RVI’s Guide To Running a Virtual Angel Group Meeting

This post contains our up-to-date set of best practices on how the River Valley Investors angel group runs our meetings online. Last updated on: 8/27/2020

---

Technology of choice:  Zoom

1. Prep
   1. Updated 5/18: We send all likely attendees these online meeting etiquette guidelines (kindly shared by the Keiretsu forum).
   2. Before the event, we ask everyone to log in with a device with a camera so we can see each other. They all have been invited to a google calendar event with the link embedded in it.
   3. Created Breakout Rooms from the get-go. I’ve used Zoom for over a year and hadn’t even realized it was built into the pro plan I was already paying for! If you haven’t used breakout rooms before check them out. Updated 4/15: we name the breakout rooms after spots in our area where people like to meet in person. Updated 5/22: We assign some of our trusted regulars to facilitate breakout rooms and help make our new attendees feel and home and meet new people.
   4. Updated 4/15: We also enabled the waiting room feature. This gives us a very easy place to park entrepreneurs and proved to be better than using a dedicated breakout room.
   5. The group Manager and assistant manager make sure to have the Participants & Chat subwindows open (do this by clicking on the respective buttons).
2. Troubleshooting & networking
   1. Updated 8/27: As our members log in, once we are sure we can see & hear them and vice versa, our Manager will invite them to head into one of the  Networking breakout rooms to socialize. We aim to put 3-6 people in each breakout so the interactions remain personal. This way people who are ready to go don’t have to listen to others getting tech support :). We always ask one of those people to serve as the “host” of the breakout, taking responsibility for ensuring everyone gets to meet each other. We often ask newer members to play this role as it helps them get to know their peers faster.
   2. As the entrepreneurs login, we have them hop into one of the breakout rooms where our assistant manager makes sure the entrepreneurs are ready to share their screen and has their questions answered.
3. Setup to best re-create in-person meeting
   1. Updated 4/15: Our Manager messages everyone via zoom’s integrated chat when networking time is about up. He then closes all the breakout rooms. This causes all members to be automatically dumped back into the main area in one minute, with a handy countdown. This helps people wrap up their conversations.
   2. With everyone present, we ask people to switch to Gallery mode, this shows a grid of as many people as can fit on one’s screen. It helps recreate (as close as we can) the feeling of all of us being around the same table.
4. Meeting start & entrepreneur presentation
   1. Updated 4/9: Remind members…
      1. There are bio breaks systematically placed in the meeting, so please stay until the breaks if at all possible.
      2. “Pass a note” to the Manager via Zoom’s Private Chat feature. We discourage people from sending messages to the whole group.
      3. Use the “raise hand feature (click the “Participants” button to find the “Raise Hand” button) to signal you’d like to ask the entrepreneur a question.
   2. Go through our introductory agenda (quick intros, explain the process, etc).
      1. Updated 5/22: Intros in a large meeting can take a while. Instead, we have attendees change their name on the zoom call to reflect their organization or expertise.
   3. Manager mutes everyone (except the presenter) to minimize background noise.
   4. Presenter shares their screen (where they already have their presentation in full-screen mode, ready-to-go). This puts their slides in full-screen mode for everyone.
   5. Updated 4/15: We have presenters confirm that they have a 10-minute timer, that makes noise when complete, ready to start. We set one up as well and if the company runs over time the Manager discreetly private-messages the entrepreneur. Once the entrepreneur has confirmed they are ready to start their timer, we tell them to begin.
5. Q&A
   1. With the presentation complete we ask the entrepreneur to stop screen-share so we can all see the grid of faces.
   2. Updated 4/9: The Manager uses the list of raised hand symbols visible in their Participants” subscreen to identify who is next in line to ask a question.
   3. Updated 4/9: Manager unmutes the person who’s turn it is (saves a lot of time of people forgetting to unmute themselves), announces something to the effect of “Mary has our first question, and Jim is next in line.”
   4. Updated 4/9: The manager mutes themselves.
   5. Repeat until Q&A time runs out (for us it is usually 15 minutes).
6. Closed-Door Session
   1. Updated 4/15: When Q&A is complete the Manager politely moves all presenters to the Waiting Room.
   2. The closed-door session continues as normal. At RVI we follow a particular format with the discussion going in three parts…
      1. “Why might this be a great investment opportunity?”
      2. “If you were on the due diligence team, what questions would you recommend they think through carefully?”
      3. “Who wants to be on the due diligence team?”
      4. Updated 4/15:
         1. If there is a due diligence team then the manager asks the team to stay present and releases everyone else to go on break for 10 minutes. The entrepreneurs are brought in from the Waiting Room. The Assistant Manager then coordinates the date & time of the next due diligence meeting.
         2. If there is no due diligence team, the entrepreneurs are sent to a breakout room where the Manager joins them and gives the bad news and a very brief summary of why we did not have the critical mass to proceed. We believe a fast, respectful no with an explanation is the only appropriate and fair thing to do for an entrepreneur. We also offer to have a conversation after the meeting if they want more info. If they are a local company we sometimes invite them to rejoin the meeting at the end to get some targeted advice from the group.
7. The rest of the meeting
   1. Rinse-repeat for other presenters.
   2. Do end-of-meeting wrap-up (portfolio company updates, upcoming ACA meetings, etc).
   3. At the end of the meeting, invite people to use the breakout rooms if they would like to continue any conversations or otherwise take advantage of the fact a bunch of us are in one (virtual) place at the same time.

