Two veteran investors, including one who invests Paul Allen’s money in startups, and a business lawyer shared some great tips at today’s Early Stage Investment Forum in Seattle.
It’s probably useful for anyone thinking about putting money into a new company, high tech or not.
Here are things for angel investors to think about, according to Michael Crill, managing partner at Atlas Accelerator; Ben Straughan, partner at Perkins Coie; and Steve Hall, managing director of Allen’s Vulcan Capital. (I’m mostly paraphrasing their advice here)
1. IP ownership. Make sure companies own the intellectual property they say they own, and that founders have agreed to provide the IP to the company.
2. Founder transition. Consider leadership for different stages of the company’s development — from invention to creation, proof of concept, early sales, scaling out, etc.
3. Use of proceeds. Make sure the company is getting enough money from angel investors to reach operational and valuation milestones.
4. Clear founders’ roles. Be sure they’re not hindered by agreements with previous employers or with other founders who have moved on.
5. Funding source. Angel investing is appropriate companies trying to raise up to $1 million or $2 million.
Venture funding is for deals of more than $3 million, ideally for companies that have the potential for $50 million to $100 million a year in revenue in five years. Ideally venture funded companies are highly scalable with the potential for an IPO. Angel deals, in contrast, are for just about any situation.
6. Entrepreneur experience. Make sure the entrepreneur has well rounded experience and will be able to grow the company to the next level and attract additional capital. Angel-backed companies can’t yet afford a deep executive bench.
7. Excess offerings. Watch for how many shareholders there are, and be sure their offerings are done in compliance with securities regulations. Are only accredited investors purchasing shares in the company?
“Oftentimes startups will give shares to their landlords, shares to their employees. … it’s difficult to manage that group,” Straughan said.
8. Valuations. Rely on comparables, talk to others in the community and be liberal with technology comparisons.
In general valuations “took a nosedive in 2000 and 2001,” Crill said. Before that people at the idea stage were seeing valuations of $4 million to $5 million. Today you’re seeing “$1 million to $3 million range for ideas, depending on the IP, the team and how far along they are,” he said.
9. Know what you are investing in. It’s a crowded startup market with substantial competition. Ask yourself, would I work for this company? The best places to invest are areas where you have experience and familiarity.
“If you’re not familiar with the 30 other companies doing the exact same thing, I wouldn’t make the investment,” Hall said.
10, Stay the course. Don’t expect to make a killing with your first investment – 93 percent of angel investments have negative returns on investment. Don’t make one investment if you can’t make ten. More than half of your investments will require more money from you.
“Your first one is probably going to lose money,” Crill said. “If you decide to embark in this wonderful world of angel investment, you’ve got to have the guts to stick it out … and do more deals.”