December 7, 2011
I’m a Dingman Angel, which is an angel network sponsored by the University of Maryland’s Dingman Center for Entrepreneurship. As a member of the group, I recently encountered a disgruntled entrepreneur who was incredulous that his startup was eliminated during the screening process – before having a chance to present to the group. He couldn’t understand why he was told he wasn’t an “Angel Deal.” I wasn’t the person who eliminated him so I could only give a few theories.
Now, to be clear, this angel group is one of the DC area’s most active angel investment groups. Our members recently invested in MeMeMe, Seva Call, YouEye, KidSafe, 410 Labs, Nexercise, Gold Lasso and Brazen Careerist. So it’s not like this is a “do nothing” investor group.
So I responded to the disgruntled entrepreneur…
Me: The best company for an angel investment is capital efficient and will require limited follow-on rounds of institutional financing that tend to squash the angel’s share.
Without seeing your plan, the need to build hundreds of capital-intensive facilities sounds like it will eat up cash with little realistic hope of quickly reaching a cash flow positive state.
There are several reasons why angels don’t invest, and capital inefficiency is one of the reasons a company is better suited for venture capital.
Angels and VCs won’t invest if they don’t have a belief in the team; the company has not met any major product or customer acquisition milestones; the use of proceeds are directed too heavily towards salaries, overhead, and R&D; not enough of the investment will be used to take your product to market; and the business is not scalable.
Most of the deals that get funded by angels have reached major milestones. They have a product, satisfied beta customers, a proven team or business model, and are at or near revenue. Founders build the company prior to angel funding by bootstrapping, using their own funds, or hitting up family and friends.
There are great companies that aren’t suited for angel investors or VCs, and your company may be one of those.
Without being there, one can only speculate.
Paraphrased Entrepreneur’s Response: I want to make 2 basic points. 1) That your definition of an angel does not match the Wikipedia Definition which among other things says:
“Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund. Angel capital fills the gap in start-up financing between “friends and family” (sometimes humorously given the acronym FFF, which stands for “friends, family and fools”) who provide seed funding, and venture capital.”
and 2) I presented a plan that showed I would be cash flow positive in Q4 of year 1.
To Which I Replied: My definition of an angel investor appears to be different than yours. Perhaps some of that involves a shift in the market. In the past 3 or 4 years, as VCs have been less active, angels are seeing more and more good deals that use to be reserved for VCs. This means that angels have the luxury of being more selective. The effect is that angels are moving up the food chain, and what once got funded now gets bootstrapped…or whithers.
Also, technology advances like cloud computing, open source software, and crowdsourcing have lowered the cost of a starting a company – meaning that companies require less capital to reach a liquidity event. The result of these advances make angels a viable funding source for companies that 10 years ago required more capital than angels could provide. So many entrepreneurs are seeking angel investors who are typically more forgiving and offer cash at less onerous terms than institutional venture capitalists.
Angel investors ultimately invest to make money. They have a certain amount of cash to invest. They don’t invest in every deal. They invest in the best deals they are offered, and it is likely that the group that you met with compared your company against other deals presenting that day and found that there were more attractive alternatives.
This doesn’t necessarily mean that your company is the ugly girl at the dance. It’s just that the competition for angel money has gotten more intense. In this environment even pretty girls are left standing against the wall.
Lastly, I have been involved with more than 50 startups as a principal, employee or investor, and the next startup I see that meets its financial plan will also be the first one.
You may have shown a quick path to cash flow positive, but without knowing you, or your team, without being your friend or family, most rational people are not willing to take a big leap of faith. The gap between where you are now and where you say you will be is only allowed to be as wide as the faith, belief, and trust in your team, your strategic plan and a judgement call on your ability to execute the plan.
The ugly truth is that investments to investors are like buses. If we miss the bus, there will be another one by in 15 minutes. See: Driving Investors on The Bus.
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