Selecting the Top Angel Deals in the Northeast… on Google Sheets

I am told that the angel groups of the Northeast have one of the best systems for syndicating deals in the country. There are many parts to making that happen. I have the privilege of running the nomination, application, and selection processes.

The process is efficient and fair and might be helpful to other angel groups, or to other groups who see a lot of applications from people seeking money (accelerators, foundations, government agencies, etc). And… no coders or high-tech talent required, we do it all with free/cheap tools we can easily modify to meet our needs!

None of what I am sharing would be possible without the contributions of the staff of the Angel Capital Association (ACA) and the participation of so many angel investors.

Process Overview

1. Set the timetable
   1. The ACA selects a date for the regional event.
   2. 7 days before the event we announce which teams are presenting.
   3. 14 days before the event applications from entrepreneurs are due.
2. Call for nominations
   1. Keep a canonical list – If you don’t have a canonical list, you are going to miss people. The Angel Capital Association maintains a Google Groups mailing list containing the leaders of all angel groups in the region and anyone who has served as a deal lead for a previously-nominated deal.
   2. People forget, so remind them – We send out “call for nominations” emails (and reminders) to the mailing list and personalized versions to each member of that mailing list 1 day before the deadline, 7 days, 14 days, 21 days, and 30 days. To keep it from being annoying we use features of MixMax so that anyone that writes me back doesn’t get follow-on reminders.
   3. Make it easy – Most angel investors do this as a hobby, so you need to make it easy for them. We, therefore, pack all the info they really need into the “call for nominations” email. Furthermore, the only things they have to do are:
      1. Forward that same email to the CEO of the company they want to nominate.
      2. Email the CEO a short endorsement blurb.
   4. Put the work in the hands of the people motivated to get it done – You’ll note in the prior step almost all the work is done by the startup CEOs. They are very motivated to get things done, done right, and on time. Even the email is very short so the deal leads can read it quickly and pass it on. Then the entrepreneurs click the link embedded in the email to get a full page of detailed instructions.
   5. Here is what one of our “call for nomination” emails looks like

      1. Subject: Paul, nominate deals by 3/15 for next ACA NE Syndication Meeting

         Request:

         1. Nominate deals by 3/15 @ 11:59pm for the upcoming ACA NE Syndication Summit by
            1. Forwarding this link (http://goo.gl/d4wgm) to deal CEOs.
            2. Sending the CEO a < 5000 character summary of your investment thesis (CEOs include it when they fill in the application form).
         2. Help select presenters by reviewing the best companies in the region. Sign up via this form to join the selection committee.

          

         Background:

         1. Nomination Requirements:
            1. Your group will champion the deal and serve as the central coordinator for follow-on due diligence efforts.
            2. Deals in due diligence or in term-sheet negotiation are certainly welcome. That said, preference will be shown to deals that at least have a term sheet from the champion angel group.
         2. Deal leads are strongly encouraged to serve on the Selection Committee so we can learn more about the company you are nominating. Time commitment is about 2 hours to read deals and 45 minutes for a con call. Please note that we have a simple and effective ranking system that removes conflict-of-interest issues while allowing us access to the personal knowledge of the deal leads. Sign up to help select presenters via this form.

         If there are any questions, do not hesitate to contact me.

