Seed Capital From Angel Investors: Dave Whorton, Founder, Tugboat Ventures (Part 2)

By guest authors Irina Patterson and Candice Arnold

Irina: On average, how many pitches do you receive per month?

Dave: From 50 to 75.

Irina: And out of those, how many deserve a closer look?

Dave: Every year we typically make, per investing partner – there are two of us [another partner is Dafina Toncheva] – one investment where we go on the board of directors, and that is a Series A opportunity. We also look at lots of seed and concept opportunities as well as incubations, and we’ll make, per investing partner, two to three of those per year. And so, to get to that, we probably look deeply  at two, three, or four opportunities per month.

Irina: And how many investments do you make a year?

Dave: Each partner will make between four and six seed investments a year, and we’ll do two to three series A or early series B per year.

Irina: When you see a promising pitch, what do you do?

Dave: We typically ask for whatever materials they have that we could review, just to make sure that it continues to make sense at a high level. Then, assuming it does, which usually it does, we schedule an hour meeting to meet the entrepreneur and spend some time getting to know him or her and to hear straight from the entrepreneur about the opportunity.

Irina: What factors do you take into account when considering whether to invest in the opportunity?

Dave: There are two things we’re weighing. Whether it be a concept through series A – that’s our core range – what we’re looking for the intersection of an entrepreneur who we think could develop to be a great public CEO someday.

I mean that not only can he or she get it started, but will that person evolve, learn, and grow under our coaching, and the coaching of others in the network, to be a successful leader of a large organization? And does the entrepreneur want to do that; is it something her or she is excited about?

The second factor is the quality of the concept itself. Do we think it’s solving a unmet need, that if they succeed in doing it, it could lead to a very successful company?

Irina: What is your average dollar amount for seed investments?

Dave: I think the smallest seed investment we made was $75,000, and the largest was $600,000. We like to do the seed investments with other like-minded, particularly angel investors, people who have domain expertise or can add value to the entrepreneur in building the business. Some of the venture groups are doing more of this, and we’re open to that, too.

But typically, we’ll be the largest investor, and then we’ll have others come along with us who are willing to roll up their sleeves and be actively engaged alongside us. What we like are other angels who are willing to spend time with the company. We spend a significant amount of time with the company, and we like the other investors to make a similar commitment.

Irina: Do you think in terms of valuation when you do seed investments?

Dave: It’s specific to the situation, so we don’t have any strict valuation range. But it’s balancing our read on the entrepreneur and on how exciting the concept is. That helps influence the valuation, but there is not formula to it.

We’re clearly not the highest valuation, typically. We’re just not. The reason being is because we take such an active role in helping our companies, we’re not just writing a check and moving on to the next project. We invest quite a bit of time and energy in each one we do, and that’s part of the trade-off the entrepreneur typically makes, which is if we’re going to engage you in Tugboat, really bring you in as a partner to us and in consideration of that, typically you get credit for that from the valuation standpoint.

Irina: Do you think in terms of equity? What is your range?

Dave: If we’re going on the board of directors, we typically own 20% to 25% of the company; it’s not a strict rule but that’s what we target. If we’re getting involved and it’s early, pre-formation of a board, and it’s just a couple of people potentially starting development of the project, we would shoot for something around 10% or 15% with the hope that if things go well, we constitute a board, and the company raises more capital, we’ll have a chance to own more of the company at that time.

This segment is part 2 in the series : Seed Capital From Angel Investors: Dave Whorton, Founder, Tugboat Ventures
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