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January 31, 2006

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Listed below are links to weblogs that reference On Being an Angel:

» Angel Philanthropy from Gif's Place
A missing middle in funding exists for non-profit social enterprises as well as for-profit ones. What are the underlying causes? If we knew perhaps we could solve the problem in both venture investing and venture philanthropy. [Read More]

» Chris Allen on Angel Investing from house of warwick
[Read More]

» Angel or VC..? from sLop
Life With Alacrity: On Being an Angel Interesting read regarding the difference between Angel investors and Venture Capitalists.... [Read More]

» REFORM VENTURE CAPITAL? WINER STYLE?... UM, I'LL PASS from Junto Boyz
I came across Dave Winer's post, "How to reform the VC industry," and found it to be interesting enough to respond. [Read More]

» Great advice for Angels from ShaulaBlog
If you read much of my blog, then youve probably quickly caught on that Im referring to early-stage investors. Often called Angels. Sometimes called Friends, Family and Fools. Angels are usually one more step removed from the original f... [Read More]

Comments

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Ryan

Excellent article. advice for everyone through lessons learned. I love it.

Marcus

I'm with a company that is more hungry for advice than money. If a company contacted you strictly for the purpose of seeking your advice on building a social network, would you consult with them in exchange for equity?

Christopher Allen

It depends on the product and the people behind it. Typically I'll charge to offer consulting in areas of my expertise, but offer to reduce my fees in return for equity. If it interests me and it isn't going to take too much time, I will consider offering advice for equity only. If it something that really turns me on, I'll offer to be on an advisory board for equity. So the range of possibilities is pretty broad.

TomB

In response to "Angel Philanthropy from Gifs Place"

(Currently in Dublin, Ireland) Was at an excellent presentation a few weeks ago for something which you might consider an angel fund for not-for-profits.

In a nutshell they provide a support and a series of levels where someone with an idea for a not-for-profit can be supported through a variety of levels

Level 1 is designed to help new ideas become real projects. Level 1 is aimed at individuals who are not yet working full time on their projects to help with the running costs. Awards consist of once-off investments

Level 2 is designed to support existing social entrepreneur led projects. Level 2 will include financial support towards the living expenses of award winners allowing them to work full time on their projects. Awards consist of 2 year investments

They support individuals who have a passion for a particular not-for-profit concept rather than an organisation

Linky is http://www.socialentrepreneurs.ie/

Michael Prichard

This post is great. I am a founder of a start-up that raised some money via the "friends and family" network and are now working on setting ourselves up for another round of capital. Your comment on being ready for the business plan to change is incredibly true. Our current model and products (even though not entirely different) is not what they were when we initially started. BUT I believe that is how a startup grows and better positions itself. You learn as you go along and work hard to make sure you are constantly improving your business.

I do have a question about business plans. We did do an extensive business plan the first time around. It took me a very long time plus 6 versions to get to that point. What is your view on how in depth a plan really needs to be? Should we do a traditional 30 page plus plan or stick to something short and concise that answers the important questions?

Thanks. Again this post was inspiring.

Christopher Allen

> What is your view on how in dept a plan needs to be?

I'm somewhat torn here on what advice to give. The reality is that the executive summary is the most that most investors will ever see, however, if you make it past that hurdle, the business plan must be a good answer to "how" questions raised by the summary. Also, no "complete" business plan is going to compensate for the basic facts of the business -- do you have a team that has the ability to deliver the product? I've read many good business plans where I was unconvinced the team could execute on it.

Tom Carter

Thank you Christopher for discussing your experience as an angel. This is an important post because is provides detail and data to support the notion that one part of our capital market for creating new companies is broken. I say broken because there are well-intentioned people (angels, friends and family) that are being invited to invest money in a situation where they really do not understand the risk: that they are setting themselves up to be crammed down upon the next round of financing. Some times the people writing the placement memorandums are not making this particular risk explicit and similarly there are entrepreneurs pitching deals that are not proactively addressing this issue - either by telling investors there is a fair change of being crammed down, or taking a strong position on protecting first round investors.

