Angel Investment Journal – Angel Investing and Entrepreneur Blog

Passive vs Active Angel Investing

Posted in Funding/Investing by angel on the October 12th, 2009

John Tozzi has a post on Business Week’s Small Biz blog regarding the trend of an increase in angel funds. I think one reason for this trend is a result of some angel investors who are excited by the idea of investing in startups, but are not able to dedicate the time to be an active angel investor.

Angel investment networks had a larger growth period a few years ago, whereas previously, individuals dominated angel funding and invested on their own (or with a small number of other people). It may be possible that many of these angel investors were more interested in the investing part than they were interested in other aspects of angel investing such as being “smart money” where the angel investors provide a large amount of advice and guidance. In addition, many angels would prefer to let others do the screening, due diligence, negotiations, and other work associated with getting a deal done.

Early Exits

Posted in Entrepreneur Advice,Funding/Investing by angel on the April 23rd, 2009

Frank Peters has a great podcast on early exits with an interview of Basil Peters.

Basil talks about some reason why it may disadvantageous to receive large sums of VC money.

WSJ on Angel Funding

Posted in Funding/Investing by angel on the January 16th, 2009

The WSJ did a brief A post on angel funding.

It includes 3 tips when looking for angel funding:

  • Angel investors can be an option for start-ups with the potential to earn high profits.
  • Expect close scrutiny. Many angels are former entrepreneurs and like to be involved and give business advice.
  • Angel investors tend to specialize, so look into their investing history to ensure there’s a good match.
  • 8 Reasons why Angel money is better than VC

    Posted in Funding/Investing by angel on the September 30th, 2008

    Gigaom has a post discussing Lookery’s recent round of funding that was raised entirely from Angel’s. Lookery’s CEO, Scott Rafer (former CEO of MyBlogLog), talked about 5 reasons why getting angel investing is better than VC money:

    1) Focus. “Angels can concentrate on the individual strategy of your company, rather than the larger portfolio management strategy a VC must bear in mind.”

    2) Deal Terms. Angels generally don’t demand as much in liquidation preferences and other deal terms.

    3) Future Funding Rounds. You will generally have more control over future negotiations in getting additional funding.

    4) Transactional Control. “You won’t have to seek permission from investors who aren’t on your board or worry about what a VC needs to have happen vis á vis managing his limited partners… Angels have no LPs, so their agendas tend to be far more transparent.”

    5) Exit. “Angels aren’t compensated in ratios. Angels get 100 percent of the profit they generate with their investment in your company. A VC only gets a fraction of the ‘carry’ generated on your deal. This is one reason a VC might be motivated to urge you to sell bigger.”

    Rob Conway, a well known “super angel”, follows up with 3 more reasons why Angel money is more attractive than VC money.

    1) The due diligence process will be less rigorous since angels are acting in their own interest and not investing OPM (other people’s money).

    2) Angels are generally more vertical specialists than compared to VC’s.

    3) “Angels have one-degree of separation from people in their professional network — not two, or three, or four. But because angels tend to be operational types, the business relationships they bring to the table are personal, not transactional. ”

    Finally, Allan Leinwand, follows up with a counterpoint on why Entrepreneurs should prefer VC money over angel money. He claims VC’s will be better able to stick with the startup over the long term, if things don’t work out quickly. However, Tom Perkins, of Kleiner Perkins Caufield & Byers, says they put companies in the “ICU” if they are not performing well. They either see if they can get out of it or they shut off everything right away.

    Market turmoil and it’s affect on Angel Investing and Startups

    Posted in Funding/Investing by angel on the September 26th, 2008

    The Seattle PI posts an article posing the question whether the market conditions will negatively affect angel investing.

    Investors are likely to get more cautious as the market suffers since they are seeing their investments in the market decline. However, regardless of the economy, it is never a bad time to start a company. Markets are cyclical and it is unlikely you will achieve great success within a short time frame. There is a good chance that once things get going for your company, the markets will have shown some improvement. (I am not trying to predict the markets here, but throughout history after every down turn, there is at least some sort of up turn.)

    Inc Magazine had an article a few months ago about this topic – Starting Up in a Down Economy. They mention several reasons for why a down market is a good time to start:

  • If your product/service offers a cheaper alternative, it could be easier to sign up customers looking to save money
  • With layoffs occurring, you have access to good talent.
  • You are likely able to cut down on expenses by getting discounts from vendors since they may be struggling
  • So market conditions should not deter entrepreneurs from making the decision to start a company. And even though some angel investors may be a but cautious, there are plenty of others that are always looking for good companies regardless of market conditions.

    Don’t be Conservative

    Posted in Entrepreneur Advice,Funding/Investing,Startups by angel on the February 21st, 2008

    I was at InvestMidwest this week and saw some really exciting companies. I was impressed by the presentations and it seems many of the presenters were either coached on what their presentation should include or they just intelligent entrepreneurs that knew what needed to be done.

