Finally, someone is calling attention to those angel investor groups who charge entrepreneurs unfair amounts of money to pitch to them, and it’s not someone with a small microphone or with no following. Jason Calacanis has announced a “jihad”, as it seems, and is stirring things up. This topic is not a new one for many entrepreneurs but many more don’t know what all this means or what the fuss is out, and could use a bit of a primer on Angel investing and how it works. Given that most of the people who read my blog are aspiring entrepreneurs and those doing it for their first time I thought I’d shed some light on the subject. This is a bit lengthy, and not for vanity – I think it’s important to cover the subject thoroughly.
In our great country, the US of A, there is an overwhelming spirit of capitalism that trickles down to every street corner and school yard. Over the decades that spirit has become what it is today – the spirit of entrepreneurship. Once upon a time “entrepreneurship” was actually a rare thing, but today it seems that everyone knows an entrepreneur in one form or another. People like Bill Hewlett and David Packard, Bill Gates, Paul Allen, Larry Ellison, Steve Jobs and more recently Larry Page and Sergey Brin, among countless others, have made entrepreneurship what it is today – something that many actually aspire to become. It’s a radical new time, a very different one than those my parents grew up in.
One of the most misunderstood part of entrepreneurship is also one of the most critical parts – the part of fundraising. Over the past few years as CitySquares has raised money, it never ceases to amaze me how many people ranging from self proclaiming “entrepreneurs” to family and friends just don’t have the slightest concept of what raising money for a start up actually means. I’ve often heard some people inquire “wait, you got so-n-so to just give you money?” Just the tone of that question makes it sound like an entrepreneur is like a street corner pan handler begging for charity.
There are primarily two types of investors in the entrepreneurial and start-up worlds – Angel Investors (and Angel groups) and Venture Capitalists (and venture capital firms, a.k.a. VCs). I won’t be discussing VCs, just Angel’s, as they’re affectionately called. Angels are indepenently wealthy individuals who invest their own money in a business and usually do so in exchange for equity (usually Preferred Stock) in the company, or sometimes in the form of a Note – effectively a loan that will convert into Preferred Stock. It’s not that complicated really. Some angel investors are professional angel investors, others are current or former entrepreneurs themselves. For example, one of my Angel’s built and sold his high-tech company to Yahoo! in the late ’90s for several billion dollars in stock. Another of our Angel investors has been an executive at several multi-national high-tech companies and did extremely well along the way as these companies exited (went public or were merged or acquired). Angels are also “accredited investors” as defined by the Securities and Exchange Commission. Sure, anyone with some money can make some investments and call themselves an Angel Investor, but to truly be an legitimate investor they really need to be an accredited investor (SEC definition, Wikipedia definition). I should also briefly note that the term “Angel Investor” is not a legal term, it’s more of a term of endearment that seems to have stuck throughout the years.
The most famous angel investment that I’m aware of is the $100,000 check that Sun Microsystems co-founder Andy Bechtolsheim cut to Google after watching Larry Page and Sergey Brin demonstrate their technology. The funniest part of this story is that the founders couldn’t do anything with the check for weeks because they didn’t have a legal entity formed under which the check was made out to.
There are other famous Angel investors like Andy, including Mark Cuban, Mark Andreessen, Ron Conway, and others. There are thousands of mostly unknown Angel Investors too. At the end of the day they all want the same thing – a return on their investment. Fair enough.
Some Angels work together, in what are known as Angel groups. These Angel groups typically form out of a shared sense of fostering entrepreneurship in a specific city or region or industry, among other reasons. The Angels might meet once a month to discuss their investments, invest together in companies, and invite startups to pitch them.
Here’s where it gets sticky. Imagine, for a minute, that you’re a young and budding entrepreneur. Let’s even say that you dropped out of college (like so many famous entrepreneurs have), you live in a house that you share with seven other young people, and you barely make ends meet. You make enough money waiting tables to cover your share of the rent and bills, to go out with friends, to take your girlfriend out, and afford yourself a cell phone and other bare essentials (by today’s standards). In addition to your part time job waiting tables at a nearby restaurant, you, in your spare time, have an affinity for cars and technology. And in this spare time you conceived a new technology that can power automobiles using carbon dioxide and have a very simple prototype designed. Pretty cool right? Probably a market for this? Maybe sell it to GM, if you can just prove that it works well, and that it’s affordable? Solve a climate problem? OK, so you need money. Your Mom and Dad are tapped, and they’re also pissed because you dropped out of college. Your uncle is good for $2000, so is your girlfriend’s parents. But you need more than $4000 to really build a working prototype, to hire someone to help you market it to car manufacturers, to hire a patent attorney to help you protect your Intellectual Property, etc. Sitting alone at a local pub you put some numbers on the back of a napkin and calculated that you really need $200,000 to get this idea off the ground and build a product and go to market. So… where do you go?
You have some friends who know people that have raised money from investors and had some success – you get the introductions and before you know it you’ve gone from playing Wii at home with your roommates to being thrust into the world of entrepreneurship, IP, angel investing, venture capital investing, business models, business plans, etc etc. But you need capital – plain and simple. Where are you going to go? You need to meet some Angel investors.
