angel investors

SBEC Pitch Night (August 2016)

SBEC Pitch Night was another fun, inspiring and interactive meeting of entrepreneurial minds. After a brief introduction from Executive Director Gary Polk and Lead Mentor Mike Manahan, the pitches began. All three companies showcased are currently working within the SBEC cohort program. First, Alina Ugas, co-founder of The Final Step, shared her vision for their program called The Needs Based Method. Next up, Annie Vonheim, the Chief Juicer at Smart Pressed Juice, dazzled the audience with the company’s plan for dominating the juice and cleanse market. And closing the evening was the charismatic Lonnie Wade, who explained how Eat Better Today can bring healthier, affordable meals to EBT cardholders.

Pitch Night is a friendly environment for companies wanting to improve their presentation skills and potentially raise capital (you never know who is sitting in the audience!). Those in attendance offer feedback on the presenters and presentation – and on this evening, the three pitches were outstanding.

Joe Platnick: Do They Have a Great Rolodex, Advice and Connections?

A few years ago I wrote a post about evaluating Angel groups and the criteria to use when seeking investment. The list included:

  1. Do they charge fees
  2. Do they actually have capital and a track record of investing their own personal funds
  3. How transparent is their organization and investment process
  4. How do they say ‘no’
  5. Honesty and integrity
  6. Rolodex and connections
  7. Advice
  8. Are they respectful of entrepreneurs
  9. Do they help entrepreneurs, regardless of whether or not they invest
  10. Do they support the local entrepreneurial community

Although charging fees—or pay to play—is a good litmus test for weeding out disreputable angel groups, you’ll also find that for-profit angel groups typically have a poor track record with these other criteria.

Most angel groups have money, and one group’s money isn’t any greener than another’s. Beyond cash, the other ways an angel group adds value to a startup is through great advice and personal connections.

One of the easiest ways to assess an angel investor’s ability to provide advice and connections is to read their bios on their website. High-caliber Angels with a lot of experience at both large and small companies, tend to have strong Rolodexes and skills that can be applied to helping portfolio companies. When reviewing their experience, consider both their work history and the companies they’ve backed as investors.

You can also judge the caliber of the group through your initial experiences, as many Angels provide worthwhile advice and introductions to their networks in the early stages and prior to investing. If you’re further along with an angel group, consider doing more diligence on the group and its members by contacting CEOs of their portfolio companies.

When it comes to connections, one of the most important when evaluating an angel group is links to VCs. Although many of our portfolio companies have told us the Angel round is the last tranche of money they’ll need (and they even say it with a straight face), most startups will invariably require follow-on funds.

William Quigley, a prominent local VC from Clearstone Venture Partners wrote a post years ago, Value of Certain Angel Investors:

As a VC, I divide angel investors into two buckets. The first group includes angel investors who know the space they are investing in. Perhaps they previously started a company in the same industry or were part of a successful company targeting the same market. As it happens, angel investors in this category usually know the VCs who invest in their space and can be a great help in introducing a start up to smart venture capital investors. Better still, these angels typically know the going terms for a start up in their market. Accordingly, they can help the entrepreneur get the best deal warranted given the progress of the business.

The second bucket of angel investors are those who have some spare cash to invest but don’t have any familiarity with the target market. These investors are generally not known by VCs active in the specific market the start up is pursuing. In most cases, they can’t help with follow on fund raising. Because they don’t know what the going VC terms are, they often set terms for their investment that make it harder to raise money in the next round.

VCs can’t know everything about an industry. So how do they get comfortable with a new business? They rely on smart people who are accomplished and well connected in that industry. If someone of that caliber happens to already be an angel in your business, raising venture capital just got a lot easier.

In the current environment, CEOs and entrepreneurs don’t always have a choice when it comes to selecting their investors. However, when you do, it’s important to pick an angel group that can deliver the intangibles, such as advice and network, along with the cash.

Joe Platnick: How Do Those @#$%^ Angel Groups Survive (AKA Angels Behaving Badly)

In my original Top 10 list of criteria for selecting an angel investor, there were two items that aren’t often discussed, but are worth scrutinizing during the fundraising process: (1) Honesty and integrity and (2) Are they respectful of entrepreneurs

If you talk to founders and CEOs that have gone through early-stage fundraising, many will share their personal stories about dealing with as***le angels. On several occasions I’ve observed angels (and not members of the Pasadena Angels) publicly berate entrepreneurs. Probably the most memorable was when a member of another angel group looked a founder square in the eyes and told them in an obnoxious manner they weren’t CEO material—a rather ironic comment, since this angel had probably spent their working life as a service provider and had never been in an operational role, and especially not one in a startup.