    Most presentations I see include one aspect that is so common it has started to frustrate me. It happens when the presenter gets to the part of the presentation about projections. They start talking about revenue projections and they present the figures, but say that they believe this projections to be “conservative”.

    I don’t know why it frustrates me, but apparently I am not the only one that feels this way. Fortunately, I only heard one entrepreneur (out of 12) claim their projections were conservative. And, upon hearing this, I saw another investor look at his buddy and smile.

    Why shouldn’t you use the word “conservative” when talking about your projections?

    First, when coming up with projections, especially if you are a start-up, it is extremely hard to predict what you could actually do. But you should do whatever you can to support your projections. So don’t try to say you just need to get 1% of a gigantic market in order to experience huge success. Talk about what aspect of that market you expect to penetrate. But since it is so hard to predict, you probably don’t know what is conservative and what isn’t.

    Second, why would an entrepreneur that is trying to “sell” the concept of his business and raise money quote conservative numbers? It is unlikely you would, so don’t try to make the projections look bigger than what you actually believe.

    Finally, even if your numbers are conservative, don’t use the word “conservative”. Don’t qualify your projections at all or maybe use a different word like “realistic” if you actually believe those projections are within reach.

    Investment Checklist

    Posted in Funding/Investing by angel on the January 4th, 2008

    Will Price put together an investment checklist that he goes threw when considering an investment in a company. A great checklist for angel’s and VC’s.

    Tom Perkins on Venture Voice

    Posted in Funding/Investing by angel on the December 28th, 2007

    This week Venture Voice has a great interview with Tom Perkins of Kleiner Perkins.

    Most investors generally talk about how they prefer to invest in people over the ideas. Some claim that there are plenty of ideas out there and it is unlikely you will come across a totally unique idea. Execution is generally considered the hard part. And that is why I was surprised to hear Tom say he invests in ideas, not people. He supports his claim because, first of all, people with good ideas are generally good people. He says he is also able to build a good team to help support the company. It is hard to argue with a person with so much success in investing in companies.

    He goes on to talk about building a team. He says you don’t need a good team right away. A main reason is because if you are seeking to build the best team that you can, it is unlikely the best people won’t come on right away when company is in its highest risk state. So you need to prove the company has potential and when there is less risk and a proven potential, it is easier to get successful and experienced people to lead the team.

    That point does support the idea that the team is very important, but it seems Tom and his team have enough experience building companies that they can provide the assistance necessary to get the company to the point of being able to prove the potential.

    The host of Venture Voice, Greg, asked Tom about their “ICU” for failing companies. Tom said they put failing companies in an ICU where the companies will either fail and they shut everything off completely or they make it out. The idea of “killing” the company completely even if there is some potential left is interesting. It reminds me of one of the central ideas behind Seth Godin’s “The Dip”. You don’t want to dedicate resources to things without a great deal of potential. You have limited resources and need to make sure you are focusing them on things with the most potential.

    Hopefully you get a chance to check this podcast, I highly recommend Venture Voice and only wish it was done on a more frequent basis.

    The Equity Equation

    Posted in Funding/Investing by angel on the July 20th, 2007

    Paul Graham has an interesting post that discusses his idea on how you can determine how much equity should be given to an investor or employee. This is often a tough thing to determine for entrepreneurs, but Paul tries to simplify it. His Equity Equation can be easily explained:

    If an investor wants to buy half your company, how much does that investment have to improve your average outcome for you to break even? Obviously it has to double: if you trade half your company for something that more than doubles the company’s average outcome, you’re net ahead. You have half as big a share of something worth more than twice as much.

    The equation is: 1/(1 – n)

    In the general case, if n is the fraction of the company you’re giving up, the deal is a good one if it makes the company worth more than 1/(1 – n).

    Venture Hacks followed this up with his thoughts on the post.

    He makes a few good points, but these two are great to keep in mind and explain why you can’t just use the Equity Equation to determine how much equity you should give an investor or employee.

    You have to pay market rates regardless of the equity equation.

    This is true. If it is absolutely necessary to get something such as an employee or money, you will have to pay market value for them, even if it is not in line with what you can justify with the equity equation. If you can’t justify it, you shouldn’t do it, but sometimes you don’t have a choice. The other option is that you may be able to get money or employees for something well below the cost of what you could justify with the equation.

    Consider the opportunity cost of spending shares on employees and investors.

    Just because you can get an investment at terms that will make it beneficial for you, doesn’t mean it is the best use of those limited resources. For example, you give up 30% of the company for something that will double your company. What if you could double your business by only giving up 20%? Just because an option is good for you, it doesn’t mean it is the best.

    Debt or Equity

    Posted in Entrepreneur Advice,Funding/Investing by angel on the May 1st, 2007

    VentureHacks has a good post discussing ideas to consider when you are determining whether you should raise debt or equity for your company.

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