Professor Raiton’s Inside Perspectives: Entrepreneurship, Creativity, Innovation

By Jonathan Moules, Financial Times

In the current economic climate, you would be stupid not to accept an offer of funding, wouldn’t you? Not according to a number of ambitious entrepreneurs.

George Bevis recently turned down “two very prominent” angel investors for his young internet business Speedsell, which buys and resells video game consoles for people.

“The offer was rubbish, the terms were absolutely absurd,” Bevis says, noting that too many people, especially at the moment, willgrab the first offer they get.

He insists that it was the right choice for him but admits that it was an easier decision to make because he was looking for “tens of thousands of pounds”, instead of the millions of pounds that some internet start-ups need.

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The financial crisis has made angel investors more conservative in the amount of capital committed but has not significantly slowed their deal making or thinned their ranks, according to the latest data from the Center for Venture Research at the University of New Hampshire.

The center reports twice a year on the activity of wealthy individual investors, known as angels, who are an important source of financing for start-up companies. In 2008 they invested $19.2 billion, the center says, a 26.2% decrease from 2007. But the total number of projects they backed was 55,480, down 2.9% from 2007. The number of active individuals was 260,500, almost the same as 2007.

The new numbers indicate that angels, who mostly invest from their net worth rather than from dedicated funds, became more frugal in the second half of the year. In the first half of last year, the center reported little change over the first half of 2007 with total investments up 4.2% and the number of deals down 3.8%.

“These data indicate that while angels have not significantly decreased their investment activity, they are committing less dollars resulting from lower valuations and a cautious approach to investing,” Jeffrey Sohl, the center’s director, said in a release reporting the 2008 results.

Another bit of encouraging news for entrepreneurs was that seed and start-up capital accounted for 45% of angel investments in 2008, a 6% increase over 2007. This reversed a trend toward more developed companies in the prior two years. The venture research center also found that 63% of angel financings in 2008 were initial investments in a company as opposed to follow-on financings. The rate was unchanged from the previous two years.

By CLAIRE CAIN MILLER and BRAD STONE, NY Times

Technology entrepreneurs are having a devil of a time finding angels. 

Angel investors are the optimistic financiers who give entrepreneurs their crucial first infusion of cash to bring their ideas to life. Now, in the midst of a punishing economic downturn that is sparing few companies, these patrons are cutting back on their bets and threatening the very foundation of the technology economy.

Unlike venture capitalists, angels invest small amounts of their own money — as little as $10,000 and usually less than $1 million — in very young companies. But like all investors, many angels suffered deep losses when the market plunged last fall.

That has left them skittish, investing in fewer technology start-ups and demanding more of those they do consider, leaving founders struggling to find money at the stage they need it most. The slowdown, entrepreneurs and investors say, could stunt the growth of new companies and have long-term effects on innovation.

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From AngelBlog

Entrepreneurs and directors frequently ask me whether angel or VC financing would be best for their company. Fortunately, the answer is usually easy to determine based on the characteristics of the company and its current shareholders.

The Corporate DNA of angel investors and venture capital investors is quite different. It’s rare to find a situation where one choice is not clearly better.

The table below describes the tests to determine whether angels or VCs are a more desirable source of financing for your company:

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From Entrepreneur.com 

Don’t blow a financing opportunity by approaching the wrong source.  As a venture capitalist, I get approached several times a day by entrepreneurs looking to raise money. One of my typical responses is, “You shouldn’t be talking to me; you should be targeting angel investors.”

The source of this confusion varies: Sometimes it’s a misunderstanding of the different roles and expectations of a venture capitalist vs. an angel investor. Other times it’s a lack of clarity on the part of the entrepreneur regarding what he or she wants to accomplish with both the business and the financing. Regardless of the source of the confusion, here are a few guidelines for determining whether you should be approaching venture capitalists or angels for your financing.

• The amount of money you’re raising in this round: If you’re raising less than $1 million, you’re likely wasting your time targeting venture capitalists, with two exceptions: 1) you specifically target funds that do seed rounds, or 2) you have a preexisting relationship with a VC firm and want to put together a seed round to get going quickly.
• The total amount of money you’re looking to raise over the life of your company: If you think you can get your company to a point where it’s cash-flow positive on less than $3 million, stick with angels.
• The type of company you’re building: Venture capitalists love to fund businesses with the potential to be enormous. Angels love this, too, but they’re much more willing to fund smaller companies that will presumably require less capital. In addition, most venture capitalists want to fund businesses that have clearly defined economies of scale (such as software companies) vs. ones that scale linearly with some factor (such as service companies).
• Your experience: Successful serial entrepreneurs always find it easier to raise money from venture capitalists. If you’re a first-time entrepreneur, that doesn’t mean you can’t raise VC money, but you’re going to find it more difficult than an experienced entrepreneur will.
• Your network: If you’ve never met a venture capitalist before and none of your colleagues have built companies with VC funds, you’re at a disadvantage by having to start from scratch. In contrast, if your best friend’s father is the CEO of a Fortune 1000 company, you have a good shot at quickly getting plugged into a powerful set of angels.

As with all guidelines, there are plenty of exceptions. One seems to hold in most angel financings: the rule of thirds. A third of your financing will come from one investor, the second third will come from a set of people following that investor and the last third will be random. So make sure you go hunting for your lead investor.