One of the key questions entrepreneurs often ask: How do as***le angels survive and why isn’t there a self-correcting mechanism that purges them from our ecosystem? In addition to losing bad angels for economic reasons, it also seems reasonable that the best entrepreneurs would avoid working with them and would force/encourage these angels to ply their trade somewhere else.

According to the Angel Capital Association, approximately 250,000 people have made an angel investment in the last two years, which would somewhat qualify them as angel investors. I suspect the majority of these individuals are decent people. As with other professions—or life in general—there will always be some bad apples.

Based on my experiences as an angel investor over the past 10 years, I have three theories about why this occurs:

1. There’s a significant imbalance between early-stage capital and good fundable companies, which means it’s a buyer’s market for investors, and companies can’t be as discriminating. I’ve talked in past posts about the funnels for most institutionalized angel groups and VCs, and that only about 1% of all the companies that apply get funded.

2. Entrepreneurs hear the hype about particular angel investors and that they’ve done the most deals and/or they’ve been around the longest, and are completely blinded by it. In many of these instances, entrepreneurs have done little/no diligence on these angels and have tended to overlook their negative character traits.

3. Money talks and entrepreneurs get blinded once the term sheets and money appear, and once again don’t do sufficient diligence on their investors.

In addition to understanding why they survive, it’s also important to understand what created the as***le angels in the first place. For the good angels it’s an opportunity to give back and they enjoy working with entrepreneurs. For the as***le angels, it’s often they’re wanna-be VCs and/or relish the opportunity to express themselves in ways they weren’t able to in their previous careers. Apparently they’ve seen some VCs behaving badly and figure acting this way will give them some VC cred. (note to these types: you’re not really a VC if it’s personal and friends & family money, as opposed to institutional—unless you happen to be Haim Saban).

Even if an angel is on their best behavior during the early stages, you should still do some diligence on their personalities and post-investment reputations. Another good barometer for predicting these behaviors can be found in your initial experiences with the admin staff-or gatekeepers—for an angel group, as these people frequently reflect the attitudes and corporate culture of the angels that employ them.

Joe Platnick: Beware of the Money Changers

In blog posts over the years, one of the topics I frequently talk about is how to evaluate an Angel group. Today’s post addresses “do they actually have capital and a track record of investing their own personal funds” and is from a story I’ve told at several entrepreneurial events. Although most people assume it’s a reference to the Bible story, it’s actually from working overseas in a previous life.

Years ago while working in a country that had heavy-handed currency laws, I always had to go to a bank or other government-sanctioned business to exchange money at a ridiculously unfavorable exchange rate. As is always the case in these locales, you could find some enterprising entrepreneur on a street cornier or back alley that would exchange your US dollars at a more favorable rate. For many that ventured to do this, the common ploy was to receive an envelope of what looked like a big wad of local currency. In reality there were some actual bills on the outside of the stack and newspaper that had been meticulously cut and placed in the middle to make it look like you were receiving actual money.

With angel investing now popular in the US there is a similar con game for startup companies raising money, with many organizations masquerading as angel groups or individual investors. Although it could just as easily be described as the angel equivalent of the email scam from my good friend the Nigerian prince.

Several years ago one of our portfolio companies was invited to present to one of these purported ‘angel’ groups. At the presentation, the founder was approached by several members of the group who claimed to be angel investors. In reality—and after getting their legal hooks into the company and extracting exorbitant fees—were nothing more than consultants that offered to help the company raise money. At the time the Pasadena Angels invested—and many billable hours of legal time later—we were able to extricate these individuals from the company—although not until considerable damage and expense had been incurred. Unfortunately this is not an isolated instance.

Aside from making entrepreneurs aware that this goes on, the best advice I can share is twofold. Before proceeding with someone or an organization that claims to be an angel (or any other type of) investor, do some due diligence on that investor. Through websites such as SoCalTech it’s easy to access the old press releases announcing that an angel group has invested in a particular company. Call these companies and ask the tough questions—including how much of the investors’ personal funds were contributed. If you can’t find any companies, ask the investor for specific ones that you can speak with.

