Angel Investment

The Texas Angel List

There are more and more angel investors in Texas looking for deal flow. I am helping to build a comprehensive list of Texas-based investors. If you’d like to be included, simply complete the following form:

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Not all angels are created equal!

coolpicWhen Robert and I co-founded Haul/ViewMarket we raised an angel investment round from several angels including 500Startups (Dave McClure and Christine Tsai), VentureSpur (Dave Matthews), Silicon Valley Growth Syndicate (Will Bunker). In each case we identified something special and unique about each group BEFORE we approached them for an investment. I believe you need to understand why it would make sense for a particular investor to invest in your deal BEFORE asking them to invest in your startup. Here are a few reasons that make sense to me (there could be lots more):

  • Deep understanding of the market – assist with product/market/fit
  • Extensive experience in the space – assist with deals that can ‘make’ the company successful
  • Strong investment reputation – assist with first institutional round

In my experience it is almost ALWAYS a mistake to raise money from an angel just because he has the money to invest. The BEST reason to raise money from an angel is that he/she has an inherent ‘gift’ that can increases your chances for success. For example, say you are building a better railroad car that will change the face of rail transport. You need $500K to build your railcar and you meet an angel investor named Jim. He just retired from Burlington Northern Railroad and LOVES your idea. The fact that he loves your idea should give you a LOT of confidence that you are on the right track. Additionally, there is a good chance that he will be able help you secure a HUGE client. It is a win-win. You get the money you need, a great advocate, social proof AND a potential client.

Be careful about the unsolicited angel begging to get into your round – especially if he is purely looking for a financial return. It is likely he doesn’t understand the risks of angel investing (e.g. you’ll lose all of your money in the majority of deals) AND he may freak out when you pivot six times before settling on the right business model. VERY early stage startups are fragile and they won’t survive activist investors – i.e. Carl Ichan would make a horrible angel investor IMHO.

Announcing ‘TEN’

For more than five years I’ve been actively involved in the Dallas startup community. During that time I have advised scores of entrepreneurs; however, I’ve often wondered how valuable my advice really was. For example, in the last thirty days I have ‘touched’ almost 100 different entrepreneurs. Touches include emails, voicemails, texts and face-to-face meetings – 100 unique connections over 30 days. I’m giving advice, making suggestions, referring employees and investors, but there is no way I have enough information about 100 entrepreneurs and startups to give any sort of valuable advice and I wonder how valuable my referrals are? What do I REALLY know about these people/companies? Truthfully, I have no idea. Additionally, I am spending a LOT of time providing this potentially dubious advice – maybe 20 hours a month. I decided that something MUST change so I am starting what I am calling TEN.

Ten-Logo-2My plan is to select 10 entrepreneurs I will spend one year coaching, advising and supporting. These entrepreneurs will be hand selected by me based on just a few factors including: how well I think we will get along, how coach-able they are, how relevant my experience would be for their business and how bullish I am on their endevour. Here is the plan:

  • 1 group meeting per month (2hrs+dinner, think EO, YPO, Vistage)
  • 1 one-on-one meeting per week (1hr)
  • 4 quarterly trips to Silicon Valley, 2-3 day (vc/angel networking)
  • 1 graduation retreat, Fri-Sun (city/venue selected by group)

The focus of these meetings will be on:

  • building teams, advisory boards, and BoDs
  • developing products and services (mobile, web, infrastructure)
  • raising capital
  • selling
  • marketing and pr

Interested? I’m going to charge you, a LOT. I’ve learned that people rarely value anything they get for free. I don’t plan to take on a single company that I don’t think I can add at least a million dollars in value within twelve months so hopefully you will be able to stomach the deal. The monthly fee for the engagement will be $1,000 (compare to a typical board member at $40,000/yr) plus a small equity component (whatever you are giving advisers). The term will be 12 months with a termination clause. If you do not want to continue for any reason you must pay the remaining term at 50% or find someone to replace yourself in the group that a majority of the group will approve. So basically you pay $12,000 for 100 hours of my time – a pretty great deal if you ask me.

I’ll be putting the first TEN class together in the next couple of months. If you are interested let me know by applying here: TEN APPLICATION


Investor Referrals – HELP ME HELP YOU!

Remember that scene from Jerry Maguire where he tells his client, “HELP ME HELP YOU!”

Each day I get a message from an entrepreneur asking for help finding an investor for his or her startup. The message goes something like this, “Working on the next big thing, can you refer me to a few local investors?” In variably I will put this request in my ‘to-do’ mailbox and forget to respond. Sorry? Not sorry? Here are 9 things I need so that I can you can help me help you:

  1. Explain the stage of the product/service: idea, prototype, mvp, revenue, growth, exit…
  2. Tell me about the team: how many people, functional skills, full-time/part-time…
  3. Explain the funding you seek: seed, angel, series a, series b
  4. Tell me how much you are going to raise: $100, $250, $500, $1M (whatever)
  5. Tell me the form of the investment: common stock sale, preferred stock stale, note…
  6. Tell me who you’ve talked to previously and their thoughts
  7. Tell me how you plan to spend the money – i.e. what are the use of funds?
  8. Tell me your future fund raising plans after this raise.
  9. Send me your fund raising docs (if available) and your deck (a must).