   6. Provide clear instructions for entrepreneurs – This is obvious, but most of us goof it up anyway. We certainly did for years and are always striving to be clearer and more respectful of the entrepreneurs’ time. The “call for nominations” email features a link for the CEOs to click where they find all of their instructions.
3. Collect applications – We collect applications via a google form. We configure the setting so that applicants get a receipt and have permission to edit their entry after submission. This turns out to be a gigantic time-saver, stress reducer and increases quality. Otherwise, you have panicking CEOs and/or deal leads calling and emailing you at all hours!
4. Create packet – We have our google form dump its data into a google sheet (see a sample with dummy data here). Then by applying filters, some spiffy conditional formatting, and hiding some columns, we can have it display only applications that are for the current period.
5. Send packet – This packet is sent to the mailing list so that the startups have maximum exposure to the investor community and to set the stage for voting.
6. Selection – This is done in two rounds.
   1. Round 1
      1. Ask everyone – You want to leverage the wisdom of crowds by getting lots of smart people to independently assess the startups. So we ask all members of the mailing list, as well as all angels who nominated a deal this time around, to cast votes. The requirements are that they review all applicants and vote on all of them.
      2. Collect the votes – Angels are not asked to rate companies by how much they “like” the company. Instead, we ask them to predict how successful the company will be at raising money thanks to the event. The difference is subtle, but it is important. See the 1st round voting form (w/ dummy data). Angels have a set deadline to cast their votes.
      3. Normalize the data – Some people score generously. Some people score harshly. We adjust everyone’s scores so that each angel’s scores add up to 100 points.
      4. Adjust for conflicts of interest – We want people who are invested in one of the nominees to vote. But obviously, they are biased in favor of their nominees. To mitigate this we…
         1. Don’t let angels score companies they have a conflict of interest with (equating to an initial score of zero). As this would hurt their nominee, we then…
         2. Replace the 0 scores with the average score the other angels gave the company. In this way, an angel does not help or hurt their nominee.
         3. As each angel’s scores added up to 100 before, because of step 2 we’ve just increased their total contribution. So…
         4. We decrease the angel’s other scores proportionally to bring their total score back down to 100.
         5. You can see all the gory math here.
      5. Schedule the video conference for the 2nd round.
      6. Publish results of 1st round – The mailing list and everyone who signed up to be on the 2nd round video conference get an email that looks something like this…

         1. Subject: ACA NE selection, 1st round voting results [confidential]

            CONFIDENTIAL – DO NOT REDISTRIBUTE

            Okay, legal stuff out of the way, happy day all! Here are the results of the first round of voting. We’ll use this to inform our conversation later today <date/time/link info>

            

            * Z Score: # standard deviations above or below the mean score. AKA how much better or worse is this company than the average company in the packet. Note that scores have been adjusted for conflict of interest.
            * Drop: # of standard deviations this company is below the next highest ranked company. AKA, how much “worse” is this company than the previous company.

            My initial recommendation is:
            * Accept the top 7 ranked companies.
            * We debate who the remaining 3 slots go to, accepting arguments from the next 5 highest-ranked teams. If there is a champion for any of the other companies, they will get a spot to advocate for the company.
            * I shoot everyone a poll to cast a 2nd round vote for who should get the remaining slots.

            Details:
            You can see the gory details on this google sheet. Most relevant tabs are: “Summary”, “Chart of Scores”, and “Chart of Dropoff in Score”

   2. 2nd round – Goal is to allocate 8-12 presentation slots
      1. Save Time – The purpose of the first round is to save time for the 2nd round. We’ve all been in deal selection meetings that go on forever and aren’t even all that effective. When you see a chart like the one above, it makes the argument faster. The top-rated companies just get in, no debate needed. The bottom companies don’t get in for much the same reason. You can then focus the time on giving away the final 1-3 slots to the much smaller set of companies in the middle.
      2. Debate – advocates for the companies in the middle get to speak for 1-2 minutes. Allow a few minutes for Q&A. Move on to the next company.
      3. Final Vote – Using this free tool I create a ranked-choice voting poll while everyone is debating. When the debate is over I publish the voting link to the chat in the video conf and give everyone 5 minutes to cast their votes. As it is ranked-choice voting, the final selections are ones that have majority support, which is awfully helpful. I present my screen and show people the poll results, I also email them to the participants so everyone has an audit trail of the voting.
7. Wrap up
   1. Startups (and their nominating angels) that did not get in receive a polite note letting them know. They also get copies of the feedback provided in the 1st round voting form so we can help them learn from failed bid to present.
   2. Startups (and their nominating angels) that got spots receive an email with a link to a google doc with detailed instructions on everything they need to maximize their odds of success.
   3. The list of nominating companies is announced to the Google Group mailing list.

 

 

Western Mass Demo Day! Wha who!

Western Mass Demo Day Connects Local Startups to Investors.

This is an invite-only event for active & accredited investors to hear pitches from startups with a connection to Western Massachusetts. Startups get an optimized way to meet a room full of different investors, many with a strong interest in companies connected to the region. Investors get a first look at the startups, meet the founders, and network with other investors.