Lastly, the only agreements you should be signing with an investor are the typical investment documents that are prepared just prior to closing on their investment and the money going into the bank. If you’re asked to sign an agreement early in the process or long before an investor has done sufficient diligence, be wary and always seek the advice of a good lawyer. In all of the situations where we’ve had to undo the damage to a portfolio company caused by these unsavory individuals, it was because an unsuspecting company founder had signed one of these consultant’s agreements.

Joe Platnick: The Angel Funding Process – What Every Entrepreneur Should Know

SBEC: Ask the Angel Investors

[This article originally appeared in 2013 – Mr. Platnick has updated to reflect recent marketplace changes.]

Recently a company founder asked me about what kinds of things entrepreneurs have done (and should do) to increase the odds of getting funded. A few years ago John Isaacson, past Chairman of the Pasadena Angels, did a presentation on “How to impress an Angel and get your company funded.” This presentation provided a comprehensive overview of the common denominators (both good and bad) we’ve seen from companies pitching the Pasadena Angels over the past 14 years. For John’s talk, he divided the presentation into the following topics:

  • What Every Entrepreneur Should Know
  • What We Look For
  • Investment Criteria and Cheat Sheet
  • Getting Inside the Mind of the Angel
  • Top Deal Killers

For this post I’ll talk about what every entrepreneur should know and provide some additional granularity to John’s main points on this topic:

1. Having a good idea is not enough

Every so often we come across an entrepreneur who believes they’re investment worthy based on how bright they are or because they came up with a good idea that was well articulated in a 2-page summary. Along with the funding criteria on the Pasadena Angels website, there are two other things we look for in companies: (1) a prototype or proof-of-concept that validates the company really can deliver on its idea; (2) ‘real’ market validation to confirm that a viable market exists; (3) the “plan” behind the plan, which I’ll address in a later post and covers how you’ll execute once you’re funded.

2. Raising capital requires both time and money

Periodically we’re impressed by an entrepreneur that has left a well paying job so they could devote all of their time to their startup. To financially support their new venture, they will often take a second mortgage on their house and max out all their credit cards. The net impression when we see this is that he/she really believes in themselves and their business, are completely committed and has some serious skin in the game. At the other extreme we’ve seen people who keep their day jobs, devote a few hours per week to their fledgling business and have invested only a few hundred dollars of their own money. Although you don’t have to follow the first scenario to secure funding, you should make sure that at a minimum you’re at least half-way between the two.

The two key points on this topic are you’ll need to invest sufficient time and money into your business to get to the point where a prospective investor will be interested. Secondly, the process of raising money will invariably be the hardest part in a startup—which also translates into time and $$$$$.

3. You can save time and money if you understand the investment process

Although this is stating the obvious, you’d be amazed at how many companies don’t take the time to do this.

4. Identify and contact prospective investors whose investment criteria match your situation

Once again, it’s pretty intuitive. One added benefit of doing this is that this research may also help you discover things about the investor that you can use to get your company noticed.

5. It’s like college…you’ll be graded on a curve

Back when I was in college I was surrounded by a lot of very bright people. As if the situation wasn’t challenging enough, my class grades were often determined by how I did relative to them and the class average, and not on an absolute scale. Raising money is somewhat like that, because investors make only a limited number of investments. For the Pasadena Angels, it’s typically 12-15 per year. Although your company may be great on an absolute scale, the chances of getting funded will go down if an investor is simultaneously considering more investment worthy (i.e., stage, market, team, exit opportunity, etc.) companies. Historically, there have been many good, potentially fundable companies we’ve had to forego because of this.

6. Don’t stop till it’s done

At times we’ve watched entrepreneurs reduce the amount of time and energy they invest in the fundraising process after hitting a milestone along the way—but before actually having the money in the bank. The most common time that we’ve seen them ease up has been after receiving the term sheet and investment agreements. The amount of time and enthusiasm that you expend during the latter stages should be the same as when you’re first pitching. Remember, don’t stop until all of the money has closed and it’s in the bank.

SBEC Pitch Night: May 19, 2015

Join SBEC and exciting startup companies on Tuesday, May 19, 2015, from 6:00 PM to 8:00 PM. The event will be held at the offices of SBEC (1215 El Prado Ave, Torrance, CA). Please note the change of venue.

Watch exciting Los Angeles and South Bay startups pitch their companies to Venture Capitalists and angel investors.

If you are interested in pitching your company, please contact SBEC as soon as possible.

SPACE IS LIMITED AND NO WALK-INS WILL BE ACCEPTED. DO NOT MISS THIS OPPORTUNITY!

Incubators & Accelerators welcome to attend!

 

RSVP to attend.

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