You may not have all of this information, but send as much as possible. Save me time. If I can help I will. If you make me send you an email asking for this information – well I’m not going to. I might send you this post and ask you to try again. But no hard feelings right?

When should you raise money? NOW! [updated]

Garrett Camp, the co-founder of Stumbleupon, recommends, “Stay self-funded as long as possible.” I think I have been quoted saying the same thing, but over the past few years I have come to realize that you can wait too long to raise outside capital.

When I founded LayerOne I raised money first and then built the company. Since then I have been starting companies using my own money including my last company – ShopSavvy. Our investment strategy was to look at the company each month and determine if it makes sense to keep investing. While we had the resources to grow the business, there was a limit to those resources and I think we should have raised outside capital to increase the pace of growth. Ironically our success in user growth and engagement made it more difficult to raise money from early stage investors. It was not uncommon to hear a VC suggest that he wishes he talked to us earlier.

We grew a lot on a small amount of money, but sometimes I wonder if it would have been smart to raise outside capital earlier. Raising outside capital provides credibility to your business giving you instant access to the blogosphere (TechCrunch, VentureBeat and so on) and access to potential employees who pay attention to what deals investors are betting on. Using your own money doesn’t win you any access, credibility or friends.

The upside to not raising outside money? You don’t have to raise money, period. Tim O’Reilly said, “Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.” Raising money makes me feel like I am visiting LOTS of gas stations – usually not getting any gas.

Now that I am doing it all over again with my latest startup, HAUL, we have decided to go ahead and raise a small amount of money ($750K) from a few smart angels (Dave McClure, Christine Tsai, Dave Matthews, Joel Fontenot). These early investors are valuable for a few reasons a) potentially ability to refer clients, b) potentially able to refer potential hires, c) potentially able to make referrals to VC firms for the Series A and (perhaps most importantly) d) social proof that the deal is smart. Within a short period of time, perhaps 6 months our plan is to raise a $5M series A investment from one tier one firm (perhaps with a co-investment from a strategic). The idea is to get everyone in the same boat together until it makes sense to raise the huge round or do a strategic deal.

When I was updating this post I realized that I wrote on this topic last year in November in a post titled, “When should you raise money?” (hmmm, I’m not too creative with titles). I suggested that when I started my next deal I’d do a few things…

  • participate in an early stage accelerator
  • raise a small angel round from Dave McClure
  • raise a series A from First Round, Benchmark or Andreessen Horowitz

Turns out we did the first two. After the holidays we will try to do the third. Go back and read that post (it was a lot better).

Mark Cuban’s Sharktank Deals

mark_cuban_sharktankIn 2001 a television program called the Tiger of Money aired on Japanese television that featured entrepreneurs pitching their business ideas to a panel of investors. The format, called SharkTank in the US, has become wildly popular around the world. While I have seen the show a few times my son watches it religiously stoking his interest in entrepreneurial ventures. When Mark Cuban joined Sharktank in season two the rest of my family became avid viewers of the show. I’ve been doing a little research into the companies that Mark has invested in from the show and you might be surprised by some of the numbers*:

  • Number of Investments: 35 (as of 2013)
  • Total Invested Capital: $7.7M
  • Average Invested Capital Per Deal: $219K
  • Average Equity Stake Per Deal: 34.8%

Here is a breakdown of the deals:

*note – in some cases Mark co-invests with another shark and in some cases the deal might have fallen through prior to close.

Dallas is accelerating, AGAIN!

Last week I had the opportunity to have lunch with Kraettli Epperson and Dave Matthews to discuss VentureSpur – a new startup accelerator coming to Dallas. Started in Oklahoma City last year, VentureSpur is expanding their 12-week startup acceleration program to Dallas. They are now accepting applications – deadline for applications is May 17th – the program start date in Dallas is July 29th (so hurry up and get your application in now). The program invests up-to $30K into each company plus an additional $100,000 at the end of the program based on the company’s success (office space, other services and mentorship are included for free). Apply HERE.

When should you raise money?

Earlier this week I was on a panel at MobCon with Michael Gorman (managing partner at Split Rock Partners) called, “Investing in Mobile Companies” and one of the early questions was about WHEN an entrepreneur should raise outside capital. Michael put me on the spot and asked my opinion. To be honest, I have had a bias against raising outside capital since I raised my first $11M when I was in my twenties. The process was time consuming, frustrating and ultimately heartbreaking. In the case of my lastest startup, ShopSavvy, we waited WAY too long to raise outside money (three full years from the start). We starved the company until last year. I decided to answer the question based on my current bias.

If you are starting a high-growth company today, it is my opinion that you should raise capital as soon as possible even if you don’t actually need the money. Why? I believe you need the social proof outside funding provides. In the case of ShopSavvy we kept getting download volume that seemed to give us the social proof we thought we needed, but the reality was without the capital the social proof would have helped us get we were really squandering the opportunity we had. We needed three or four times the staff we were able to field on our own – outside money combined with our traction would have ensured we exploited the opportunity that was in front of us.

