Angel Investment

Startup Funding: The problem is you, not your address.

asdfI had the opportunity to drop in on the opening ceremony for Dallas Startup Week 2015 on Monday. During the first panel Michael Johnstone of the Mark Cuban Companies was asked why it was so hard to raise money in Dallas and instead of agreeing with the premise of the question he argued that it wasn’t really harder to raise startup capital in Dallas versus San Francisco. I’ve been thinking about it and I’m starting to think he might be onto something.

Case in point, the other day I met a couple of founders at my StartupMuse office hours and listened to them talk about their mobile application. They’ve been working on it for two years and they’re struggling to raise outside capital. After asking the pair about their personal lives and determining they could easily pick up and move to the Bay Area I immediately told them they should move – that was the ticket to startup funding. The next week one of the founders dropped in on my office hours for a second time and we started playing with the actually mobile application – it was horrible. It was then that I realized moving to San Francisco would be a HUGE mistake for this company. Ironically, I imagine it would be EASIER to raise money in Dallas for this particular team – their deficiencies would be glaring in the Bay Area.

Optically, when you read TechCrunch, the startup publication of record, you’re reading about 90 Bay Area startups for every Dallas based startup so you might naturally assume it is easier for startups to raise money there. The truth might be very different.

10000 SFO Based Startups (unfunded)
1000 SFO Based Startups (funded)
10% funding rate

1000 DFW Based Startups (unfunded)
100 DFW Based Startups (funded)
10% funding rate

These numbers are simply for example, but I hope you get the idea. There are simply far fewer startups in the Dallas area seeking funding. I would imagine that for every 100 startups running around in the Valley there is just one here in Dallas. This is just conjecture, but I wonder if it is actually EASIER to get funded in Dallas? In the Bay Area EVERYONE is starting a company and very few of them are getting funded. In Dallas most everyone is NOT starting a company so those who do are the exception not the rule. Perhaps it is easier for Dallas startups to get attention because they look more like black swans than white ones.

In fact, I am the poster child for Dallas based companies raising venture capital. I have attempted to raise startup capital exactly three times. First with LayerOne (total investment $30M+), then with ShopSavvy (total investment $7M+) and finally with ViewMarket (total investment $10M+). In each case I was able to secure the initial funding as well as follow on funding – I really wonder if I would have been as successful if I was in San Francisco.

I am 100% certain that I am not certain whether or not it is harder for Dallas companies to raise venture capital, BUT I am certain raising money is hard. I do, in fact, believe that most of the companies that aren’t successful at raising capital aren’t successful BECAUSE of their product and team – NOT their location. Good products and teams WILL find investment capital regardless of location.

 

 

How to raise angel investment in 6 steps.

indexThis morning during my office hours at Cafe Express I had the opportunity to meet with an entrepreneur who is just beginning the process of looking for seed/angel capital for his startup. He had a deck, an idea, a team and was hoping to get some help finding potential investors. I could have made a few referrals, but figured it would MORE helpful to share my own personal experiences raising seed and/or angel capital.

Thesis One: Money Ain’t Equal

When we began looking for seed investors for ViewMarket (an ecommerce marketplace for video content creators) we intentionally sought out investors who’ve had success in the space. For example, we thought Dave McClure would understand the ecommerce aspect of the business from his early experience at PayPal. Next we thought Christine Tsai would would understand the video part of the business from her early experience at YouTube. Finally, we thought Will Bunker would understand the analytics side of the business from his experience as one of the Match.com founders. Once we secured funding from these three we knew we were onto something – they helped us validate our own thinking. Had we raised money from local real estate or oil and gas investors we we’d still be wondering if we were on the right track. Smart money CAN be very smart.

Thesis Two: Smart Money Begets Smart Money

Eventually, if you have any level of success, you’re going to raise a Series A investment from institutional investors (VCs). The fact that you’re earliest investors are familiar with the space and had their own successes will give you a big leg up. First, it is very likely that these engaged angels will help introduce you to the same investors who funded their prior companies (presumably the VC made a lot of money on this deal so they’ll take the meeting). Second, other investors, when they learn that seasoned/successful/known entrepreneurs have risked their own money to help you launch they’ll be curious and want to meet.

Given these two thoughts I recommended that the entrepreneur do the following:

  1. create a list of all former/current startup competitors.
  2. create a list of all startups that have ‘pain’ that his product solves.
  3. create a list of the investors in the above companies.
  4. create a list of the founders of the above companies.
  5. reach out to the investors to ask advice about his product and ask for referrals to potential seed investors.
  6. reach out to the founders to ask advice about his product and ultimately ask for investments.

Only AFTER the entrepreneur had secured an investment from two of these angels should he move forward with a broader conversation with more financial investors. This process will save you a LOT of time. If you can’t convince someone who’s had experience and success in your space to invest – you might want to keep working on your idea before raising money. Remember, most startups fail. If you can find a few entrepreneurs who’ve been there and done it in your space you’re much more likely to find success – leverage their experience. Good luck!

Startup Investor Relations 101

sand-hill-roadOnce a startup founder has raised outside capital, regardless of stage or amount, it is time to think about building a lasting relationship with his investors. Here are my top four tips:

  1. COMMUNICATE regularly with each investor/director by sending a monthly progress/update email. Spend 30 minutes detailing all your accomplishments, challenges and go-forward plans. You don’t want to wait until your next board meeting or until they email you asking what the hell is going on.
  2. ASK each investor/director for help each month. Think about how each investor/director can help you – perhaps with a product launch, a candidate for employment or a business development deal. If you keep them busy they will be a LOT less likely to get in your ‘business’. One of two things will happen – you will get much needed help or he will hide from you.
  3. MEET (in person or via phone) with each director PRIOR to each board meeting. Show him your agenda and ask him if there is anything he’d like discussed at the meeting. If there are controversial issues to be discussed determine where he stands. If he’s on your side enlist him to meet one-on-one with directors who might not be on board yet PRIOR to the board meeting.
  4. DOCUMENT each interaction with your investor/director. The day after your board meetings email an overview of what happened and what decisions were made to each director. You will approve the minutes at the next board meeting, but you’d be surprised how time can change your perception of history. Do the same thing EVERYTIME you engage with your investor/director – a quick followup email detailing what was accomplished and what everyone has committed to do is VERY important.

Let me know if you have any ideas to improve your investor/director relationships.

Women in Venture Capital & Startups

female-investor

Women are changing the face of Venture Capital and if you’re an entrepreneur you need to start finding out how they’re doing it. I’ve put together a Twitter List of women in venture capital who tweet. It only has 50 women on it today, but I’ll be adding more in the coming weeks (feel free to recommend anyone I’m missing). Subscribe: Women in Venture Capital.  I also have put together a list of the women most likely to join the Women in Venture Capital List called Startup Women (feel free to recommend women involved in startups).

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:

Use Wufoo templates to make your own HTML forms.

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.