Bleeding Edge

Recently, I gave a talk on angel investing in the current startup market to a group of really savvy Super Angels in the San Francisco and Silicon Valley area of California inside the Google campus, and then we held my annual Super Angels retreat in the Marconi park near Mill Valley.

I had founded many years ago the Mill Valley Angels network and this is our annual get together to reminisce, reinvigorate, and reimagine the World.

A world that included all super Angels, some great Founders who had multitudes of exists and Great Returns, and a few Entrepreneurs who had graduated to become early stage Venture Capitalists.

This time around there were also a few “new heads” in the room from the Great Banks, who had the temperate impression that that the market is overheated, the slop is getting dirty, and the waters ahead are going to be rather choppy.

And their naturally concerted suggestion was that we should exit en masse.

Their solid Banker’s Advise can be summed up in this: “Exit the frothy Market of Illiquid Assets now at any cost — before the whole ship is in danger of foundering…

I agree we may look back on 2015 as the point in this cycle at which we entered a bubble and overvalued tech startups. Investors are definitely paying higher prices for seed and venture deals, and despite a growing number of “unicorns” (startups valued at $1 billion or more), strategic buyers aren’t paying a commensurately higher price to buy these startups.

As an angel investor in so many more than hundred deals and an individual LP in more than twenty venture funds, I have a lot riding on the market for tech startups. Not a week goes by without me making a capital call, re-upping an existing or making a new investment. In addition, the real day to day Life and my Ecosystem, hinges on the continued vitality of startups, growth companies and those who fund them.

So my friendly Goldman Sachs Bankers, and my Investment Banking colleagues, and even my Lawyers, tell me that now would be a great time for me to step back, leave my existing chips on the table, because as an angel, there aren’t many other liquidity alternatives, and sit out this exuberant period.

But I’m disregarding that advice for now.

Here are a few reasons for why I’m continuing to invest and increase my exposure to the Early Stage Deals as opposed to anything else…

And here are the ABCs of Angel Investing:

A) The most important reason we do what we do and in a way that we do it, is that myself like most all other Angels — we aren’t typically Banker-Wankers, or even rational economic actors as mainline economists would describe us. However we are driven by both Moral Sentiment as Adam Smith would suggest and by Emotional Intelligence as I always say…

When I commit to invest in a Dream, in an Idea, on A Founder, or even in an Angel Fund and on my own Mutual Angel Venture funds or a single unique startup — I’m generally thinking I’m making at least a 10-year bet. And sometimes I take Twenty year bets too…

I can do this because I don’t have to return investors’ capital in a set timeframe, which enables me to focus on 10- 20- or even 30-year blocks of time, and how my strategy will unfold and yield opportunities over the long term. Value Investing in StartUps requires to be able to see across the Horizon towards the Founders Dream of a City of Light… cause this is what a “Great-Company-to-Be” represents for me.

A senior banker recently asked me what kind of return rate I seek on my investments. The simple answer is: I don’t. Sure, I consider how many multiples of my original investment I can possibly return (also known as cash-on-cash return) and have to believe the company has a chance to return a massive multiple. Yet, I don’t measure the success of a venture by the return on my cash – and that’s not economically rational. I don’t believe I’ve ever made an angel investment solely for direct economic outcome.

To me, it isn’t about getting in the right deal — it’s about being in the flow. I don’t invest on the theory that this founder will make me money on this company. I invest on two theories: that this is someone with whom I want to be in business and that this founder will make me money at some point, either directly or indirectly.

B) Angel investing should be continuous rather than one-and-done, yet I think this applies selectively and in three specific ways: a) I seek out co-founders I expect to be able to back in two, three or even four ventures because these are people who are unstoppably compelled to start things. b) For great companies, the first investment is usually not the only investment needed, so I expect to have opportunities to reinvest (double down). c) As the market changes from hot to cold and back again, I may reinvest at a lower, higher or even at the same price — but will never re-invest in a Company that has lost it’s way.

I believe angel investing generally only makes sense at some scale and in filling up the space by populating all of the system and the network with smart bets.

Intelligence Rules Here: In other words, either build a big “Angel Bet” (c) portfolio or go home to the Mass Market Tracking Funds. It’s remarkably unlikely for an Angel Investor to stumble into an investment in Twitter without also investing in other less illustrious startups along the way… An angel’s ability to add value to and understand the value of startups should increase the more Angel investments that Angel makes. I’m not suggesting a straight line, but experience and network effects matter the most in this market.

