“VCs” is a buzzy term.
Saying something like: “Yeah you know, we’re looking for VCs,” or “I have a meeting with some VCs” makes you extra cool – especially if you’re wearing plaid and can brandish the newest iPhone.
For most budding entrepreneurs, the first money that comes in after the 3 F’s (if you don’t know what they are, don’t worry about it) is Angel money. Without the restrictions of formal VC arrangements, Angels are usually providing less capitol and potentially shouldering greater risk as they’re funding companies who usually have significantly less market traction than those who reach the venture capitol level.
Sammy Abdullah co-founded the Dallas Angel Network in 2010 – and I was fortunate enough to pick his brain about some of the major questions a young startup might have about getting Angel-involved. This tends to streamline the process for the relation of the entrepreneur and investor(s). “You just don’t have as many voices that you have to tune into with this kind of arrangement.”
Sammy doesn’t identify any one arrangement as inherently “better” than the other (though his group will be moving toward the “fund” model), but he does believe that the distinctions are important for a Startup to understand. Usually the 501c3 process is free but less united, while a for-profit fund may cost money to pitch, but tends to be smoother in terms of getting a united decision from the investment group to put money down – or not.
1) What are the Various Angel Group Structures, and How does the Entrepreneur’s Experience Differ with Each?
In general, you’ve got 501c3 companies, and you’ve got more traditional “fund” arrangements. Often, the 501c3 groups allow entrepreneurs to pitch for free, which is great because the only investment for the entrepreneur is their time. However, the down side is that each potential investor needs to be pitched and spoken to individually. For the entrepreneur, it can be cumbersome to speak to each potential investor on their own time, with their own unique questions. “And it’s not uncommon for the angel with the smallest check to ask the most questions,” Sammy says.
With the fund model, the entrepreneur has one point person. This person talks about the deal, sets the timelines, and goes to the board of angels in order to approve the deal.
2) What Should an Entrepreneur Know About Before Getting Involved with a Fund?
Some Angel groups need to charge entrepreneurs to come in and pitch. This isn’t necessarily a bad thing – but an entrepreneur should understand the track record and reputation of such a group before investing to show up in the first place. If nobody in the group is involved in projects in your industry, or at your level of development, or with your revenue model, you might be wasting everyone’s time. Alternatively, you don’t want to step into a room with three people in the room.
3) What Kind of Initial Funding Do Angels Want to See Entrepreneurs Coming in With Already?
Most angel groups are looking for entrepreneurs who have already had enough of an investment to get them “off the ground.” This initial money might come from a rich uncle, an accelerator program, or money saved from a corporate job.
“At the angel level, we like to see that someone trusted you with their money… It’s more of a litmus test,” says Sammy. If nobody – including friends – have backed your project, it might be a sign of an underlying character flaw. Similarly, it might be a sign of a lack of tenacity. “It’s hard to ask people for money… and it’s harder to ask friends and family for money than it is to ask a stranger.” Again, Sammy’s perspective here is more in what that first “friends and family round” represents, as opposed to just having money in the bank by itself. An angel’s investment is not just in a good business idea, or a budding but solvent company, but in a person with the qualities that it will take to get a company to that next level.
There’s other way to test the “gusto” of the entrepreneur, however. For example, some have credit cards loaded up, or dump in savings. If an angel can’t see someone else’s chips on the table (IE: the entrepreneur’s family or friends), anything to show that they have all of their own chips on the table is a signal of determination. Angels want a guy who’s commitment is compelling.
4) Are Angels Okay with Entrepreneurs Who Don’t Simply Want to Build-and-Sell?
In short, yes.
Sammy mentions that few if any angels are looking for positions where they’ll need to hold for 8 to 10 years. They want a liquidity event of some kind within a much shorter time-frame, but this doesn’t have to involve a sale to a larger company. It might also include an IPO, or some kind of pervious “cash-out” arrangement determined in the initial agreement with the entrepreneur and investor(s).
Angels look for some kind of a clear path of an exit. The worst fear for Sammy – and likely many other angels – is not a company that crashes and burns violently… but what he refers to as a “Zombie.” A zombie is a company that picks up, plateau’s and putters along at a much-lower-than-expected level of performance for years and years. If the entrepreneur is passionate about the ongoings of the business, he may have no incentive to sell, and may be happy with the salary he’s getting… but the angel never sees an exit and remains illiquid for far too long.
For this reason, redemption rights are one of the options in this overall amalgam of “exiting.” For example, if a company does not hit 70% of projections by a certain date, there is an arranged pull-out from the investors.
“Every entrepreneur should go into their business as though they’re going to ‘Zuckerberg-it-up’… guys should want to go in and dominate their industry. It’s funny, sometimes people say ‘If we just get 1% of market share, we’ll be worth X’… but 1% is NOT domination… I want to see guys who want to own the market,” Sammy tells me. It’s his believe that seeing that kind of real belief and zeal behind an entrepreneur is something that is not a turn-off to an Angel, and that Angels are happy to be along for the ride for 8 years if – of course – they’re building a tremendous amount of wealth on paper.
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If you have other questions for Sammy, or for other investors on our program – be sure to email in at info@Emerj.com.