Now, let's say risks are made clear and they are understood. The entrepreneurs and individuals who manage other people's money are certainly going to do what is in their economic interest. Hopefully it is clear that the "innovation industry's" long run economic interest just might include respecting the angel class of risk capital. If not, high net worth investors will find better ways to play; and of course, this is exactly what continues to happen. Investors who are committed to investing as angels are organizing themselves and their industry. Founders are understanding the need to protect their friends, family and angel investors by getting them series a preferred stock rather than LLC shares or common stock with warrants; and there are some VCs who are want angels do well as much as they want their fund to be the first capital in. All this suggests that perhaps the only problem is one of education and awareness, and I am glad that Christopher's post will help provide people both.

Christopher Allen

> Founders are understanding the need to
> protect their friends, family and angel
> investors by getting them series a
> preferred stock rather than LLC shares
> or common stock with warrants

Unfortunately, even participating in a Series-A Preferred doesn't protect you -- subsequent rounds of investment can have priority, and often VCs are requiring that previous rounds preferences are removed.

We as Series-A investors as a class could theoretically deny the VC, and probably bankrupt the company. However, in practice that is impossible as enough of the Series-A investors are either committed to the current management team that they'll vote yes, or sufficient of the Series-A investors think that they'll get $0.10 on the dollar vs zero, or sufficient Series-A investors participated in later rounds that they are willing to write-off the Series-A round.

SBarth

This post was excellent. Getting the chance to walk in the shoes of both the entrepreneur seeking capital and an angel investor managing investments is rare and valuable.
One thing that can also help entrepreneurs looking at angel investors is understanding the culture of the industry. There's a great podcast at this URL: http://www.fundinguniverse.com/podcasts/bill-payne2-fundinguniverse.mp3 by the name in angel investing: Bill Payne. He shares what he's learned from his many investing experiences and gives some great info on what to expect as an entrepreneur seeking angel money.

David S. Rose

Chris, what a thoughtful, well-considered and accurate post! It's always interesting to see how the paths we wend in life cross and re-cross. [Chris and I first met over 20 years ago in the ferment of the early Mac and online days, when both of us were Sysops on Compuserve, among other things.] For my part I started entrepreneuring in the tech space in the late 1980s, and eventually rode the cycles of booms and busts up and down to great heights and great depths. Along the way I, like you, began angel investing (after my long-suffering spouse refused to let me start another startup :-), with a mix of companies in both the active and passive angel mode. Coincidentally, one of my most active investments is in a network security company, KoolSpan (www.koolspan.com), that is doing some insanely neat stuff you might find of interest.

Also like you, I quickly realized the great benefits of cooperative angel investing, and also started up an angel group, spun out of the erstwhile New York New Media Association. New York Angels (www.newyorkangels.com) has grown over the past several years to over 65 members (including people like Esther Dyson, Alan Patricof, Gideon Gartner and a bunch of other well-known investors) and half a dozen early stage VC funds, who work and play well with us, and value the role that angels occupy in the life-cycle of early stage companies. In the past three years we've invested over $14 million in over 20 companies, which actually brings us close to the scale of a small VC fund (although everyone still decides and funds individually).

However, as you well know, once an entrepreneur, always an entrepreneur, and after several years of sideline-investing, I finally got permission from The Boss to start up another company, and thus, combining both my technical background and my angel background, was created...Angelsoft! For the past two years we've been working on developing a comprehensive platform for supporting angel investors and entrepreneurs, and the result will finally be unveiled next week at the annual summit meeting of the Angel Capital Association, which is being held in New York.

Angelsoft, which is currently in beta with over two dozen angel groups around the world (including that of Bill Payne, who is appropriately cited by the previous commenter as a wonderful resource for angels and entrepreneurs) is a soup-to-nuts solution (www.angelsoft.net/tour) designed specifically to remove as much friction as possible from the angel investment process, and thus help get more investments into more early stage deals. I'll be fascinated to hear your thoughts on it if you get a chance to take a look.

