Seed Capital From Angel Investors: Saad Khan, Partner, CMEA Capital (Part 5)

By guest authors Irina Patterson and Candice Arnold

Irina: What is your average investment size?

Saad: I think it’s between $250,000 and $500,000.

Irina: Do you do follow-on investments?

Saad: We have. We have some companies that don’t actually need any more money, as well.

Irina: How long does it take for entrepreneurs to receive money from you?

Saad: From a seed perspective, it’s very quick. I run all of our seed investing. Typically, the companies meet with me, and if we’re excited about them, usually I’ll introduce them to my partners on the technology team, which has another four people. So, it’s a matter of days if not a couple of weeks.

Having said that, most of the investments that I’ve made, even before the company has been fundraising, we’ve known or gotten to know or been introduced to the team. We’ve had the opportunity to actually get to know them. They get to know us.

So, when the time comes that they are interested in fundraising, the process is very smooth because we have a relationship. That’s a really important part, especially when you’re talking about wanting to invest in people.

Typically, we’ve seen those people in action; or what they’ve done in the past; or even just from a progress perspective in terms of the evolution of their thinking for what they want to do.

I like to get to know people, what motivates them, how they operate, and get a sense of them, hopefully before we start fundraising discussions.

Irina: Who else is involved in your decision-making process?

Saad: Our entire technology team.

Irina: Do you think in terms of valuation when you look at companies?

Saad: Valuation is always important, but I would say, fundamentally, the most important thing is are we excited about the people, and we have to think they’re exceptional entrepreneurs.

If they are, that’s the criterion we’re investing in. Sometimes, that means that we’re willing to pay up a lot for people whom we think can do big things. That’s fine.

I think that’s the diligence and mechanics of investing. Our criteria are always about who are the people, why are they exceptional, and do we think that they have the potential to do something world changing?

Obviously, valuations and structuring are some things that we do, but that’s after the fact.

Irina: Do you have a range numbers for equity that you usually seek?

Saad: I think we like to think of all of our investments as standalone investments. So, if the company decides never to raise any more money again, we want to justify the time and effort that we’re going to spend with them.

Again, I don’t know that we’d have any hard and fast rules in terms of how much equity we have to own.

I think, at the end of the day, if the pie is big enough, a small piece of a very large pie can still be something exciting.

I think it’s myopic to think in terms of, “Oh, we have to own 40% or 20%.”

It’s just not the right way to think about people and investing. I think it’s got to be about, are we excited enough about the opportunity? Do we think it’s something that big, in which case, 1% of a $100 billion opportunity is certainly a big number. So, no. No hard and fast rules.

Irina: What about returns?

Saad: Venture funds, typically, have a 10-year investment horizon. In terms of the money that people give to us to invest, we’ve made commitments about giving that money back to them, at some point, over the course of 10 or fewer years.

That’s one side of it. In general, as an asset class, venture returns need to be 20% to 30% IRR (internal rate of return). That doesn’t mean 20% or 30% per company. It means the fund, in general.

So, if you do the math, you can start say, “Well, we like things that have at least the opportunity to have big exits in a relatively short period.”

That’s the venture game. I would say that 99% of all companies out there don’t even fall into that potential. It’s a specific group of companies that we’re looking for. Beyond that, you never know.

Every company we invest in, we hope has a huge opportunity, but we get a lot of things wrong. There are a million reasons why things don’t work out.

This segment is part 5 in the series : Seed Capital From Angel Investors: Saad Khan, Partner, CMEA Capital
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