This event is organized by a coalition of the region’s startup investors including: Launch413, River Valley Investors, Springfield Venture Fund, Milltown Capital, Alchemy Fund, Golden Seeds, the Maroon Fund, and the event is hosted by our friends at Valley Venture Mentors. For regulatory compliance reasons, representatives of other investment groups & funds who wish to attend need simply request an invitation. Members of the local entrepreneurship ecosystem who wish to observe may also request an invitation.

Value Proposition for Startups

If you want to raise money now or in the near future, Western MA Demo Day puts you in a room full of people with money, who actively invest in companies like you, and who are keen to be helpful. And… there is no fee to apply or participate!

Learn more & apply at: www.westernmademoday.com

Launch413 Completes Seed Round

My thanks to the many people who put their faith in Rick Plaut and my new venture, Launch413. A special thanks to the many members of River Valley Investors who provided the pre-seed funding to get us started and then played a big part in finishing our seed round.

For those that don’t know Launch413, we are an alternative venture fund that takes startups from Launch to their first $10 million in revenue. We are serial entrepreneurs and veteran executives dedicated to helping startups become engines of prosperity in our region. We accelerate our entrepreneur’s progress by investing our expertise & networks to provide strategies and introductions that would have taken years to acquire on their own.

Launch413 uses a royalty-based model instead of equity, allowing our entrepreneurs to keep 100% ownership of their venture.

We are now actively seeking companies to invest in. If you know any great startups with a connection to Western Massachusetts and who want to scale to at least $10 million in revenue, let me know :).

How Much Due Diligence Does An Angel Really Need To Do?

Due diligence (AKA “doing your homework” on a startup to see if investing is the right call) should clearly take time… but how much? Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article on this topic. Her full article (with her permission) appears further below.

One of the biggest debates in the angel industry is how much due diligence investors should do before they invest. From “rank and file” angels to rock star investors like Ron Conway or Mark Cuban, opinions differ vastly from literally doing none to conducting formal processes that take months.  So how do you decide what the right amount is for you?  And what are the factors you really need to check out?

Count me in the camp that believes that doing due diligence is a very important.  For me, it is about being comfortable as an investor that the team, market and product have a chance for success, that there are no red flags pointing toward failure, and better understanding the company’s capital needs over time.

As I’ve posted before, angel investing is risky.  Due diligence doesn’t completely “de-risk” a deal, but it helps eliminate deals in which there are clear problems that lead to failure – things like products with no real customers, CEOs with integrity issues, and no true right to sell the innovation.

A 2007 study found that angel investments in which at least 20 hours of due diligence was done were five times more likely to have a positive return than investments made with less due diligence time.  Put another way, while 45 percent of investments in deals with 20 hours of diligence resulted in a loss, 65 percent of the investments with less diligence took a loss. That is pretty compelling.

The point here isn’t that an individual must do at least 20 hours of due diligence for every opportunity you seriously consider.  Instead it is to understand that due diligence can help you make better decisions and increase chances for a good return. And you don’t have to do all of the work yourself – many times you can access diligence information conducted by other investors you trust.

Getting Started – Key Factors

There are some very good practice resources for angels to learn about comprehensive due diligence, including questions to ask, checklists that angel groups use, best practice papers summarizing recommendations from top angel investors, and courses on investment best practices.

Although I always recommend using background resources like these, if you lean toward a faster approach, here are my top three due diligence questions to address:

Is the entrepreneur and team up to the task – and do they have the integrity you need?

A starting point is to ask the entrepreneur a lot of questions and of course check their references.  As you talk with those references, get them to suggest additional people for you to talk with.  Sometimes these are the most important interviews you will do.  In these discussions, Internet research and possibly a background check, you can also find out if the person has had issues in managing money or has been arrested – the kind of red flags that make investors walk away.

Rick Vaughn, leader of the Mid-America Angels in Kansas City, provides some good color about what you’re looking for in assessing the entrepreneur.  “It goes back to that old saying that people get funded, not business plans.  To some degree we are looking at the entrepreneur and thinking, does this person have the vision, patience, courage, creativity and integrity necessary to lead a successful venture?

“Investors are going to be thinking about how they will feel about working with the entrepreneur and the rest of the management team.  Do they feel good about forming a relationship? Investors want our level of trust to increase with each interaction we have with the CEO and the team.  If it doesn’t, that can be a deal-breaker.”

Are there customers or strong potential customers for the product or service?

A company can only grow and make money if they have customers who will pay them money.  If you prefer an early-stage company that has a product ready for sale, then it is important to ensure the company has established customer relationships.  If you like startups that are still developing their innovation, then you need strong evidence that potential customers really see that the startup can solve a pain point that they will pay for.  Generally having two established customers who will confirm that they are buying or will buy the product is a decent hurdle.   Understanding the customer situation also helps confirm or reveal important things about the market for the product and length of the sales cycle by interviewing customers.

