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Calling All Angel Investors

Posted on Saturday, Feb 11th 2012

We are doing a retrospective on my blog on Seed Capital from Angel Investors as part of the 1M/1M project. As we speak with a variety of angels in different regions, what strikes me is the number of startups out there looking for seed capital.

Bob Aholt of Pasadena Angels says that his group looks at about 35 to 50 business plans a month. That’s 420 to 600 businesses a year looking for capital.

These businesses go through extensive screening. “We sit around for a couple of hours and we try to whittle the 35 down to six entrepreneurs whom we want to come in and give a 15-minute screening pitch to us,” Aholt explains.

Aholt and his colleagues narrow those six down to one or two entrepreneurs whom they invite to give a full pitch to the entire membership group at a breakfast meeting.

“If they can come out of this breakfast meeting with a significant level of interest, say 24 [or] 25 members at a minimum saying that they’re interested in going into due diligence. At that point we’ll move along the scale, take the company into due diligence, and we’ll start looking at the documents and doing reference checks and talking to customers and things like that,” Aholt says. [Read Irina Patterson’s interview with Bob Aholt here.]

While there are variations in their size, investment criteria, and the exact process, a large number of angel groups in the U.S. and even around the world use a similar screening model.

The oldest and most well-known of these is Silicon Valley’s Band of Angels. Comprising 127 high-tech executives, the band has seeded 200 companies and has had more than 40 profitable M&A exits and nine Nasdaq IPOs. The combined networks of the 127 members produces a large deal flow of about 50 a month, of which only three are invited to present to the group. The band has invested in eight companies in the last 12 months. [Read our Band of Angels interview with Nicola Corzine here.]

New York City–based Wider Wake Networks has 25 members and a sharp focus on digital media advertising and the related ecosystem. The group does only about four investments a year. Paul Olliver, a founder of Wider Wake Networks, explains the low number this way: “The first is that if we’re making four investments a year of $1 million each, that’s $4 million in a year that we’re putting into businesses. But the second and most important thing about that number is that we don’t want to drill 10 pipes and make sure that three come back with oil; we want to put down only three pipes in precisely the spots where we know there’s going to be oil.” [Read Paul Olliver’s interview here.]

So, you see, the number of entrepreneurs who actually succeed in raising money is small. The angels acknowledge this is an issue, but they rarely have the bandwidth to invest energy in coaching the entrepreneurs whom they choose not to invest money in.

Olliver says he occasionally sees a good business plan that doesn’t fit his investment portfolio, and he’ll refer that business to other angels and VCs. “We’ve all been on the other side of the table. We’ve all tried to raise money, and it’s not easy,” Olliver says.

Malvern Lusky of Houston Angel Network says, “I invest in the management. Accordingly, they must be seasoned management teams with proven track records. I have found that investing only in seasoned management teams who have performed previously will increase the chances of the venture’s success.” [Read Malvern Lusky’s interview here.]

Many angel investors have this bias, as do many VCs. But as we know from history that a large percentage of entrepreneurs are first-time entrepreneurs, and they are the ones who will likely make many mistakes; they need a lot of coaching, mentoring, and hand-holding.

But let’s also not forget that Sergey Brin, Larry Page, Bill Gates, Steve Jobs, and Mark Zuckerberg were all first-time entrepreneurs who built some of the most valuable companies in history.

So we do need to continue nurturing and encouraging the entrepreneurs who are “works in progress.” At 1M/1M, if entrepreneurs have come up with bad business models, we tell them so and advise them not to waste precious years of their lives on dead-end ideas. Where possible, we offer them guidance on how to tweak their business models in hopes of finding greater success.

For the future to be glorious, the entrepreneurial energy that is being wasted needs to be harnessed. Just like oil, water, and other scarce resources powering the world, entrepreneurial energy is something precious and critical for economic growth and sustenance.

Let’s figure out ways to make a much larger percentage of our entrepreneurs successful. Let’s not allow this essential energy to dissipate.

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It's fascinating how all the movers and shakers in the tech industry (Zuckerberg, Brin, etc.) got to where they are mainly because of these investment groups, whom you almost never hear about, but who were the ones perceptive enough to see that there was a lot of money to be made in these guys' ideas. What I imagine is even more fascinating is all the spectacular investment failures, or the investments would have been successes if there hadn't been that one fatal flaw, that don't get reported on, but are probably just as interesting.

George Saturday, February 11, 2012 at 10:09 AM PT

Sramana,

I agree on all points but am struck with the vast numbers of businesses that go unfunded and the enormous number of jobs that didn't get created as a result. We listen to politicians drone on and on about job creation and yet there are thousands of entrepreneurs ready to hire millions of people and build businesses but for lack of capital. We license our machine learning AI technology to many start ups and end up helping them find capital so they can get going.

One last point that you failed to point out in this post is that many angels are well intentioned but have no idea what they're doing. Just because someone has money to invest doesn't make them an expert in starting and building a company. They should be reminded of this at least as often as they complain about the inexperienced entrepreneurs looking for capital. Angel boot camp could salvage alot of otherwise good deals.

Tom

Tom Marsh Saturday, February 11, 2012 at 1:54 PM PT

Tom,

Most businesses not only go unfunded, they SHOULD go unfunded, because they do not meet the criteria required for a business to be fundable. These are cash businesses that have to be funded by personal savings, and/or friends and family capital. They do not qualify for professional investment.

On your point about clueless angels, it is absolutely accurate.

Sramana

Sramana Mitra Sunday, February 12, 2012 at 11:17 AM PT

Investors who funded Brin/Page and Zuckerberg are VERY well reported on.

Sramana Mitra Sunday, February 12, 2012 at 11:18 AM PT