Techflash posting.. for pay angel groups

In response to John Cook’s thoughtful post: http://www.techflash.com/seattle/2009/10/angels_to_charge_or_not_to_charge.html, here is my reply. John – thanks for raising this topic.  It is a timely posting.  Historically, VCs haven’t ever charged entrepreneurs because they are paid management fees from their limited partners.  And individual angels don’t charge because they are investing their own money and don’t need to.  This has become an issue as angel groups have sprung up, and hired managers to manage deal flow and help entrepreneurs.

 

So who are the managers?  Some angel groups (like the Alliance of Angels) are investor-led, volunteer organizations.  The leadership of the group writes checks to startups.  (I’m personally in over 25 deals.)  We work closely with entrepreneurs and appreciate that, in many cases, they have given up lucrative jobs, mortgaged their homes, and invested virtually everything in making their company successful.  These are the entrepreneurs/companies we want to back and don’t want them to take any cash out of the company and put it in the pockets of middlemen who will “introduce them to investors.”  At the AoA, our executive committee is comprised of our most active angels – the ones that are actively investing in new companies.  I, personally, am less likely to invest in a company that is represented by an advisor who takes a fee that is dependent on raising money.  Our business model is simple – we put ourselves on the same side of the table as the entrepreneur: invest in the success of their company, help them thrive, and win only when the company does well.  It is a long-term commitment.

Other groups are led by “advisors” who only coordinate and don’t generally write their own checks.  These are the groups that want their money up front.  A friend of mine, who was a founder of Tech Coast Angels in San Diego, told me that one nationally syndicated organization not only charged entrepreneurs $8000 for the privilege of presenting there, but then would ask for $25,000 to $50,000 in consulting fees to help them hone their business plan and presentation. 

 

I’m glad that you have raised issue.  The AoA is in its 12th year.  We pride ourselves on helping entrepreneurs succeed and have a track record to prove it.  Startups that make it through our screening process get to present to more than 50 qualified angels at one time, and approximately 30-50% wind up getting financing.  I urge all entrepreneurs NOT to pay egregious fees to get in front of any investor.  It’s not necessary.  Just reach out to the ones who won’t ask you to pay – they are typically more aligned with your interests anyway!

Paying for presenting to Angel groups

I’m not sure I could or would want to be part of an angel group that charges entrepreneurs for the privilege of presenting/pitching their company.  It seems very odd that a bunch of high-net-worth individuals would ask an entrepreneur, who has most likely mortgaged their home and used their life savings to start their company, to pay them to look at their deal. 

 See the following link: http://www.avc.com/a_vc/2009/10/paying-to-pitch.html

Comments?

Google & the Future of Search

I just read the Business Week article on Google (BW, October 12, 2009, p44) and believe it misses the key point – the threat against Google is that its search just isn’t very good.  Unfortunately no one is yet much better.  Someone will be, and it may be Google itself, but I believe it is just as likely to be another startup.

First, a little background.  I was the first General Manager of Microsoft’s search group in 1995.  That was at the beginning of search and almost all of the players lost their way.  Microsoft focused on its “shows,” believing that content was king.  Yahoo believed it was a portal.  Alta Vista couldn’t decide what it wanted to be.  Etc.  I knew at the time that finding what you wanted on the Internet would be a daunting challenge.  It would be hard to distinguish your search intent from a key word or two to deliver a result that both high precision (missing no positive searches without lots of false negatives), while prioritizing the search with the responses that really met your intent.

What Google has done exceptionally well is keeping its search simple – its interface is clean, uncluttered, and easy to use.  Comparing it to Bing, it is easy to see why it remains on top.

What it does poorly: giving results that match what its users are really looking for – too many irrelevant results.  Why?  It’s core page ranking thesis.  Google believes that the most popular links are the ones that are most relevant.  This is true sometimes, but equally false at other times.

So.. where does this go?  I believe that some very clever work will be done that allows for more precise search results based on a better algorithm than page ranking.  Who will do this work?  My bet is on a startup, where “NIH” isn’t a factor.

Professional Angels: the new early stage VCs

As I’ve blogged before, the market conditions are driving early-stage investment capital back to basics.  VCs have always fostered great entrepreneurs with great ideas.  But the model has changed profoundly and permanently (see my earlier blog: “Why the VC Investment Model is Broken”). 

So how do great entrepreneurs build their business in 2009?  Professional Angels.

Most professional angels are members of angel groups.  (See http://www.angelcapitalassociation.org/ for the largest trade association.)  In these groups, members generally act as individuals for their own investment, but team on the key aspects of deal sourcing, deal screening, due diligence, investment pooling to ensure that there is sufficient capital overall for the company, and then monitoring the deal afterwards (including board representation).  In this regard they act like an early-stage VC fund, but the decision making is on an individual basis.  In the Seattle Alliance of Angels (www.allianceofangels.com) these groups have grown from an average size of about 2-3 investors to 6-12 investors in the last 4 years.  Such organization makes life easier for the entrepreneur, since they only need to negotiate with one person (the “lead investor”) and they get more money.  From the angel investor point of view, there is more leverage on the deal, more shared due diligence, and the knowledge and wisdom that comes from the entire group.

Professional angels in groups also behave differently than the individuals.  Most, if not all, now reserve for follow-on rounds (even though the entrepreneur’s business plan might call for this “being the only round of financing required”), just as a VC would do.  For example, the Alliance of Angels did 44 transactions in 2007, with 15 being new companies; 29 were therefore follow-on rounds.  In 2008, this pattern continued with the AoA doing 36 investments, where 19 were new, so 17 were follow-on.  This behavior allows an angel group to carry a company through from inception to cash flow positive in many cases.  No VC or institutional funding is required for this sort of deal.  This is a new phenomenon that will help shape the market going forward.

The implications of this are the following:

1)      Angel groups and funds can and do provide the capital needed for a capital-efficient company to make it to cash flow positive.

2)      Entrepreneurs and investors are positioned for more rapid exits, since the valuation needed for a successful exit is often much less.  If a startup takes in VC money, it will often require an exit over $150M for a successful exit (http://blog.drosenassoc.com/?p=7).  These exits are rare and the company often either fails or is sold for the liquidation preference, so the entrepreneur does not have a successful outcome.  On the other hand, if the total capital is low, even an exit of $20-40M can be hugely positive for both investors and entrepreneurs.

3)      Companies can now be built in a more capital efficient way.  With better tools, open source, Amazon Web Services, stimulus money, SBIR grants, etc. small amounts of capital can now go a long way.

Professional angels are filling the void created by VC funds getting larger and startups being more capital efficient.