Also, as the due diligence best practice paper notes, “Customers need not just the will but also the ability to pay (for these products).  If the venture targets customers without sufficient budget for the product, it won’t matter how badly they want it.”

How much capital does the company really need to get to an exit?

While it is important to dig into the potential exits for a company, it is also critical to get a beat on how much capital the company needs now and in future rounds of growth.  This provides a sense of the hurdles the company will face and how much your ownership stake may be diluted over time.  Many companies tend to underestimate how much money they will really need.  Ask lots of questions of the entrepreneur and financial team to get an idea of how realistic their financial plans are and mine data on companies in similar industries to see their financing and exit trajectories.

So what is the right amount of due diligence for you? Every angel will personalize the process for their own needs.  However, if you are new to angel investing, you can gain a lot by reviewing the wealth of resources available and talking with experienced angels about what is important to them and the processes they use.  Although you’re likely to adjust your approach as you make more investments, you will definitely increase your odds by incorporating due diligence into your investment decision making.

It’s All In The Terms: What To Prioritize In Angel Term Sheets

Terms term terms! Angels, new and veteran alike, agonize over what terms are to ensure the proper incentives and to properly compensate for risk. Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article on this topic. Her full article (with her permission) appears further below.

An essential part of angel investing is setting and agreeing to the terms of the deal.  Many angels recognize the importance of deal terms, but often wonder which components of the term sheet to prioritize. I’ll reveal the answer, but first some background about term sheets.

A term sheet outlines everyone’s intent for a deal. It is typically provided by the angel with help from their attorney. For this article I worked with angel investor Katherine O’Neill and attorneys, Ben Straughan, Partner, and Jim Carroll, Counsel, for the Perkins Coie Emerging Companies & Venture Capital practice. They also shared their insights in a recent Angel Capital Association webinar, The Key Points of Term Sheets.

A well written term sheet is critical because it leads to a great contract and creates investor-entrepreneur alignment needed for a positive relationship because it delivers the returns everyone wants, assuming the company is successful. O’Neill, executive director of Jumpstart New Jersey Angel Network, underscores this point: “This is the time you have the greatest opportunity to really control the main factors that allow you to make a good exit.”

So what deal terms are most important to angel investors?  Tapping their years of experience, Carroll and Straughan suggest five critical terms for a series seed preferred investment (otherwise known as a priced angel round):

Pricing: This represents the value of the company and helps determine how much of the company you will own. It is important to get the valuation of the company right in the beginning, which can be an art with startups and early-stage companies with few assets and short track records to build on.

Participation Rights: These define an angel’s right to invest in future funding rounds, often providing the angel with a better chance of a good return. “Angels should focus on participation rights,” Straughan said. “It allows you to double down by continuing your right to invest in future rounds.”

Board and Information Rights: These rights outline whether you (or someone from the investing organization) will be on the board of directors or be an observer at company board meetings. They also determine the information you will receive from the company and how often you will receive it. For example by explicitly asking for quarterly financial statements and annual budgets, everyone can keep their eye on the ball on the status of the business while ensuring the company doesn’t have onerous requirements (because these are documents that a company needs to produce anyway).  Related to these, I like the idea of shareholders having the right to vote or at least have veto rights on key strategic issues such as selling or liquidating the company or developing entirely new lines of business.

Liquidation Preference: If the company is sold, these preferences define what preferred shareholders are paid e.g.  X times the original purchase price before any other assets are paid common stockholders. 1X liquidation is normal for angels.

Redemption Rights: These rights can help angels to achieve liquidity by selling their shares back to the company if management wants to continue running the company but investors want out.

Although these five components provide an excellent guideline for what to prioritize, term sheets can quickly get more complex, and most include many other terms which are also important.

Most experts recommend that angels start with a standard term sheet to help simplify the process and to reduce legal fees.  I’ve provided sample term sheet examples in this article and there are a wealth of other online resources.  These are a few of my favorites:

• Angel Resource Institute – Their term sheet resource center includes both example documents and helpful insights. They also offer workshops on understanding term sheets.
• FundingPost Venture Capital Glossary – This is a glossary of financial terms for angels and entrepreneurs to understand.
• Hyde Park Angels – How to Read a Term Sheet (and several other great blog posts)
• Investor IQ – The Kauffman Foundation, ACA and ARI provide a wealth of video and materials on all facets of angel investing from experienced investors
• Seraf Investor – Angel Fundamentals: Understanding Equity Deal Terms (Introduction), and many other great and important insights into being an angel investor

Term sheets are critical and that is exactly why they can sometimes be overwhelming. Beyond these resources I always recommend talking to other angels and learning about new approaches, trends and ideas at regional and national angel events. With resources like these there’s no reason to sweat the terms on your own.

