Category Archives: Angel investment

What’s the Difference Between Angel Investor and VC?

Angel investment, Business Financing, Venture Capital, , ,

I see this confusion a lot: People use the terms “venture capital,” “venture capitalist,” and “VC” to apply to any outsider investing in a startup. However, it’s really useful to draw some distinctions in this area, between three important classifications: venture capital, angel investors, and anybody else. 

angel investment VC

Venture capital means big-money investment managed by professional investors spending other people’s money. The money comes from extremely wealthy people, insurance companies, university endowments, big corporations, etc. Think of Kleinert Perkins et al., First Round, Softbank, Oak, etc. Venture capital usually comes in millions of dollars. 

Angel investment is people who are accredited investors as defined by the U.S. Securities and Exchange Commision (SEC), which sets wealth criteria:

they must have a net worth of at least one million US dollars, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and have the expectation to make the same amount this year.

Those rules were going to relax with the Jobs Act of 2012, which people would open the gate to crowdfunding, but hasn’t yet.

The most important distinctions between angels and VCS are: 

  1. Angels invest their own money; VCs invest other people’s money. 
  2. Angel investment is much more likely to be in hundreds of thousands than in millions of dollars. 

Aside from those two distinctions, it is generally true that VCs will be more rigorous in studying (called “due diligence”) the investment before they make it. Both angels and VCs will have similar processes for looking at summaries, then pitches, then business plans. 

Anything else is called “friends and family,” which really means “not VC” and “not angel investment.” The laws on investment allow a few so-called friends and family, but there are limits. The intention of all the regulation in this area is to prevent the kind of stock frauds that were rampant during the great depression. 

Willamette Angel Conference Invests More than $450K

Angel investment, Business Plan Contest, Starting a Business, , , , , ,

Yesterday’s Willamette Angel Conference (WAC) 2013 event invested more than $465,000 in four Oregon startups, highlighted by more than $250,000 in Portland-based Sonivate, which has developed a fingertip-mounted ultrasound probe that enables imaging while leaving both hands free to do work with simultaneous tactile feedback. 

Willamette Angel Conference

Three other startups got WAC investment at the event: Amorphyx, a Corvallis company with innovative technology that reduces manufacturing costs and increasing the brightness, speed and efficiency of LCD and flexible displays; DesignMedix, a Portland company addressing the rapid rise in drug resistance in multiple diseases; and Green Zebra Grocery, an innovative chain of small healthy-food grocery and convenience stores, based in Portland.

The event concludes three months of study (called “due diligence”) by the group of more than 30 angel investors, about half and half from the Oregon university towns Corvallis and Eugene. This year’s event was held on campus at Oregon State University. The event alternates between Corvallis and Eugene. I’ve been a member since it started in 2009. 

Earlier in the day, keynote speaker Diane Fraiman of Voyager Capital noted that Oregon companies have received more than $600 million in venture capital funding, and challenged us, the WAC members, to continue investing in our area. That might have influenced us — our deliberations are strictly confidential, so I’m not saying — that afternoon as we added more than $200,000 to the investment amount originally planned that morning. That also doubled our previous year’s investment, and — we think — made this WAC event the largest investment of any of the Oregon angel investment groups. 

Hallspot, a Eugene company that started on campus at the University of Oregon, was awarded a $2,500 Palo Alto Software prize for the best concept-stage company. 

Q&A: How Do I Finance My Company Without Losing Control?

Advice, Angel investment, Q&A, Starting a Business,

Question:

I need $250,000 to get my business started, but from what I see on the web, I’m going to have to give away the business, practically, to get that money from investors. And I don’t want to borrow the money because it’s a startup and I can’t be sure I’ll succeed.

cash ball and chain

My answer:

  1. You may be worrying about the wrong thing entirely because investors want know part of you or your business. Don’t even try to get angel investors unless you can convince them that there’s a reasonable chance that the money they give you today will give them ownership in a company that they’ll be able to sell to somebody else for 5, 10, or more times that amount of money in 3-5 years. “Reasonable chance” is just that, a decent shot at it, we know you can’t be certain. But can you convince people that it’s worth spending money on your business for their chance of return?   Ask yourself: do you have what investors want? If you don’t, then don’t waste time on this.
  2. Investors write checks. They expect something back in return. If they they write checks for your business instead of to buy a fancy car or second home, that’s because they expect to own something for a while and make money on it when they sell it. Don’t complain about giving them ownership.
  3. Real investors want control for good reasons. Good investors end up as partners. Don’t give up control if you don’t have to, but depending on how good your business looks, and how much startup experience you have, sharing control might be the only way to go. Or the best way. 
  4. I’ve written it many times, although this isn’t mine originally: choose an investor like you would choose a spouse. Find somebody compatible, who can offer help and advice, and ad to your team.
  5. If you manage to convince friends and family to invest in your business and give them a bad deal, you’re going to have to live with that problem for a long time.
  6. 10 good reasons not to seek investors for your startup.
  7. You don’t want to borrow the money because there’s too much risk? But it’s your startup, right? Why should anybody else take the risk you don’t want to take. Banks aren’t supposed to take risks either; it’s against the banking laws.
  8. Not that you should borrow the money, even if you can because you have house equity or something to pledge as collateral. Weigh your own risks and returns.
  9. If you want peace of mind, scale that business plan back to a size you can manage with your own resources. It’s possible for some businesses.
  10. Look for alternative financing like early prepaid sales, or share of future revenues, etc. Read 5 non-traditional ways to get startup money.

