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Meet the Angels in Pacific North-West

5% of all businesses are funded by angel investors; less than 1% is funded by VCs

March 1, 2012                                                                                                                                                                                         

 

Seattle, WA

 

 

On March 1st the Venture Lab, a division of MIT Enterprise Forum Northwest had its monthly “Meet The Angels” networking meeting to help connect entrepreneurs with presenters.MIT Enterprise Forum has 29 chapters across the US whose primary mission is to help entrepreneurs launch their businesses.Representatives from seven of Pacific Northwest region’s top angel groups attended the meeting in the Boardroom at One Union Square in Seattle, WA.

The panelists for this session were Mary Holmes, Chief Marketing Officer, ZINO Society; Gary Ritner, Founder & Manager, Puget Sound Venture Club; Tom Kadavy, Board Member & Screening Committee Chair, WINGS; Loren Lyon, Chapter President, Bellevue/Eastside, Keiretsu Forum; Lars Johansson, Co-Chairman, NW Energy Angels; Barbara Prowant, President, Seraph Capital Forum; and Yi-Jian Ngo.Facilitator Rebecca Lowell, Chief Business Officer, GeekWire, led a discussion on the ways entrepreneurs and angel investors engage.

Business funding vs angels’. Five percent of all businesses are funded by angel investors; however, less than 1% is funded by VCs. Yi-Jian Ngo, Managing Director, Alliance of Angels was firm: “You might receive different advice on when to approach investors, but when a parent company is spinning out an idea, the Alliance of Angels will never fund anything that is funded by a parent company. In many cases the best source of funding comes from a partnership in your industry. If you can find an angel group within your domain space, you have a much higher percentage of raising the money. If you are in IT, find IT-focused investors, they have experts who will understand your business better, and will more likely give you the money. Ninety-five percent of the angel investors are not a part of an Alliance of Angels group, so you still want to try search for angels from your field, use LinkedIn, etc.”, says Yi-Jian Ngo.

Funding for growth vs control. A CEO may be fearful of losing control when bringing in investors. Tom Kavady leaves no room for misunderstanding: “You will lose some control; that is a short answer. A key part of attracting the right investor is matching not only the dollar amounts but also personalities, because they will be in your hair, and if it does not work, it can be miserable.”

“If you want total control, an outside investor is not the rout you want to go”, adds Rebecca Lovell. Ngo advises to be aware of what you are signing, andprotect board positions, as they usually balance control issues. “Usually angels form an LLC that invests into your start-up. Time sheets, control-- all that is important when angels want some control. That is one of the main differences between getting the money from LLC and directly checks from the angels. Angels prefer to form funding LLCs”, advises Ngo.

Timeline of engagement. Panelists agreed that it takes 3-6 months lead time from a formal company presentation to angel investors to money in the bank (including due diligence that takes 3-6 weeks at the beginning).

Valuations. There are some recent trends to report in valuations. Company valuation changed dramatically in 2008, many companies dropped to 50% of what they have been previously worth. Valuations since then have become more conservative: if you have no company and no revenue, you cannot be worth $20M. Valuations are pretty tough—have reasonable expectations or you will chase investors away. Price seed-stage companies reasonably--do not exaggerate.

Lars Johansson cautions: “Valuations are not based on the proformas. What do you want to see in the proformas?”

“Comparables are an appropriate way to understand how much money you can count on, there is usually a valuation range,” points Ngo. Rebecca Lowell spoke in favor of current financings: “Use current financings. I teach my students that DCF analysis is right in only one way – that it is wrong in revenue projection. If your company is worth $2M in assets today, and you have risen $1M from investors, for a total of $3M, your realistic company valuation is $2M, because frankly those investors own a third of your company, so only $2M is left.”

“A” round vs “B” round. As Gary Ritner suggests, put your best foot forward in the A round. The B round will not be that powerful; in the B round you can be behind in the proforma, A-round guys will cut the hair.

Due diligence. When to be prepared to kick-in the due diligence? “Better be ready for it before you pitch. In our group, follow-up meetings are actually pre-scheduled for the very following week in order to keep the process moving”, explains Lars Johansson, Co-Chairman, NW Energy Angels.

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Tom Kadavy, Board Member & Screening Committee Chair, WINGS asserts that there is a direct correlation between a due diligence preparation, and success of the funding initiative: “We had a company who finished due diligence in 2 weeks, because they were so ready”. Helping entrepreneurs to keep the big picture in mind, Barbara Prowant, President, Seraph Capital Forum, cautions not to underestimate that due diligence is a first look into your company. The panelists agreed that if you receive a “no” from the first due diligence review, it is harder to come back and prove you have done better the second time. Your reputation as managers has been already formed in a certain way and angel--as any investors--first select people to invest in and work with.

Preferable entrepreneur profile. Because 52% of the investments fail within the first year, angel investors are very specific about their requirements for company profile. Loren Lyon stressed that sloppy presentations and poor communications skills are major turn offs.He would prefer to see a professional presentation, someone who did a good job on 10 slides. “Presenting is a learned skill,” he said, continuing “but requires also a personality. Even very senior people sometimes do very poor presentations.”

Lars Johansson, Co-Chairman, NW Energy Angels, suggested that presenters should also do due diligence.Presenters should feel comfortable with investors as much as they would want to be comfortable with the entrepreneur. He wants to see a passionate, but coachable, willing to learn individual. Johansson also stressed the importance of describing where this great idea or technology fits in in the overall ecosystem:who will buy it and with what does it compete.

The panelists spoke passionately of the importance of a good business plan as a part of pitch for funding. Ngo looks for the plan to point out how the company will grow and scale. Angels quickly spot the red flags in the pitching documents. For example, a sales person is often the first expenditure when funds are received. If it is a secretary, a receptionist, and a part-time resource – the endeavor will likely be a failure.

Ngo explained legal forms of entities that the Alliance of Angels prefer not to invest in LLCs. Instead, they invest in either a Corp, or an S-Corp. LLCs are usually quickly converted into Corporations to accommodate funding.

Track record. Barbara Prowant and Gary Ritner agree that marketing, sales are important. Engineering teams with homogeneous skill sets cannot answer or drive these questions. “Nothing happens in the world unless you can sell it”, says Ritner. – “Involve a sales guy earlier, even if he is expensive. All my failures initially were not because the product was not great, but because the management team could not execute. Mixes skills teams are very important.”

Rebecca Lovell provided this hint: “Family-based start-ups are ineffective – the skill set is locked, it’s difficult to bring in talent because of fear of a loss of control. One entrepreneur, who used to prefer family-based models, said: “I had three very successful marriages.”

What if your business was not selected? Mary Holmes provided some comfort.“’No’ does not always mean ‘no’. ‘No’ can mean: ‘Get your act together.’”

Rebecca Lovell suggests being ready to interpret a decline literally: “Often no is a no, though. Why? Investors want some traction, some velocity, that something is happening at the market and the company starts taking off. ”.

Tom Kavady concluded that getting professional advice prior to reaching out to angel investors is very helpful, it is hard to learn from experience in this world, it is too big and complex.

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Request to be contacted to tell your story about the impact you've made or impact you hope to make for your business and your clients. We can help you evaluate your ideas proactively or on the go and execute on them.