Seed Capital From Angel Investors: Brian Garrett, Co-Founder And Managing Director, Crosscut Ventures (Part 6)

By guest authors Irina Patterson and Candice Arnold

Brian: If we’re rude in how we go about saying no to entrepreneurs, they’re not going to be likely to come back to us with the next idea.

For all intents and purposes, we could be wrong. This current idea may be a brilliant one. It just may not be right for us, so we try to be respectful to every entrepreneur.

We try to be responsive to every inbound request. It’s tough, I will acknowledge. We try to be a resource here in the Southern California market because, again, our goal is to foster a real ecosystem in innovation.

We need a lot of successes to breed the next generation of successes, so our goal is to try to be as helpful as possible. But we couldn’t charge for that. That wouldn’t fly.

Irina: What do you think about angel groups that do charge fees for presentations?

Brian: I take the same stance that Jason Calacanis does. Everything he said on that topic, I’m a firm believer in. [Jason’s post on why starups shouldn’t have to pay to pitch angel investors is here.]

Irina: Do you think in terms of valuation when you invest in a company?

Brian: Yes. We are not like a lot of the other individual angels. We are not fans of convertible notes that get priced at the next round of financing.

Our philosophy is: If our money goes in, you’re using a capital we’ve provided to drive the value up. Should that happen, why let you price our money at the next round? We should come to an agreement on a fair valuation today where we are then aligned, from that point forward, as partners in this opportunity, and we all benefit from the success that happens to the business.

So, we price most of our rounds, and we would like to make the argument that for the value or the percentage of ownership that you’re giving up, you’re getting a lot in return above just the capital.

Irina: What are your ranges?

Brian: There’re always exceptions to the rule, but if you’re talking about traditional seed stage deals, it feels like today, in Southern California, that the pre-money range is somewhere between $1.5 million and $4 million.

It feels like there’s been a little bit of inflation to that range up in Silicon Valley. I’ve seen deals recently that are PowerPoint pitches and maybe an early prototype being done at more than $6 million. We haven’t seen that same effect down here right now, and I think it’s a factor that there’s less competition.

So, local entrepreneurs have fewer funding sources to pursue where they could potentially get those higher prices. It still feels like our average pre-money in our first portfolio on our seed deals is in the $2 million range.

Irina: How much equity do you usually seek?

Brian: We view this as ratios of ownership. How much do the entrepreneurs need in their pockets to be highly motivated to build a success? Because without them, we have nothing.

So, it has to be a balance. But we also would like to have enough ownership that if the company is a success, and we contribute a lot to that success by dedicating our time, our resources, our relationships, that we also have enough reward for the value of what we’ve helped contribute.

There’s no perfect number to that, and it varies by opportunity. We do think about it. Because I have a finite amount that I can commit to, I want to make sure I have enough ownership to give them the percentage of time I’m willing to dedicate to make that company a success.

Irina: Do you have a range?

Brian: It varies, depending on our check size, somewhere from 3% or 4% to as high as 12% or 15%.

It depends on how big a check and how early we are in the opportunity. You have to understand that the company is probably giving up anywhere from 20% to 40% in that round of seed financing.

We’re syndicating all of our deals. We’re not going solo into almost anything right now.

We’re trying to find additional, value-added venture and super angel investors who have Rolodexes and different sets of relationships that can help these businesses. The company’s usually being diluted by 20% to 40% for that round of financing.

This segment is part 6 in the series : Seed Capital From Angel Investors: Brian Garrett, Co-Founder And Managing Director, Crosscut Ventures
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