Tips For Angels To Assess Startup Business Models

Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article with tips for analyzing startup business models. Her full article (with her permission) appears further below.

Can the company you are considering investing in scale and get to a good exit? How is it going to make money, really?  These are some of the most important questions every angel investor needs good answers for from the entrepreneur. Successfully evaluating a startup business model can make the difference between success and failure of your investment.

Business models can be stated simply – like “razor blades” (offering a high margin shaver at a good price in order to increase sales of razor blades) and “freemiums” (offering basic services for free and charging for premium services) – but they involve the detailed overall strategy of the company.  A business model is how the company defines the market and its products, along with how it gets and keeps customers, how they get to the market, and how its resources are set up, all while eventually making a profit.  Startup business models are even more complicated because most startups are essentially experimenting with their strategies and will evolve their model as they test it out.

Many entrepreneurs and investors use the Business Model Canvas by Alexander Osterwalder to develop and evaluate business models.  Brigitte Baumann, founder and CEO of international angel group Go Beyond Investing and 2014 European Business Angel of the Year, takes more of an economic approach.  I’ve been working with Baumann to develop a set of free resources for new angels to get started successfully and connected with her recently on how angels evaluate business models.

When Baumann reviews a business model her first step is to sort the business plan information into four economic-focused building blocks:

• Unit economics: the hard data that include the selling price of the product or service and the costs involved.
• Customer economics: customer acquisition, retention and support).
• Market economics: what it will take for the entrepreneur to actually create the market buzz or demand needed to acquire customers who will use the units.
• Business economics: the development and overhead; this includes anything from additional offices that might open to support for handling finances, etc.

Thinking about a business model through these four lenses helps to get to an understanding about how much money an entrepreneur needs in order to become self-sustaining. It also makes the financial goals for each round of funding more obvious.

Knowing how entrepreneurs think about the business model is very important. To quote Baumann, “The entrepreneurial team should all ‘live’ the model. They touch it every single day in every action that they do.”

Naturally getting to those important answers requires analyzing the business model from two crucial perspectives: scalability and the break-even point.

Scalability – is a key indicator in whether or not a company will go public or be acquired and investors will get returns on their investments. It is about a company’s ability to multiply revenue with minimal incremental cost, creating a profitable and valuable business.  Baumann suggests that when angels meet an entrepreneur, we need to understand whether he or she is planning for 3x, 10x or 100x growth from where they are currently.

Knowing which level helps investors understand the amount of money the entrepreneur needs to raise and in how many rounds.  A company that is planning for a 100x growth is likely further along in their development and has the chance of a great exit for all involved.

The Break Even Point – Beyond scalability it is important to understand the company’s break-even point, when it becomes self-sustainable and doesn’t require more outside capital.  Baumann has a chart to determine break-even, incorporating fixed and variable costs, as well as the incremental costs that come with increased scalability in a new video.

To understand scalability and break-even points in due diligence, angels need to understand the economics of the company’s revenue growth plan and when they are a “real business.”  Questions to investigate how revenues will grow and all of the involved costs.  Make sure entrepreneurs are realistic about how much money they will need to get to break-even by asking them where the current round of funding will take them, how many rounds of funding they think they will need, what resources they need to get to each level of scalability and what milestones they accomplish in each round.

Many scalable business models involve big margins between true product costs and selling prices and/or pricing mark-ups.  But angels need to make sure the entrepreneurs have thought through all of the relevant costs, including the costs of customer acquisition, retention and support over the lifetime of the customer relationship.

Other critical things to check into during due diligence are the market economics, particularly whether they are using the true accessible market and whether their potential share of the market is possible.  These days, it is easier and easier to get data on the company’s existing competitors to get data to compare to.

The bottom line is it is key that entrepreneurs and investors understand the business model before reviewing the financials. Entrepreneurs need to know the drivers that capture market share, outmaneuver the competition and make the business succeed. And investors need to know how to get that information out of the business model or help entrepreneurs build a business model that provides those answers. Without this knowledge it’s difficult to properly evaluate a startup and to make a wise investment decision.

Scorecard Helps Angels Value Early-Stage Companies

Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote this article on a growing techqniue used by angels to evaluate companies. Her full article (with her permission) appears below:

Scorecards are ubiquitous in baseball, helping coaches, players and fans understand the factors that led to a victory or defeat.  It turns out that scorecards come in pretty handy for startup business investing, too.

This past October, I enjoyed watching my hometown Kansas City Royals become the World Champions of baseball. Their scorecard was easy to understand, what with runs, hits, and great pitching stats.  Those stats were the factors that led to their World Series win.

