronger ecosystem. That is why I spend so much of my personal time trying to learn from other angel groups, both locally and nationally, about what works and doesn’t work. My colleague Angels do likewise. We run a bunch of educational events locally to share our knowledge and insights and encourage other Angels to strike deals that are balanced between return and being entrepreneur friendly. It is why I spent so much time crafting a “Series A Angel Term Sheet,” (http://drosenassoc.com/Draft%20Term%20Sheet%20for%20Alliance%20of%20Angels.pdf) that is now being widely used, not just in Seattle, but around the world. It simplifies the process of bringing in early money for startups, while lowering the costs. All of these activities lower the barrier for entrepreneurs raising money, not as you assert, making it more difficult.

Angel groups are a fabulous way for an entrepreneur to raise money. It is much more efficient to present once to 60 active angels than to set up 60 individual meetings. I don’t know one entrepreneur who would argue with that proposition. And, through the Angel Capital Association (a Kauffman Foundation spinout), we are now sharing best practices, participating in educational events, making sure that public policy encourages early-stage investment (e.g. http://blog.drosenassoc.com/?p=41), making sure that as many Angels as possible enter the ecosystem, and encouraging each other in bleak economic times.

As part of this socialization, it is evident that Seattle IS progressive. We have funded as many or more early stage deals at a slightly higher price than our peers in the Bay Area and Boston. Your assertion that entrepreneurs in the Bay Area are getting their deals funded without a financial projection or a solid plan is an urban myth that is not supported by fact; it encourages behavior that neither helps entrepreneurs or investors. We do help the “the next great idea from two guys who are just finishing their computer science degree at The University of Washington” in part by helping them understand what it means to create a great business. In my 25 years of experience, I have not seen a success where throwing money at people without a great business concept created a great business. It is the marriage of great technology, great people, and a great plan that makes the breakout companies. Yes, this takes some discipline and hard work. Saying that the best model is angels willing to throw money at entrepreneurs who are not committed to a disciplined approach is not only wrong, it does a great disservice to the entrepreneurs willing to quit a high-paying job to risk everything to build a great company.

And during the last year, I’ve spoken at events throughout North America without reimbursement. Like you, Marcello, for me this is a passion, not a business. But most Angels need a return on their investment, if they are going to continue to invest. We need more maturity in the process, not less.

We all want to see more intelligent, high-net-worth individuals in Seattle become Angel investors. They way to do this is NOT by telling them that they should “invest and pray”. It is by showing them how to be successful angel investors, how to lead deals without as much pain as in the current process, and by making it easy to pull the trigger on their first few investments. One way that other communities (e.g. Bellingham) have used is the deal-specific LLC that started this conversation.

Success will come by finding more ways for entrepreneurs and Angels to communicate and understand common goals and then achieve extraordinary results. And success will build more success.

Investor Relations for Private Companies

One of the questions I am asked by first-time startup CEOs: what is an appropriate level of communication with my investors?

This is both a difficult and profound question. It is simple to say that more is better than less. It is also simple to say that any good investor would rather have you spend your time executing your plan than spend your time chatting with investors.

So.. my simple rule of thumb is that you should treat your investors (and the money that they have invested in your company) with respect. And you should recognize that their support, encouragement, and trust that came with that money are incredibly valuable commodities that will continue to pay dividends over time. Let me give rules of thumb for great investor relations by private companies and some issues that need to be considered.

Ten Simple rules for great IR for private companies:

Get the bad news out fast and first. Even if the news in embarrassing (like we are running out of cash sooner than we anticipated, or our customers found a flaw in our product), share it first and fast. Be very candid about the failings as well as the successes.
Don’t bury bad news at the end of a report.
Don’t wait to issue the report until you have good news to share.
Don’t forget to share your passion for your business that’s generally what made your investors invest!
But don’t allow your passion to obscure the operational facts, like the numbers are not what we anticipated.
Communicate frequently, but not too frequently. These communications should never be less than once a quarter. But remember that your investors are not your employees, so you don’t need to send daily/weekly updates with operational trivia. This just defeats the purpose of making sure that your investors know the state of the business by burying them in the minutia.
Communications can written or in person or a combination. Face-to-face quarterly meetings are a great idea for a company that is growing and needs support and help from its investors. They are especially good for a company that needs to show its product. But they take some time to prepare.
Communications can be short, but never skipped. For example, a simple note to all of your investors that “we have had to revamp our product plans and details will follow within 30 days” is an OK message. As is, “we have received an acquisition offer, but the terms require us to keep the details confidential, so we will let you know as soon as the deal is consummated.” Don’t surprise them!
Your investors are smart, so treat them accordingly. Be very realistic and forthright about the impact of any misses/changes. Early stage investors know the risks. Tell them if the board insisted you take a salary cut or that you have had to lay off key people. These things happen. Sometimes the impact will be that their investment will never realize the potential you had hoped for, but that you will work for the best possible outcome.
And, lastly, NEVER have the communication of the change of your company status come via a package of documents from your lawyers! Even in the case of good news (which is rare), you owe it to your investors to be the one who communicates FIRST. Even if it’s an email (or cover letter in the legal package) that says, “we have had to do X, because of Y, and the result is that your shares have to be changed in the following way. You will be receiving a package by FedEx to implement that change. I will be holding an emergency investor meeting tomorrow at 9am to explain these changes. Those who can’t be there can phone in.”

Even with these simple rules in hand, there are a number of issues that you need to consider.

Can I share proprietary information with my investors? This is a tough question. Seek counsel from your lawyer. In general, most startups do share proprietary information, but make sure your investors know it is proprietary. Make sure that they know they can’t redistribute or share it further. Only give info in writing that is less sensitive.
Know your investors. Ask them if they have investments in competitive companies. If they do, it doesn’t disqualify them from investing in your company, but make sure that they know they can’t share the info you give them.

Simply put.. if you treat your investors well, they will be there to support you when you need them. Not just in this company but in future ones.

Dan Rosen