Thursday, August 27, 2015

In 1998 a group of 12 women...

...met at Laird Norton (thanks to its CEO, Debbie Bevier) because we each wanted to have access to the same deal flow that male angels enjoyed but with added goals over an above great returns on our risk capital. Sue Preston, the Managing Partner of the Seattle Angel Fund, was one of those 12 women as was I. Indeed, we wanted more than just good deals!  We wanted to also encourage and support women entrepreneurs, grow the pool of women angels in our region, and increase the number of women board members.

Sadly, Seraph Capital Forum recently reached the end of its lifespan. Why did this group, the first women only angel group in the country, lose its mojo? I believe it’s because we were an all volunteer organization. We could not do all that was needed to drive an angel organization that continually needed to add members, secure deal flow, tout our statistics, and be the executives/wives/mothers/school volunteers/etc. that we also are. Simply put, the members reached burn out trying to do it all. I hope they appear at the Seattle Angel Conference, become members in other angel groups, take on more board roles, encourage more women to be active investors, and mentor more women founders.

It’s awesome to see women today who have BIG IDEAS and expect to receive the same large funds for their companies as their male peers. Sheryl Sandberg’s book, LeanIn, has had great impact I believe. Women were exhorted to expect more from our significant others and to be authentic about who we are rather than to try and be more like men. I recently was speaking with a women founder and her comment to me says a lot: “I’ve learned to outsource most of my wifely duties so I can focus on what my company needs, I can’t do it all nor do I want or need to, that’s a myth.” It doesn’t mean she is a bad mother or a bad wife, it means she is focused on what is important to her family and her company.

My goal with this column is to create a conversation about the growing force of women from STEM career initiatives targeted at growing diversity in tech, to highlighting the capital efficiency of women founded companies as well as the superior returns of these companies to their investors, and creating awareness of how men and women entrepreneurs differ that leads to embracing the differences so you can increase your returns by investing in good deals. I hope there are more Jonathan Sposato types who invest in diverse teams because he knows they will make better decisions by their diversity of thought and perspective. Some great readings on these topics are listed below.

ROI of Women
Women Entrepreneurs: Bridging The Gender Gap In Venture Capital
How Are Female Entrepreneurs Different From Male?
10 Reasons Why Women Make Better Entrepreneurs
Access to Capital for Women Entrepreneurs

Janis Machala, Managing Partner - Paladin Partners LLC

Originally published in the Seattle Angel monthly newsletter, to get great articles like this early, sign up now.

Sunday, July 12, 2015

Angel investing misnomers

Adapted from Josh Maher's blog....

I hear a lot of misnomers about angel investing. Some are grounded and some are far from grounded. Before you completely discount angel investing or early stage investments from your investment portfolio - read through these and let me know what other misnomers are out there...

I'm a great financial analyst and therefore I'll be a great angel investor - sorry, one does not follow the other. You may be a great financial analyst AND a great angel investor, but often there is limited financial detail to analyze at the stage of investments that angels participate in. There is certainly a requirement to understand the capitalization of the business, how many rounds will be required, and who will invest in those rounds - but there is very limited current financial analysis involved

It's called angel investing because I am giving my money away - don't confuse angel investing with philanthropy. One thing the majority of the fifty or so top angel investors I interviewed from my book agree on is a broad diverse portfolio is important for angel investors. Meaning you have to have enough investments to make the power law work for you. Granted, investing in public markets generally does not require the same type of strategy because it is easier to invest in five public companies that consistently return a specific amount. In early stage investing, there will be a lot of losers so the thought of "throwing money away" is grounded. It is the ones that aren't losers that provide outsized returns that make all the difference though, these return more than enough to make up for the losers. The term "angel" comes from the need these businesses have to be saved - they are continually on deaths bed at the early stages, spending every last dime to grow the company. Angels are swooping in to provide capital, mentorship, connections, and sometimes hands-on work. The more expertise or support an angel can provide to the company the less likely the investment will be thrown away.

I like to build or turn around businesses so I am going to angel invest - whoa... slow down a little, try your hand at private equity - not angel investing. Unfortunately many angel investors think they will have deep hands on roles in the businesses they invest in. In some cases this is true, more often the involvement is from a mentorship point of view or from a connections point of view (connections to customers, partners, employees). The majority end up being very hands off though, most angel investors are relatively passive in their activities even though they do get regular updates and opportunities to provide feedback and make connections. If you really want to be operational, look harder at being an employee, consultant, or enter into a private equity relationship where you are buying a controlling stake for the purpose of operations. If you would rather provide assistance as needed and have something of value to offer on a couple hours a week basis, angel investing is suitable. If you want to be passive, build in a great portfolio management strategy such as investing in a curated (pre-screened) list of startups or following great investors into deals.