Angel investors are using a similar concept for determining the value of the startups that approach them for financing.  They look at the factors that make a new business more or less valuable in a valuation scorecard.  The factors are just different, like industry sector, market size and quality of the management team.

Before we jump into the details of the scorecard, it’s important to understand first why company valuation is so important to angels and entrepreneurs.  The bottom-line is that it is part of the critical calculation of determining how much of the company the investor owns for their investment.  Marcia Dawood, an experienced investor and board member of the Angel Capital Association, walked new investors through the important calculations in a recent webinar.

Dawood explains there are two types of valuation – ”pre-money” is the company’s value before an investment and “post-money” is after the investment.  And an investor’s percent of ownership equals the size of the investment divided by the post-money valuation.  We use both to determine percentage of ownership.

For example, if a company has a pre-money valuation of $2 million and raises $500,000, then the post-money valuation is $2.5 million.  The investors own 20 percent of the company (by dividing the $500,000 by $2.5 million).

Sometimes entrepreneurs back into a valuation when they know how much they want to raise and how much of their company they are willing to give up.  Investors can do this too.  Dawood says, “Think about Shark Tank.  Mr. Wonderful says ‘I’ll give you $200,000 for a 10 percent stake in your company.’  Divide the $200,000 by .10 and you get a $2 million post-money valuation and after subtracting the $200,000 investment, you get a $1.8 million pre-money valuation.”

The numbers in the calculation can have a huge impact on your success in an investment, so it is important to be comfortable with the final pre-money valuation and the elements that get you to that number.  You don’t want to buy company stock for too high of a price.  So how do you do that?

Keeping Score

There are several ways to value startups, but the most popular method used by angels to determine a pre-money valuation is the Scorecard Method. Bill Payne, a long-time angel who also led the webinar, uses a real estate analogy to explain the method:  it appraises startups using comps.

The Scorecard Method is used for comparing target companies to similar startups, such as business sector, stage of development and geographic location.  You compare your target company to the norm for several factors and then adjust the median by your appraisal of the target.  These days it is easier to find data on investments and valuations of entrepreneurial firms on the Internet.

The main parameters, or criteria, of the Scorecard Method, in order of importance, along with their respective weights, are: entrepreneur, team, board (30%), size of opportunity (25%), product/technology (15%), sales/marketing (10%), need for more financing (5%) and other (5%). You can change the percentages according to your own preferences about what is important to a startup’s potential.  Put them into a column.

Next , approximate how the company you’re trying to determine a valuation for stacks up in each of those parameters against similar startups. If you think the management of the target startup is 20 percent stronger than the other similar companies, for example, then use the number 120 percent in the comparison column for the parameter. Do the same for the other criteria. When you are finished, multiply the two numbers in the row and post that number in an adjusted weighting column.

Tally the numbers in the adjusted weighting column and multiply that sum by the pre-money valuation for similar startups.  You end up with a chart with a final valuation scorecard like this:

This should be fairly accurate as long as you have a good starting value and use a similar stage of development, a comparable business sector and a like location.

Obviously, you want to keep in mind that if the seed stage valuation is too low, entrepreneurs are going to eventually be diluted after multiple rounds. As a result, their interest in driving the company is going to be diminished. If the seed stage valuation is too high, the entrepreneurs and the investors have undervalued the financial contribution.

Other Options

The Scorecard Method, along with the Venture Capital Method and the Dave Berkus Method, are only three of the many methods used by angels in appraising a pre money valuation of a startup company. It is best to use multiple methods, then make a decision from there as to what you think is appropriate for your company and the company you are investing in.

Besides these methods, the Angel Resource Institute offers other ways to learn valuation.  There are also some ACA webinars which are chock-full of good information.

Payne recommends that angels try multiple valuation methods for each investment opportunity.  Essentially, establishing benchmarks helps make something that is very subjective more objective.

Angels who get a 10X plus exit return have hit one out of the park.  Hitting it out of the park goes a long way toward establishing a winning portfolio. And, with a quality business model, good management and a scorecard, it is a whole lot easier to tell if you are winning, in finance – or in the World Series.

terested in angel investing? Consider applying to join the River Valley Investors.

How Angels Can Enjoy The Best Returns — Financial And Otherwise

Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article making the case for wealthy to consider becoming angel investors. Her full article (with her permission) appears below:

With angel investing being so risky, eventually most smart angels wonder – is there a way to increase my odds for good returns?  And how else do I make investing a good experience for me?

Here’s the good news.  Studies show that angel investors can make good returns, on par or better than VC or other types of private equity, when they follow some good investment practices.  The studies put proof behind what was previously just common sense. On top of that, many angels are having a blast investing in startup companies and are happy to share their secrets for fun.