When playing Roulette and this game is akin to this StartUp Angel game — you need to populate the Reds or the Greens to beat the House and increase the Odds of Success. Therefore spreading out your chips is a good policy and preferable to anything else at the very early stage. My first investment into a startup is generally a simple 50K.

That is the great majority of my Angel investing in seed stage and I stick with it. Usually I never go to the StartUp after that. Unless they are Exceptional like Twitter. Never cross that thinking line is an important caveat — but I always help the Founders to go find this company for M&A, or this VC for cash, and I generally help with Network introductions to take them upstream to the the next level and to the Institutional and VC investors for follow on investments.

And when I erase my own Panoism Rule and plan from the start a long term value Investment — I give a 20% to 30% of what I expect to deploy into that company given analytical progression. I also spread out the investment into a “burn-rate” over twelve months to make it last but also because I expect to fund the “Truly-Great-To-Be” company three times with each round likely to be far bigger than the last, enabling me to double down on the winners while walking away from the Losers.

The same holds true for the early stage funds. For instance, I founded and invested in the first Angel seed fund to be run as a Mutual Fund. This was an early stage “ANGEL” fund of $21 MM to grow Companies all around the Ecosystem taking on the best of breed StartUps from the Top Accelerators of the land. And I proactively committed to raising a second follow up fund because I saw how fast my other co-investors were quick to commit, despite the lack of proof points on the first investments. I discussed this and came to an agreement that because the first fund was a seed fund, they all assumed that they would be investing in the second fund without those proof points. The Super Angels had already made the decision to invest in follow-on when they saw a good thing. So this is is a Good Metric to expect from all Angels.

C) I want to see You and I don’t want to see your deck. Am saying this because I want to see you’re a DEC. I’m not sure this is a reasonable approach, but I am sure that if Kim Kardashian breaks the Internet and causes all the StartUps to crash and burn tomorrow, I’ve made enough connections to Driven, Energetic, and Charismatic (DEC) people, that I will continue to have intriguing opportunities elsewhere. These Founders, Co-Founders, and Funders, have made me more valuable as an investor in what I perceive to be a virtuous cycle than if I had stuck to the Old Model of Super Angel Investor.

Today, and in a typical day this happens at least for a couple of hours each day, – the more often I help good founders, funders, and companies alike, the more recognition, clout, and value I gain for my long term Strategy. Yet in a surprising twist — the more value I give away, the more value I gain.

I am literally “A River To My People” and that experience that I attained by helping others succeed, helps broaden my network and causes me to be described as a Boon to All I come in contact with.

This becomes an enthusiastic following for Me, and the more I help founders, investors and companies to succeed in a combination of Ways that do not involve me making moneyed bets in their fortune — the more Returns come to me. Strange How This Works…

Do This And See For Yourself.

Iterate…

Reiterate This…

The “C” in DEC seems redundant, but for me charisma in a founder is essential, because they must recruit followers — whether it’s an investor, co-founder, employee or customer. Founders must have something magnetic. Sadly that requirement doesn’t apply to the angels and Investors they have to work with…

In short, while current valuations indicate that we’re in a bubble, there’s an abundance of DECS founding or ascending the ranks of great tech startups right now that I’d like to work with. That informs how I try to behave in this market and it also encourages me to stay in the market and keep plugging away.

It’s also worth noting that I generally only invest where I’ve known the founders for at least a year — but then again, I’m not always economically rational, am I?

But since we look for new Angels all the time — it is best to find them here by growing them organically from Entrepreneurs who succeed and have great exits with our help. I call it to: Nurture the Nature and here is how it’s done…

Teach new Entrepreneurs in our Companies to grow a Strategic Thinking to succeed:

To get angel investors to invest in your start-up, you have to make sure you understand their motivation. You also have to make yourself stand out somehow, and ensure you can succinctly articulate your vision for the business and why it has the potential to grow into a significant company.

Here are the best ways to follow in order to make your pitch successful:

A. Big Problem You Are Solving

You need to clearly explain why your proposed product or service is solving some big problem or important unmet need in the marketplace. Here are key questions to consider:

• What is the problem?
• Why are existing solutions inadequate?
• How does your solution differ from the competition?

B. Market Opportunity Is Extra Large

Angel investors typically want to invest in businesses that have a large market opportunity and can grow to be very big. Here are important questions the entrepreneur needs to address:

• How big is the addressable market opportunity?
• What data do you have to back up your claims about the total addressable market and growth rate?
• What percentage of the market do you plan to capture, and over what time period?