How do you move forward? You need to present your technology and business model to an Angel Investor, or more likely to an Angel group. There are many of them out there. A quick gander on the ACA website shows that there are actually a few right in your city. So you email an executive summary to these groups at their general email address and hope for the best. What usually happens at this stage is that you receive some responses from the Angel groups asking you to fill out an online application. The application process is a tedious but excellent exercise, forcing you to refine your concepts into just a few sentences, and to present your financial forecasts and capital requirements. The application process isn’t fun, especially when you have to do it for 4 or 5 different groups. Then, you wait. You wait while your information is being circulated among the angels or a committee. Then, after a few weeks (yes, weeks) you get an email telling you how wonderful your idea is, how excited some investors are, and you have an invitation to present to a committee representing the Angel Group. This is very exciting! But there’s a catch… you need to pay $750 first.
Now you pause, and you think long and hard. You ask yourself why you, a bootstrapping, young, starving entrepreneur who’s living off of peanut butter and jelly sandwiches, who’s put so much on the line, should have to cough up $750 just to present your idea to a committee! Absurd right? But what choice do you have… either you pay it and maybe raise some money, learn in the process, make some connections, or you don’t and hope something better comes along.
This is not unusual. Most angel groups want you to pay something to present to them. And they have their reasons, usually good reasons. But doesn’t it seem unfair? Absolutely! Despite their reasoning, it’s just unfair!
When CitySquares was barely six months old we paid to present to an investor group. It was our first time. It was almost the same scenario as I presented above. It cost us about $750. It was a total waste of money. We had a bunch of old timers vet us through their committee, and blow smoke up our asses. So far so good, or so we thought. Two months later we finally presented our business to a room full of 50 or so Angel investors. As it turned out, 90% of the people in the room had no idea what we were talking about. Zero, zilch, nada. They were in completely irrelevant industries, and in the twenty minutes or so that we were allotted, with a ten minute Q&A, it became painfully obvious that not only was our idea way over their heads, but that we’d just wasted $750 and a whole lot of time. And to make matters worse, it was soon made clear to me that this specific angel group had made very few investments and had zero successful outcomes.
How did that leave me feeling? Angry, frustrated, mislead, and a bit more broke.
This not just my story, but the story of many many other entrepreneurs who just don’t know better, who don’t know where else to turn, who have to learn the hard way. This is so much more common then most people realize. But it’s just part of the territory. Just as with any advisors I’ve attracted to the company, the best people I’ve come to work with are those that don’t ask for anything up front. They are genuinely interested in you and your business, and they want to help.
Now let’s get something straight – Angels are investors, and they’re in business as investors for one reason – to make money. Any other reason is secondary. So then, it seems that charging entrepreneurs a fee for pitching them likely has some justifying, right? Sure! But the entrepreneur doesn’t care what about those things. The entrepreneur is in business to make money, but he/she is not rich! And there’s the discrepancy. That’s where it becomes “unfair” – that’s where it’s skewed. Some Angel groups charge a lot more than $750. And there are even some people out there, predators, who prey on entrepreneurs and charge them for introductions to Angel investors. Fred Wilson points this out on his blog as well.
Generally speaking, Angels are not bad people and they’re are not milking entrepreneurs. I think its safe to say that this statement applies to 99% of angel investors and angel groups. It’s a scary place out there for entrepreneurs, especially when you’re being taken advantage of by wolves in sheeps clothing – and there are a lot of wolves and no shortage of sheepskin. The key, as with so many other things in life, is to sift through the bullshit, the noise, and use your instincts and intuition. That’s not easy, because all the signals can be confusing. In addition to using your basic human intuition is associating with the right people, good people, people who from the start do not want to take advantage of you, and people who are genuinely interested in helping you move to the next checkpoint. CitySquares was fortunate enough, after learning some of these lessons, to meet these of people. These folks guided us in the right direction, brought us into the right meetings, made the right introductions. And they didn’t do any of this for a fee.
My advice? Do your homework. Find out if the angel groups have had success, and if there’s a genuine interest in your kind of business or industry. Find out if they’re the right profile of investor you’re looking for. If not, then move on – don’t waste your time or money. Another piece of advice is to find a back door into an Angel group. Don’t follow the same protocol as every other company. Find a way inside the angel group through a connection – perhaps one of the angels in the group is active in your industry!
I think Jason Calacanis is doing a great thing by calling some of these groups out, because some charge a very unfair amount, and some of them have developed reputations for being egregious in these regards, and for wasting entrepreneurs time and doing little to nothing for the entrepreneurial scene. And Jason has a great platform to do this. These Angels and/or Angel groups definitely have a knack for ruining it for the others, and spoiling the bunch. That’s a damn shame.
Angels are fantastic resources beyond their financial capital. They’re intellectual capital is often priceless. They contribute a lot to the economy, providing financial capital for hiring people, for creating industries, and much more. Don’t let the bad ones spoil what can and should be a wonderful entrepreneurial experience for you and for the world.