Dave Davison

Chris: after reading this post I realized that we had more in common than just our mutual "investment" in MG Taylor. After 20 years of founding and leading companies to either sucessful exit or failed "no-exit", I became a VC partner in a medium size Venture Firm-and after finding the process not to my liking joined the Band of Angels as an early member. I found my experiences on all 3 sides of the early stage investing practice - Entrepreneur/Founder, VC Partner, Angel Investor calibrate well with what you report and advise in your post.

As an active Angel member of the Band of Angels, I spent several years with Matt and Gail Taylor at Knowhere in Palo Alto attempting to learn how to apply many of the processes that were in practice at Knowhere to the due diligence investigation of startup companies. Feeling that we had found a unique way to conduct the practice of investing and managing a portfolio of startups, in late 2000, we opened a venture development "accelerator" called VentureStream fashioned along the lines of the advice you provide in your post.

- Along with an almost complete committment of the first tranche of a $100 Million Fund, we had aggregated over 100 top-flight advisor/investors to help what we hoped would be a select cadre of successful startups. We built the VentureStream Accelerator with Knowhere-style furniture, hired some of the MGT alumni to help us with the graphical facilitation we were applying to our due diligence and startup investigation process, and partnered with Ernst and Young, who had just bought out their Design Shop license from the Taylors.

I figured with that combination we would have a very promising future.

Our timing on raising $100Million for VentureStream was exactly wrong and so, and as the dotcom bubble began to burst, we were unable to close on the necessary funding to proceed, and we closed Venturesteam having made only one investment in a spinout partnership from Ernst and Young named RealFoundations. Must have done something right since I just received a very nice cash return on my investment and my ex-partners have gone on to very successful practices themselves.

LESSON: TIMING IS EVERYTHING - and I should have learned it from my first investor/mentor Sam Bodman(then head of Fidelity Ventures, and now Secy of Energy in Bush's cabinet) Sam said "At a time when feeding frenzy drives the VC industry and startups can get exorbitant first round valuations, and when deals have to be made in "internet time" = that's the time to sit on the sidelines with your money and wait until the bubble bursts.

I think the investment practice of both my previous professional VC partnership and more particularly the Band of Angels was very haphazard and given to very impulsive decision making. I was trying with VentureStream to do better but our timing was not right. I think both Angels and VCs have it better now that the bubble frenzy has segued into more reasonable valuations and time to do the diligence. However, other than good timing, skillful creation and filtering of prime deal flow and outstanding and continuous project management of the portfolio companies, nothing substitutes for having enough experienced bandwidth in partners/associates/angels as you so wisely point out.

Having left VentureStream five years ago to be an historical footnote on the Wayback Machine, I am content to meander the field of venture philanthropy as a social venture catalyst - seeking to find companies who have that unique hybrid makeup that my friend Jed Emerson calls the Blended Value Proposition. Gifford Pinchot would know what I mean and I would guess you do too.

Todd Thigpen

I came across this post thanks to your reply to the question in LinkedIn about angel investors. I recently began organizing a startup for a subscription based career management website which is a new experience for me. Your effort to share has increased my understanding. Thank you for the great information and advice.

cheers,
Todd

Joshua Zhao

Thanks for this candid insider account of angel investing from the trench. One thing strikes me as a bit ironic though: if all business plans don't go as planned, why are we fussing about driving it down to details in due diligence, apart from it being a good exercise? I would think that the vision/mission for a venture should stay in the same direction, though the tactics and specific routes to get there tend to develop and adjust over time. Otherwise, you are basically funding a different company than what you originally set out to back, isn't that true? I would argue that companies discarding their original plan rather than just tweaking some details tend to fail more often, or at least having less of a chance of making it really big.

I guess I've heard too much on how the original plan turns out to be something totally different and want to offer a balance: we can and shall still value our in-depth thought put in upfront. There are still high quality ideas to be had at the onset.

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