Angel Investors Today

Recession, Reluctance, or Resurgence
Angel Investors and the Companies They Keep

January 28, 2002

By John Eckstrom

So you’re a late bloomer and started a dot-com company in the last year. Or maybe you started a business much earlier but are just now in need of investment capital. Your big question is probably, “How do I raise angel dollars now?”

Here’s my personal view of today’s market for companies and angel dollars as well as 10 of my best “GET REAL” strategies.

Why did Alan Greenspan spend last year carefully avoiding the word “recession,” especially when unemployment claims were approaching the half million mark? With the most recent interest rate cut the number is now the lowest it’s been in 40 years. But what has it accomplished? I wonder when we have seen such attention, dare I say, “spin,” on the economy? And why am I so focused on our friend, Mr. Greenspan? Well, he is the national symbol for what is happening in our economy. Everyone imagines he is the knowledgeable uncle who always seems to have the right answer. Lately, though, we are all less convinced that Uncle Alan can provide the answers to our troubled businesses.

Let’s put Uncle Alan on the back burner for a moment, and try to get a better understanding of how a new business can raise capital while the rest of the economy is still falling off the economic cliff.

Angel investors are not a new phenomenon but their role in financing companies has taken on new meaning during the past decade’s roller coaster ride to fame, fortune, and failure. The VC-backed companies of the 1980s gave rise to fortunes in the 1990s that increased both the number and wealth of private and angel investors.

In many cases, angel investors have bridged the gap between the growing number of new companies and the VCs’ ability or desire to provide seed capital. In the San Francisco Bay Area there are numerous organized angel investment organizations including KeiretsuForum, Byzantine Forum, Angels Forum, North Bay Angels, Band of Angels, to name a few.

As the CEO of your own early-stage company, you will most likely approach one or more of these angel groups to get your much-needed seed or first round funding. But, first you have got to “GET REAL” about the critical strategies you need to obtain angel investment dollars. All 10 of these strategies are equally important.

1) Get real about your valuation.
Problem: You know the concept alone equals a $10 million valuation.

Solution: When investors weren’t paying attention during the last two or three years high valuations were common place. Everyone is paying attention now and valuations are much smaller than most entrepreneurs would like. That $10 million valuation of a year ago is probably a $1 to $4 million valuation today.

2) Get real about your investment needs.
Problem: You think you can get by with $300,000 or you want the whole enchilada and are asking for $5 million.

Solution: You need to raise about 20 to 50 percent more funds than you think you will need to get to the next round of funding. Also, closing the next round will take six months longer than you have planned.

3) Get real about your ability to raise the next round.
Problem: You think Uncle Alan will have solved the economy’s problems in the next quarter or two, just as you start to look for the next round.

Solution: Look for the next round now. If you can get commitments from VCs or strategic investors for a round contingent on your ability to raise seed capital from angels, then you’ll be in a better position to obtain that angel money.

4) Get real about your market.
Problem: Too many new companies have unrealistic views about the size of their market. They’ll say things such as, “It’s growing at 2,000 percent per year!” They will also over-estimate their ability to penetrate, saying unabashedly, “The 800-pound gorillas have nothing on us!”

Solution: Be focused and start small enough in a market that you can dominate – then develop your market over time.

5) Get real about your competition.
Problem: You are the only one to ever imagine this idea (both Newton and Leibniz thought the same thing about calculus).

Solution: Do a thorough job of researching your competition and be prepared to discuss how you are different.

6) Get real about your product development deadlines.
Problem: We have the Holy Grail product and it’ll take us two and a half years to develop it.

Solution: This approach won’t work anymore. It didn’t work before but companies were able to get money because some investors believed the Holy Grail existed. Find the essence of your product and build it first – produce the other features that complete it and sell them as “releases” and “enhancements”.

7) Get real about your management team.
Problem: Your CTO still holds a system administration job and envisions himself the CEO if he can only get you out of the way.

Solution: Investors see this as the number one make-or-break ingredient. While the company may not always have all of the key players (including a CEO), it does need some solid management, a plan to fill out the team, and a realistic assessment of the execution experience and track record of the team.

8) Get real about your survivability rate.
Problem: You are tenacious and confident that you can be successful.

Solution: New companies are like restaurants – within a year 95 percent of them fail. Have a “Plan B” ready – don’t dwell on it but you need to have it as insurance for those “what if” scenarios.

9) Get real about your IP (Intellectual Property).
Problem: You can articulate with great vigor how your technology is different, better, or unique compared to what exists.

Solution: If you haven’t spent the money on a patent attorney, now is a good time to get started -– investors are looking for a “sustainable competitive advantage” and having patented IP is a very strong start.

10) Get real about your entrepreneurial spirit.
Problem: You’re willing to put in three months and $5,000 to start your new venture at which point you’ll have funding.

Solution: Most entrepreneurs put in well over a year of their life without a salary and invest tens of thousands of dollars of their own money to get a company off the ground – remember what I said about survivability.

So what does all of this have to do with Uncle Alan? Only that we have certainly hit at least one of the three R’s that are in the title of this article: Recession, Reluctance or Resurgence. Moreover, no matter what the state of the economy, a company will have a better chance of success if they have all 10 of their “get real” ducks lined up.

This means that you must build your business the old fashioned way. Build value by starting a company that has realistic aspirations, products, customers, revenue, profits, and has a sustainable competitive advantage. The markets will no longer accept the one-hit wonders. Angels, too, are looking for the Grateful Deads, ABBAs, and Tony Bennetts of the world – companies with staying power.

John Eckstrom (John@CXO4Rent.com) is the CEO of CXO4Rent (a management consultancy, specializing in building and growing early-stage companies. He is also an active private equity investor and serves as an advisor and board member.

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