I don't know enough about startups to be an angel investor - well you know more than you think. Especially if you are investing in deals with other investors (whether that be curated (pre-screened) deals or following top investors). If you have quality deals to select from you really can look at the companies where you understand the industry or the business model and make investments based on that information.

Investing in the public markets is safer - this is what everyone said about real estate right? Honestly though, it is more about managing your portfolio than it is about investing 100% in early stage companies. Yes these are risky, yes there is an opportunity for outsized returns. Many investors only invest 3-10% of their portfolio and understand that they could lose the entire amount. That small percentage of your portfolio should really be invested in 25+ companies to be properly diversified. If you are at the low end of the accredited investor qualification you are probably only investing $1k-$10k per investment to get that many companies into your portfolio. In this way you are relying on the effect of a power law where a couple of those 25 companies will make up the entire return for your early stage investment. When you plug the numbers into a spreadsheet you are risking 10% of your entire portfolio for the opportunity to return 27% IRR or 2.6x return on 10% of your portfolio. You should be making similar calculations with every other asset you allocate towards in your portfolio and can do the math to see how safe or not safe the investment really is.

Only the wealthiest people in the world are angel investors - I think we need to define wealthy a little more precisely. Accredited investors only have $1m in net-worth, this is actually a huge number of households (especially considering how few do invest). That said, the median wealth of accredited investors is $2.5m so not that much higher considering angel investing can return 27% IRR when done properly.

What other reasons have you heard or said yourself about angel investing?

Check out my blog for more thoughts about including early stage companies in your portfolio.

Thursday, July 2, 2015

Want to learn about angel investing?

There are a lot of places to help new and experienced angel investors learn more about the practice. Our newsletter (sign up here) is the best place to stay up to date with the latest happenings around Seattle for angel investors and entrepreneurs looking to raise capital. We highlight the best blogs, podcasts, workshops, and events to help you learn more.

We also put on a few of our own and there are a few coming together in July that you'll want to attend...

The first (7/7/15 @6PM) is Intro to Angel Investing w/John Sechrest.

Interested in exploring how startups get funded? Ever wonder what it really takes to build a successful company? Perhaps you have some expertise to offer to help get a new business off the ground but aren’t ready to give up the day job.

Come join John Sechrest an entrepreneur, angel investor, and the founder of the Seattle Angel Conference and the Willamette Angel Conference. John will provide an introduction to angel investing on July 7th at 6:00PM in 36/1108 – Elliott.

What: Intro to Angel Investing w/John Sechrest
Where: Microsoft Building 36/1108 – Elliott
When: July 7th, 2015 at 6:00PM
RSVP: Reserve your spot for free!

Sunday, June 28, 2015

“Angel Portfolio” summer workshop series underway

This post comes from a local Seattle angel investor Keith Laepple, who's active investing is usually in collaboration with other investors in groups such as Seattle Angel Fund, Alliance of Angels, and Seattle Angel Conference.
What basic strategies should guide angel investors’ selection of various startup opportunities coming their way?

It’s an on-going and often confusing question for angels of every experience level. And Seattle Angel Fund manager Susan Preston’s presentation at Seattle Angel’s recent “Portfolio Approach to Angel Investing” kick-off workshop drove head-on into some of the fundamental principles – and math -- angels should know as they build a portfolio that in the long haul will make the difference between lackluster (or worse, negative) returns, vs. the 20-30% IRR known possible with favorable deal flow and due diligence. As Susan showed, the very skewed averages of eventual startup exits – e.g. only 7% of deals bring 75% of returns – implies that by the numbers, every pure equity deal (i.e. no revenue-based returns) in a typical angel portfolio needs 10-20X return potential on paper, independent of the competence of the entrepreneur team, innovation of the product, size of the market, and so on.

That may sound daunting on the surface, particularly for new angels and entrepreneurs, but Susan (thankfully) went on to show that estimating ROI is actually straightforward, even refreshingly objective, once you know the basic formula and data to use. It’s also made easier by working together with the founders, who as equity stakeholders themselves want as clear a view on exit ROI as their prospective investors.

