Old and New School Angel Investing Philosophies Clash in Chicago
Aug 31, 2010
Yesterday we attended the Angel Excelerator event in Chicago, Illinois, a half day workshop pulled together by Hyde Park Angels and Excelerate Labs. Going into the event, I was interested in learning the ins and outs of being an angel investor as we see a lot of startups and investing in some could be a strategic way to help additional startups across the country. While all the speakers had something interesting to say, I was surprised by the clash of old and new school angel investing philosophies. For example, do angel investors really want to read 30 page business plans? None of the angels I have been talking to do, but I guess every angel is different. Some believe the exercise is valuable to understanding the entrepreneur and how they think – others wouldn’t bother to look past the executive summary. Some were also much more pro-entrepreneur, whiles others just seemed interested in the investments and terms. Nonetheless, the day was filled with knowledge sharing which at some point was more academic than actionable, but still useful.
Here are my six takeaways from the afternoon.
1.) Mentors and tinkering are important to success. Brad Keywell, one of the co-founders of Lightbank, the Chicago-based, early-stage investment firm that funded The Point (now Groupon) stressed these two points. Brad calls Lightbank’s investment style “partnership” investing rather than “angel” as it offers more than just capital. This starts with mentoring and he shared the importance of mentors by saying:
“Mentors are critical to success. Mine has been Sam Zell.”
He also went on to say that:
“Collective action is what changes the world.”
But the biggest thing that Brad explained was the importance of “tinkering” when it comes to startup success. He shared the story of The Point which was based off the idea of contingent commitment to do something. In tinkering around with The Point they came up with GroupOn. They didn’t use massive technology, they used a simple WordPress blog to test out the idea of Groupon, saying:
“You don’t need big fancy technology. You need a place to test and tinker your ideas until you find one that will be successful.”
2.) There are lots of angels and they are funding more new businesses then VC’s. This point was highlighted and explained by Bob Okabe who brought lots of data to the table from the University of New Hampshire’s Center for Venture Research.
3.) Understand key metrics! If you don’t and you are investing, then you are an idiot and you deserve to lose your money. Dave McClure had one of the most entertaining sessions as he explained the importance of metrics to the startups you invest in. Dave explained the most important metrics are clicks on your site and understanding what’s driving them so you can increase them – and of course a plan to move them up the scale for monetization. As he quizzed the audience on critical metrics to understand, it seemed that very few people actually had this information top of mind. You can find Dave’s entire slide presentation from his talk here.
4.) Look for quality people to invest in. Bob Geras shared his insights from years of angel investing in the Chicago area including the qualities he believes are most important in the entrepreneurs he invests in, like curiosity, imagination, a survivor-attitude and being highly adaptive. Bob wrote a 17 page dissertation on angel investing which is available online.
5.) As an angel investor, be thinking about the exit when you first invest. Tim Hoerr shared his method for evaluating startups. He also explained the importance of thinking about the exit from the start. This approach is not one that entrepreneurs generally think about so it is often good to find out how they react.
6.) Get started with some small investments. David Cohen and Brad Feld, the founders of TechStars in Boulder, Colorado spoke about how they view building a startup ecosystem. They explained how it is a 20 year arc and not going to happen overnight. They also shared the importance of the following three things to any startup ecosystem:
1.) Smart people – not looking for PHD’s, but are looking for curious, charismatic people.
2.) University – helps with a continual influx of people into the system
3.) Culture – help foster a culture that embraces the entrepreneur and makes them feel comfortable
Brad and David also shared a new view on mentorship where the mentor and the mentee both learn from each other, rather than a top down approach.
Everyone enjoyed listening to VC legend, Alan Patricof as he shared his insights and perspectives on the overall state of investing and the changes he has experienced through the years. One takeaway from his talk which might be a bit controversial is that investors should not take a board seat.
Did I walk away from the day ready to be an angel investor? No, not exactly. But I did come away with lots of valuable insight that could be helpful for when TECH cocktail starts angel investing in startups.