Tips

• Angel investors can be an option for start-ups with the potential to earn high profits.
• Expect close scrutiny. Many angels are former entrepreneurs and like to be involved and give business advice.
• Angel investors tend to specialize, so look into their investing history to ensure there’s a good match.

Small businesses looking for financial help from an “angel” often turn to individuals willing to invest in promising, start-up opportunities. Angel investors can be a good funding source to consider after you’ve tapped your friends and relatives. But angels usually don’t write blank checks. They’ll want to see progress and a way to exit the deal down the line with meaningful profits. So expect angel investors to do a lot of research and careful investigation into your business plan.

Be thoughtful in approaching potential investors. Biotech investors, for example, don’t want to hear about a clothing manufacturer. A scattershot approach is likely to turn them off. Industry associations, local trade groups or, in some states, business-incubator centers can help point to potential angels.

Angel investors often invest through groups or networks. These provide due diligence, extra research, access to potential deals and shared expertise that one person operating alone generally doesn’t have. For instance, one member of an angel group might have background in a particular industry or the know-how to set up deal terms, sharing that knowledge with the other investors.

Angel investors are usually thorough, so don’t expect to get your money quickly. It could take several months to meet with different individuals or groups and answer all of their questions. (There are exceptions, including the case of Google, which got funding from an angel before its cofounders finished their presentation to him.)

Because they’ll own a part of your company, they’ll likely want a say in major decisions, and they’ll watch to see whether you listen to them. Don’t expect them to write a check and walk away. Many angel investors are former business owners who want to help people like themselves. They may be able to provide good advice based on their previous experiences.

Getting funding from angel investors isn’t easy, but it can be done if you take the right approach and are a good match with their interests. And the benefits can beyond the money for your business, but their expertise in both in business operations and your industry niche.

From  The Great Startup Game blog

This is a pretty decent explanation of how to pitch angel investors if you’re new to the game of chasing capital.

(View the Video)

From Basil Peters - AngelBlog - Best Practices for Angel Investors and Entrepreneurs by Basil Peters

The most important new data on angel investing comes from Robert Wiltbank of Willamette University and Warren Boeker of the University of Washington.

Robert Wiltbank is one of the world’s pre-eminent researchers on angel and VC investment.

One of the fascinating aspects of this research is how VC investors affect the exits of angel-backed companies.

When I first saw this data, it leapt off the page at me 

This graph shows what the greybeard VCs and angels have known for a while. If your company has VC investors, they will reduce the probabilities of an exit that would produce a 1-5x return for the angels. That exit might have produced a 100x return for the entrepreneurs (because they paid much less than the angels for their shares).

Having VC investors does increase the probabilities of exits above a 5x return.

But there is no free lunch. The data shows that after a VC invests your chances of failing completely also increase significantly.

The other important factor, which unfortunately this data doesn’t show, is that adding VC investors will also increase the time until a successful exit by about a decade.

This is an important message in my new book: “Early Exits - Exit Strategies for Entrepreneurs and Angel Investors - But Maybe Not VCs“.

Angel groups slowed their investment pace this year and expect a weak 2009 because of the recession, according to a recent survey by the Angel Capital Association.

The survey, conducted from Nov. 6 to Nov. 18, indicates that total angel group investments in North America will decrease this year by at least 10% from 2007 to about $1.72 million per angel group. The average investment rose by about 6%, to nearly $281,000, but the average number of investments was 6.1, about 16% less than 2007.

Angel group leaders had been optimistic about increasing their investments at the beginning of this year in a survey conducted in January and February. But by the November survey, nearly half of the respondents found their activity was less than they had predicted.

General economic issues were cited as the biggest reason for reduced investment activity. More than half of the groups that had lower investments said that uncertainty in the market reduced investment activity. Other significant reasons included a loss in member wealth and the need to reserve additional capital for portfolio companies.

While nearly half the survey respondents believe they will receive more investment requests in 2009, 55.8% said the number of investments and the dollar amount of investments will decrease or stay the same.

By Rob Day, Greentechmedia:blogs 

I’m referring, of course, to angel investors — individual investors who put money into startups, typically at a pretty early stage.  Here on this site, and even more so in the media, the heavy focus is on venture capital inventments from institutional investors.  But that ignores the critical role angels often play in getting the VC-backed startups off the ground in the first place.

As the attached Center for Venture Research survey results show (note: link opens pdf), angels are a major player in the financing of entrepreneurs in the U.S.  In the first half of this year, CVR estimates that 23,100 startups received funding totaling over $12B.  Compare this to the $14.9B and nearly 2,000 venture deals tracked by Moneytree in 1H08.  Roughly comparable amounts, but more than 10x the investments — as reflecting the CVR survey’s conclusion that 46% of angel investments were in seed and start-up stage.

Let’s make this more specific to cleantech — the CVR study indicated that 10% of the angel investments in 1H08 were made into “Industrial/Energy”.  So we can roughly estimate that about 2,000 cleantech startups received angel funding during the first half of the year, of which about half were seed or startup stage.  Meanwhile, E&Y tracked 29 seed and first round VC investments into U.S. cleantech companies during 1H08.  I would argue that most VC-backed seed rounds are left stealth and unreported, so the E&Y figures are undoubtedly low.  But even still, the difference in number of investments by each type of investor is significant.

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