While examining a startup’s financials before diving into the typically more fun team, strategy, and technology vetting, does take discipline, it also usually produces some of the most useful insights for founders. Importantly, it can prevent a waste of everyone’s time on further due diligence if key numbers– revenue growth, valuation, industry multiples, exit timeframe, subsequent funding rounds, etc. – can’t show high potential return. By walking through even speculative “pro forma financials” together with investors, entrepreneurs will test and improve their grasp of their market, industry, and business model. And beyond just number-crunching, this exercise surfaces relevant assumptions and open questions for product roadmap, customer definition, and marketing strategy, which then give investors clear focal points for the rest of their business due diligence.

Of course, a lot more than just ROI math factors into the portfolio strategies and preferences of experienced angel investors, and this was explored in part 2 of the session in a panel conversation with angels Geoff Harris and Eric Doebele, who invest independently and as part of groups including Seattle Angel Fund, Alliance of Angels, and Oregon Angel Fund. Looking for “something extraordinary,” Geoff said, like the hydroponic lettuce company in his portfolio, often leads him towards individual startups, since he enjoys the intellectual curiosity and stimulation of angel investing. Eric Doebele highlighted that in his portfolio, diversification isn’t so much about a mix of industry/product category, but rather investing in startups at different stages of growth and valuation. And for both, seeing opportunities to utilize their career experience and network to help founders build their businesses is an important consideration.

Attendees, a mix of both active and aspiring entrepreneurs and angel investors, engaged Geoff and Eric with questions about their portfolio approaches, from a variety of angles:  How do you narrow your deal flow, before devoting time with specific startups? Do you look only for opportunities for on-going involvement as an advisor or board member, or do you also make passive investments? What traits do you look for in entrepreneurs? What signs of revenue, or revenue potential? How do you defend against dilution from future funding rounds? How much do founder salaries and personal skin-in-the-game matter to you? How does crowd-funding affect portfolio diversification?
As every angel investor comes to figure out through sessions like this plus their own experiences, there are no uniquely correct answers to any of these questions. But some common patterns and principles do emerge, first and foremost that, as this Seattle Angel session thoroughly underscored, angel investing truly requires a portfolio approach in order to produce great returns in the face of startups’ high-risk odds and skewed exit returns. Moreover, there as many successful portfolio strategies and “investment theses” as there are successful angels, built around the various aspects of investors’ experience, personalities, talents, and values. For this reason, participating in a local angel group fund and network is probably the easiest and most fun way to develop and refine a personal strategy, learn what types of startups fit your interests, and build a portfolio faster and with less overall risk through collaborative due diligence and fund pooling.

Watch this spot for additional Seattle Angel blog posts and education session announcements that will further explore angel portfolio topics!

Sunday, June 21, 2015

Angel Profiles: Chris Bradbury

Chris Bradbury is currently working on a project to help startup entrepreneurs that combines his passion for startups and his background in management consulting and angel investing.  Additionally, Chris is involved with Clean Tech Open, which is an accelerator for startups in the cleantech space.  

What attracted you to exploring angel investing?
Two things.  I wanted to diversify my portfolio and I have always been passionate about startups ever since I started working for one right out of college (or perhaps even earlier at my first lemonade stand).

If you’re still angel investing, where do you find most of the companies?
Yes, still active.  I've found companies through angel groups and networking.

What are the top three things you look for in companies where you invest?
Team with integrity, ingenuity, credibility and the ability to get things done, followed by a focus on a market they can dominate.  

How did you incorporate angel investing into your overall portfolio?
Keeping it as a small part (5-10%)

What have you learned since you started angel investing?
How much I enjoy doing due diligence (DD)!  As an engineer, I think it's great, because companies are literally showing you all the details of "how it works."  :) Since DD is the key to financial performance of this asset class, it's nice that it is within my control to make happen.

What do you wish you would have known before you started angel investing? 
  1. The importance of developing an investment thesis and sticking to it before writing checks.  It's one area where diversification is not a good thing.
  2. Another is not to get swept up in "a great idea or team" because that is insufficient for a great investment.
  3. Along the same lines, the purpose of due diligence is to filter out companies.  There is no point making an investment if DD raises flags (of any color)!

What space are you most interested to invest in next?
I tend to invest in talented people rather than industry sectors, although there are some I do avoid due to my lack of knowledge (e.g. biotech).  It's nice to be able to help the company succeed by making connections or leveraging one's experience or network. 

What resources should entrepreneurs and angels use to learn more?
Angel groups are a great way to learn the ropes.  Find a mentor to discuss potential deals.  One thing I did when I joined a local group was to volunteer to help on DD.  I explained to entrepreneurs that I was only doing DD and would not be investing until I'd been through the process a few times.