If (and when) I start my next deal you can bet that I will participate in an early stage accelerator like TechStars, Y Combinator or 500 Startups. After I get my inexpensive ‘social proof’ from an accelerator I will immediately raise a small angel round (likely a convertible note) from folks like Dave McClure, Jason Clavier and Aydin Senkut. And then, as soon as possible, I will attempt to raise a Series A from a top tier VC like First Round Capital, Benchmark or Andreessen Horowitz.

Is it possible to build a successful business without going through these three steps? Sure. I’ve done it several times, but I have never built a HUGE business. If you want to build a billion dollar business you are going to need a LOT of help. You are going to need the people you meet in the accelerator, you are going to need the people who fund your angel round and you are going to need the help of the partner you work with at the venture capital firm. You are going to need their help to help you get out of your own way. Very few of us have the ability to scale from zero to a billion and we need the best of the best to help us take our nascent ideas to the next level over and over again. Don’t mess around with you business – trust me – raise money ASAP.

59 Angels

Over the years I have compiled a list of angel investors and I figured that I would share that list with you. Before you pick up the phone or send an email I would spend a few minutes reading up on how and why angels invest in early stage companies. Dana Mattioli from the Wall Street Journal put a list of books you might want to read:

“Angel Financing for Entrepreneurs: Early-Stage Funding for Long-Term Success” by Susan L. Preston

“A Good Hard Kick in the Ass: Basic Training for Entrepreneurs” by Rob Adams

“The Venture Capital Cycle” by Paul Gompers and Josh Lerner

“Attracting Capital from Angels: How Their Money — and Their Experience — Can Help You Build a Successful Company” by Brian E. Hill and Dee Power

“State of the Art: An Executive Briefing on Cutting-Edge Practices in American Angel Investing” edited by John May and Elizabeth F. O’Halloran

“Every Business Needs an Angel: Getting the Money You Need to Make Your Business Grow” by John May and Cal Simmons

“Term Sheets & Valuations — A Line by Line Look at the Intricacies of Venture Capital Term Sheets & Valuations” by Alex Wilmerding

“The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything” by Guy Kawasaki

Angel Capital Association

Is downside risk mitigation important to investors?

Over the years I have learned that my assumption that all investors seek to minimize downside risk is just plain wrong. For example, venture investors want to ensure their capital has a chance at generating out-sized returns. They have limited resources (time and money) to make the best investments as possible. Mitigating downside risk doesn’t pay very well because more often than not the investment opportunities with the greatest upside potential have horrible downside risk protection. Partners at venture capital firms have very little time and can only sit on a limited number of boards. They have to be VERY picky about the startups that get their attention. So don’t bother spending much time trying to explain why would be hard for a venture investor to lose his money in your deal. Angel investors, on the other hand, love to hear about how their money is safe. Of course they want the same sort of out-sized returns and they have limited resources (time and money), but there is one major difference: the money they are investing is theirs. Making money is REALLY hard and angel investors don’t like to lose their hard earned money in your out-sized investment opportunity. They really want to know how they can get their money out of your deal if it turns south.

For the past 30 days or so I have been working on putting together a $5MM round for ShopSavvy (our mobile app company) at a $19MM pre-money valuation. We have spent almost a million dollars building ShopSavvy into one of the leading shopping platforms for mobile phones. Today the app has more than 6.5 million users who are actively saving money by comparing online and local prices of the items they buy. Three months ago our biggest competitor with just 2 million users sold their assets to Ebay for $5/user. Using this as a comparable we should be worth at least $32.5MM. I would argue (and I have previously) that if you include our team and our backend systems (Pricenark) we are worth even more. Several potential acquirers have approached us about selling, but we have decided that ShopSavvy could be a billion dollar company in as little as three years. As a search/advertising business we think that each barcode scan our users conduct could be worth between $.05 and $.20 each (each Google search is worth between $.05 and .06 each) making ShopSavvy an important player in the mobile shopping game. Add platform opportunities like our payment wallet, couponing, rebates, deals and warranties and ShopSavvy could become the dominate player. If we wanted to sell ShopSavvy today I have no doubt we could get $50MM or more for the company, but we have convinced ourselves that it makes too much sense not to go for the grand slam. For a mere $5MM and 24 months we will know if we are going to be that billion dollar company – pretty cheap in the scheme of things. Again to reiterate: for a venture investor the problem isn’t mitigating the downside risk, but ensuring the upside opportunity. On the other hand, angel investors love to protect the downside. If ShopSavvy continues to grow at rates even half as fast as our current growth trends it will be worth significantly more than invested capital. This is just the sort of bet angel investors love – lots of upside and very little downside. Turns out it is a lot easier for us to raise capital from angels and super-angels than venture capital firms.

So what does this mean to you? If you have a great way to mitigate downside risk spend more of your time talking to angels and super-angels. If your downside risk story is horrible, keep talking to venture capital firms and the issue won’t even come up.