Let’s start with the largest study and what we can learn from it to enhance financial returns.  Rob Wiltbank, CEO of software company Galois and professor at Willamette University, collected data on exits – good and bad – from hundreds of angels in the Returns to Angel Investors in Groups.  The study found that the overall return for the 1,100 plus exits in the dataset was 2.6 times the invested money in 3.5 years, or about 27% gross Internal Rate of Return.

More important than the average return for this “portfolio” of 1,100 exits, was the very wide and unbalanced distribution of the exits, with 52% of the exits losing some or all of the investment and 7% providing nearly all of the return.  This means the average in the study didn’t describe the performance for most of the angels who participated.  But there are some good takeaways that can lead to better returns:

• Look for the home run opportunities.  As Wiltbank says, “The returns are massively skewed.  Ten percent of all of deals produce 90% of the returns.”  Really sophisticated angels have paid attention to this.  A few top angels have told me they started out looking for singles and doubles, thinking they could make most of their returns in those deals.  Now they have changed their game – it’s all about hitting home runs.

• Diversify your investments.  Not only does a small percentage of deals deliver the biggest returns, but there a 50-50 chance that each individual investment will be a failure or a success, so you need to make many investments to find the one that will be a home run.

• Take your time and be patient but persistent.  The 52% of the exits that lost money did so in an average of three years, while the big returns took an average of six years.  As you wait for the bigger returns, learn from your experience by watching others and enjoy the process and the angels and entrepreneurs you meet.  (More on this later.)

• Do due diligence.  Just looking at amount of time in due diligence, angels who did more than the median amount of diligence on a deal (20 hours) did significantly better than those below the median.  The overall multiple difference was almost six times – 5.9X compare to 1.1X! This is mostly about reducing failures.  Said another way, 65% of the below-median due diligence angels lost money, compared to 45% for the above-median group. Now, there’s a reason to roll up your sleeves to check the companies out!

• Invest in what you know.  Putting your specific industry expertise into your investing is common sense.  The study showed that when the investor had expertise in the company’s industry, the exit was three time higher than for others (3.7X compared to 1.3X, both in around four years).  Use your entrepreneurial experience too.  Wiltbank says that “angel investors are well suited to early-stage investing because many have been entrepreneurs themselves.”

• Stay connected to the entrepreneur after you invest.  Investors who met with company leaders often to mentor, coach, or offer strategic consulting and that monitored the company’s progress saw an overall multiple of 3.7X in four years.  Conversely, those who took a more passive approach reported an average lower multiple of 1.3X in 3.6 years.

Angel investing is about financial returns, but it is so much more than that.  As top angel David S. Rose wrote in his recent book, “…investing in startups has so many other dimensions that, for quite a few angels, the external rewards may be even more important than then financial ones.”  He sees a number of non-cash benefits that come with your “angel wings,” from “entrepreneurship without responsibility” to giving back and developing life-long friendships.

My organization, the Angel Capital Association, gives an annual award to one person who makes a big difference to angel investing and one of my fondest memories is watching the first winner receive his award in 2005.  Bob Goff, leader of the Sierra Angels in Nevada, won not only for his active investing and support for the entrepreneurial community, but for his total embodiment of angel investing as “doing good, having fun, and making money – not necessarily in that order”.

That phrase has stuck with me and so many other angels I know.  Many angels enjoy spending time with other smart investors, meeting remarkable entrepreneurs and learning about interesting and innovative ideas.  Beyond the personal experience, it’s wonderful to know as an angel that you’re helping build the economy, creating jobs and life-changing innovations, and giving promising new businesses a chance.

And I can’t leave Rose’s “entrepreneurship without responsibility” without another comment.  One of my favorite angels has said how much he loved starting his very successful company and selling it for a great return, but not so much the part in the middle (running and growing the company).  As angel investors, we know the responsibility for the company’s success is with the CEO and we can enjoy being involved with the company without taking the responsibility “in the middle” of getting to a great exit.

Angel investing offers many returns.  What could be better than doing good and having fun while employing good investment practices that make money at the same time?

Interested in angel investing? Consider applying to join the River Valley Investors.

Startup valuation, the Seraf Method

The Angel Capital Association put out this interesting piece on a new method for startup valuation, the Saraf Method.

Short Version:

• The first step is to consider the exit practicalities for the company (see full article for details),

• The next step is to think about the financing requirements,

• The third step is to look at the current fund-raising market conditions and current deal details and

• The fourth and final step is to look up your valuation on the adjusted “curve” on the Valuation Look-Up Table.

Full article