C. Founders Are Suited for Success

For many angel investors, the founders/management team is the most important factor in determining whether to invest or not. So try to convey the following:

• That the founders are passionate, dedicated, and have integrity
• That the founders have relevant domain experience
• That the founders can work well together and are complimentary
• That the founders are strongly motivated

D. Pitch & Demo

An image, demonstration, or prototype goes a long way in giving the angel investors a powerful understanding of your business. Be sure to come pitch&demo to the SEATTLE ANGELS : http://www.meetup.com/Seattle-Angels

• Highlight the differentiating features compared with your competition.
• Strive to present a great user interface or product look and feel.
• Discuss the key intellectual property and technology underlying your product.

If you have beta testers who have used your product, discuss the learnings you have gained from their feedback.

E. Angel Investors

The best way to get the attention of an angel investor is via an introduction from one of their trusted colleagues. Start by using LinkedIn to see if you have any connections to the investors. Angel investors can be found through:

• Angel Networks and Lists [ http://www.meetup.com/Seattle-Angels ]
• Entrepreneurs
• Lawyers
• Accountants
• Angel investor University networks [ Harvard Angels ]
• Venture capitalists
• Investment bankers
• Crowdfunding sites like Indiegogo and Kickstarter

Once you get the introduction, here is what your email to the angel investor should include:

• The name of the person who referred you to the investor.
• Short bullet points about what your company does, what problem it’s solving, and any early traction its gotten.
• Information showing the founders to be competent, passionate, and experienced.
• A 2-3 page Executive Summary or 15-20 page PowerPoint investment deck.

F. Great Pitch Deck

You need a great PowerPoint presentation/pitch deck when presenting to angel investors. It needs to tell a compelling vision and story. This deck should be no longer than 15-20 slides, and contain the following key information:

• The overview of the company
• The problem you are going to solve
• The market opportunity (and that it is large and growing)
• The management team
• The technology and intellectual property
• The product or service
• The revenue/business model
• The marketing strategy
• Any early traction, market validation, or early customers
• The competition and your advantage over the competition
• Financials and projections (and be prepared to answer questions on underlying assumptions)

G. Don’t Dos, When Pitching to Angel Investors

Avoid the following:

• Don’t give the investor a 50-page plan to review. They don’t have the time.
• Don’t say you have no competition.
• Don’t show unrealistic or uninteresting financial projections.
• Don’t ask the investor to sign a non-disclosure agreement (NDA).
• Don’t present unrealistic valuation expectations for your company.
• Don’t underestimate customer acquisition issues.
• Don’t underestimate competitors.

These are only some of the mistakes that many start-ups make…

H. Prepare, for the Pitch Meeting

You typically get one meeting to impress a potential investor. So make sure you are prepared for the meeting by doing the following:

• Practice your pitch in front of an audience and get feedback.
• Review the investor’s LinkedIn profile and website.
• If you have common connections on LinkedIn, ask those people for any insights on the investor.
• Review what portfolio companies the investor has invested in.
• Be prepared to answer questions concisely.

I. Early Traction or Adoption

Demonstrating that you have gotten early adoption or paying customers puts you far ahead of entrepreneurs who just have an idea or business plan. So, if you have an app, get as many downloads of your beta version that you can get. If you have gotten good press or good reviews, make sure to share that. Customer testimonials can also be helpful.

J. Financials and Projections

Angel investors will want to understand the financials of the business and any financial projections. So be prepared to answer the following questions:

• Do you have detailed financial projections for the next three years?
• What are the key underlying assumptions for the projections? Are they reasonable?
• What are the key cost components for the product?
• What are the unit economics and gross margins?
• What will be your monthly “burn” rate (expense rate)?
• How much capital are you raising?
• How long will that capital last?
• What will you be able to prove with that capital?
• What is your desired pre-money valuation for the company?
• What is the cost of customer acquisition?

So these are the ABCs of Angel Investing that you might be able to benefit from along with a few pointers for when going upstream to the institutional and the VCs that are always sure to follow on the steps of the successful Angel Investors.

Yours,

Dr Kroko

PS:

Join me Tonight in a celebration of Angels those Super Investors of the Ecosystem of StartUps in the most Innovative of cities around the world — Seattle.

Join Me Here: http://www.meetup.com/Seattle-Angels/

And RSVP right here: http://www.meetup.com/Seattle-Angels/events/221395763/