(Image: cash chained, bigstockphoto.com.)

Do You Have What Investors Want?

Angel investment, Starting a Business, Venture Capital, , , ,

What do investors want? I’ve read more than 100 business plans in the last two months. Entrepreneurs are overwhelmingly predictable on this point. Investors want disruptive. Investors want game changing. 

But not just saying it. Being able to believe it. Two of every three plans says it. Only a very few make it actually believable. 

And believable, in this context, is still a matter of huge uncertainty. Nothing in startups is fully believable. The closest you get is an interesting market story about solving a real problem and doing something important differently, and a team that seems to have experience and background that indicates it can execute the idea. 

The best thing I’ve seen in a while on what investors want — at the high end of venture capital — is this one on The Anatomy of a Successful Entrepreneur, that appeared on TechCrunch about a week ago. Post author Rip Empson digs into the recent Kaufmann data on venture capital, adds some analysis by Fred Wilson, Chris Dixon, and others, and comes out with the short list shown here. 

 

 

Interesting Idea for a Hybrid Crowdfunding Solution

Angel investment, , ,

This is interesting: what if some crowdfunding sites limit the investing to so-called “accredited investors” as defined by the SEC. I just read David Rose’s take on this at Quora.

David mentions two sites, his own gust.com and angelist, that already group accredited investors. Up to now they work as platforms for getting investors together to look at deals, submitting deals to investors, and managing communications, research, and so on. But they could also register under the JOBS act, as he suggests: 

… fully registered Broker/Dealers and actively facilitate financings for a percentage of the raise.

Why not? No good reason why not. 

Why? The JOBS act loosened restrictions on who is allowed to invest in startups, and it is now waiting for regulations to make it real. In the meantime, though, there are hundreds of thousands of accredited angel investors. Using the change coming in crowdfunding but starting with accredited investors could get somebody started quickly, without (in theory at least) violating the existing regulations. 

 

Is Venture Capital Gone Forever

Angel investment, Venture Capital, , , ,

I completely agree with Steve King of Small Business Labs, in Is the Venture Capital Industry Broken? He says:

The news here isn’t that the VC industry is broken. This has been actively discussed for years. The news is who’s saying it’s broken.

Which is, in the flap this month, the Kauffman Foundation.

The Kauffman Foundation has long been a close friend of the VC industry.  In addition to investing many millions of dollars with VCs, Kauffman’s mission of supporting entrepreneurs and high growth companies has resulted in them closely collaborating with the VC industry.

The foundation recently published We Have Met the Enemy and He is Us, a blistering critique of venture capital and its role in startups.

Here’s the problem in one simple business line chart (why I like business charts). It shows how the rate of return on venture capital looked great during the first big Internet boom. It’s not a pretty picture.

On the other hand, those low points in the last few years aren’t uncommon, are they? How is your industry doing since the great recession? The chart shows pretty much what Steve summarizes as follows:

Kauffman has many reasons why the industry is broken.  But the quick summary is the industry simply hasn’t performed well.  Only 38% of the funds Kauffman invested in over the last couple of decades beat public market small cap indexes.  This is primary due to the expensive fees VC firms charge.

So does this mean hard times for startups? I doubt it. I see is a shift towards smaller seed rounds and more angel investment as a web and software technology have reduced the capital needed by the average high-end web startup to get from nowhere to proof of concept and validation. In an oversimplified general sense, what took $2.5 million in 1998 takes probably $250,000 today.

Business comes in cycles. Suppose the huge camelback hump in returns in the late 1990s (the boom) were a temporary aberration. The hard times afterwards (the crash) are probably a temporary aberration too.

Steve recommends this story in GigaOm and this one by Fred Wilson of AVC for further reflections on the Kauffman findings.

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3 Essential Truths About Startups and Investment

Advice, Angel investment, Back to Fundamentals, Starting a Business, , , , ,

Today I’m answering, with this post, a lot of similar questions I get often in email, where somebody is asking me how to get connected to or hooked up with or recommended properly for angel investment. Here are some unpleasant and unpopular facts about startups and investment.

  1. Only friends and family believe in you and invest in you because you’re you. And that’s if your friends and family do believe in you; that’s not true for everybody. Outside investors, in sharp contrast to friends and family, either believe in your business prospects, your market, and your team, or they don’t invest. They’re doing it to make themselves money. (back story: I get a lot of emails from people asking how they can get investment for their business when they have pretty much nothing to offer investors. The answer is: You can’t.)  Or not at all.
  2. About that great idea you have that’s worth $5 billion for which you need $500 million to get started: unless you’re already a startup star, or an oil prince, or family wealth princess, just forget it. Mark Andreesen or Mark Cuban or Paul Allen could maybe get $500 million for a new idea. You can’t. (If it makes you feel better, neither can I). Give it up or scale it down to a $5 million idea that takes $5,000 to get started; or just forget it.
  3. All of you newbies – new to entrepreneurship, no successful startups, no traction — asking how you start your business with no money: Please, get real. Once in a blue moon a foundation or government agency will grant some money, and usually that’s just a low-interest loan, to some proposal that has social and economic value that fits government priorities. We see this in special development zones, some scientific or defense-related research areas, and occasionally with private money committed to social good. But it’s rare. If you aren’t one of those special cases, forget it. And if you are, do your homework, find out what really happens with grants and such.

If you’re still interested in a startup, stop looking for some pie-in-the-sky solution. Get a job in the business area that interests you, and learn the business. Partner up with people who’ve been there already. And do your homework, look up all those web pages full of good advice about startups, including this one, bplans.com, which is full of information about what you can and can’t do. If you’re in the U.S., connect with your local Small Business Development Center, or Women’s Business Center, or Small Business Administration (SBA) office. If not, find the equivalent in your country. Get some real info, and then do the work: do some research, develop a realistic plan, take real steps.

Starting a business isn’t a right. The government doesn’t owe you your startup. You have to make it happen. 

Disrupt Education … Please!

Angel investment, Business Plan Contest, Venture Capital, Venture Contests, , , , ,

I wonder if we as a society are ever going to figure out how technology can disrupt our antiquated systems for educating our children.

Think about what’s happened to information, social interaction, research, and business over the web — not to mention mobile technology — and then think about education. Preschool, K-12, and higher education.

Would anybody disagree that the institutions we depended on as kids are now embattled and crumbling as a result of political and economic factors? Higher ed has had the worst inflation of any industry I can think of over the last two generations. And the K-12 still depends on the old model of the teacher and two or three dozen students in a single classroom.

Innovation, yes, all over the place … but has it really changed anything yet?

And why not? Last week Shelley Palmer‘s email update tipped me off to Harvard and M.I.T. Offer Free Online Courses on YTimes.com, and a new Stanford-related venture called Coursera, a Web portal to distribute a broad array of interactive courses in the humanities, social sciences, physical sciences and engineering.

Also last week I received this in email…

(The innovative minds at TED have brought a new educational video website to the head of the class. Today, TED-Ed launched http://ed.ted.com a site that features TED-Ed’s original K-12 animated videos with accompanying lessons and quizzes. On top of that, the site allows educators to create original lessons for any YouTube video, rendering the video on a new link where teachers can monitor student progress.

And I’ve subscribed to several and offer several courses at udemy.com myself. And by this time we’ve all heard of Kahn Academy, another compilation of online courses.

How many universities are offering online courses? How many of those are simply free to users? How many at very attractive prices?

But what about attendance, homework, kids doing things they don’t want to do, people growing up, validation, certification, leverage, consistency?

My angel investment group is looking in detail at EdCaliber, which offers online tools for K-12 teachers. And I saw two additional education business plans over the last three weeks at business plan competitions at Rice and the University of Texas.

I’m hoping something really changes public education for the better. I haven’t seen it yet.

(Image: bigstockphoto.com)

What Kickstarter Means to You — Maybe

Angel investment, Crowdfunding, Venture Capital, , , ,

I’ve had several visits to Kickstarter.com in the last week. First because some friends of mine are looking to launch a project there. Second, because I’m getting so interested in crowdfunding. Third, because of the Three Years of Kickstarter Projects infographic on NYTimes.com.

At kickstarter, I saw the Pebble project that’s raised more than $8 million for an epaper watch. It was at $6.6 million when I first saw it last week. This morning it’s at $8.3 million.

While I was at Kickstarter, I preordered my Phonesoap unit there for $39. I saw Phonesoap at the Rice Business Plan Competition two weeks ago. It didn’t win that contest, but it has now won $63K of the best kind of financing, without question, which is sales.

Every entrepreneur has to go look at what’s happened with that project. Take a step back, exhale, and think of this as the best possible kind of financing: prepaid sales. The people who’ve contributed to Kickstarter don’t get a share of ownership. They get future product, not yet built. And they have to fit into one of the standard kickstarter.com categories. You can get that with the NYTimes infographic.

Need I say more? Go look at it.

So what’s going on at Kickstarter? The best possible financing, sales as pre-sales or pre-order sales. It’s not technically crowdfunding, but it’s better than that, because it doesn’t dilute ownership.

By the way, speaking of crowdfunding, Myventurepad.com this week released a free ebook called The Revolution in Venture Funding, which covers the topic pretty well . Disclosure: I’m one of the authors.