Month: June 2005
Yesterday, I received an interview request for an Inc. Magazine article concerning angel investing. The article is being driven by a recent survey by George Washington University that found 58% of venture capitalist respondents said that angel involvement “sometimes” or “mostly” makes a company unattractive. The main reasons given were that angels tended to give start-ups overly high valuation, made negotiations unnecessarily complex, or were unsophisticated and uninformed about the requirements of venture financing. Occasionally my interview requests are via email (preferred) so in this case I wrote up my thoughts. I have no idea what will end up in the article so I figured I’d post the thoughts here for anyone interested in my point of view on the angel / VC dynamic.
While 58% is a nice number, I think that an aggregate statistic isn’t that useful. I’ve had a large number of experiences with angel investors – both as an angel and a VC. I’ve found – not surprisingly – that there is a wide range of quality and experience among angel investors – if they are experienced and high quality, they are good; if not, they are have no impact or are not good.
When I actually read the study (after the interview, of course), the lead result was that 94% of VC respondents answered “Yes” to the question “Do VCs consider angels beneficial to the venture industry?” In fact, only 6% of VCs responded that angel involvement “mostly” makes a company unattractive (52% said sometimes – which is where the 58% mostly/sometimes stat came from.) So – as with many articles – the data is being munged in a way to tell a more provocative story. Only 5% of VCs said that angels “never” make a company unattractive – if you take off the tails of the normal curve (“mostly” and “never”), you end up with 89% of VCs saying angels “sometimes” and “seldom” make a company unattractive to VC investment – a total non-story as far as I’m concerned (at least around this measure.)
During the interview, I was asked three specific questions. The questions and my answers follow:
1. What, in your experience, are the most important problems?
- Unsophisticated angels / entrepreneurs who structure the angel investment poorly.
- Angels who are “too active” – they think they are running the company instead of letting the entrepreneur run the company.
- Entrepreneurs who give up too much of the company too early to angels that “are going to help” (but end up only being money) and – as a result – the VCs are faced with founders that don’t own enough of the company.
- Unrealistic valuation expectations.
- Chronically bad advice (e.g. “I don’t know technology, but here is what you, oh Mr. Technology CEO, should do.”)
- Ego ahead of value (e.g. the angel investor is more interested in being able to say “I’m an angel investor in company X” than having company X be successful.)
- Toxic view of VCs (or angels.) I’ve met many angel investors who think VCs are bad. I’ve met many VCs that think angels are bad. This is just dumb. Individual people are either good or bad – evaluate them on their own merits.
- And the biggest –> bad partners. Whether it’s an angel or a VC, the investor becomes the entrepreneur’s partner. The entrepreneur needs to make sure he wants the partner. If there’s a mismatch here, it’s often fatal (or at least very painful.)
2. Could you provide any examples where the angel investor and the venture capitalist clashed and the start-up was held back as a result?
- Case 1 (where I was the angel investor): I was an angel investor and chairman of a company. We were a young (20 person) startup that was raising its first VC round (we’d raised about $1.5m of angel and strategic investor money.) The CEO was young (early 20’s) and I was in my late 20’s. The CEO was doing a terrific job, we had a hot young company, and had four different VC firms put term sheets down to lead the deal. One of the VCs did a great sales job on the CEO and the partner said something to the effect of “I’ll work with you and mentor you.” We chose that firm to lead the investment. Two weeks after the investment closed, the same partner took me out to breakfast “to get to know me better” and within 15 minutes said “I’d like to bring in an experienced CEO to run the company.” As you could imagine, this bait-and-switch didn’t go over very well with me or the CEO. However, after a week or two of struggling with it, we decided to help the VC bring in a “professional CEO” to run the company. We helped recruit the new CEO (took about 3 months) and then the CEO transitioned the business (took about two weeks) and there was nothing for the founder / CEO to do (since the old CEO / founder was – well – the old CEO and the other exec positions were filled.) So – he resigned (as did I as chairman – I didn’t want to be on the board at that point.) There was more tension (not drama in this case – but tension) then necessary (I’d like to think that in this case we went quietly.) The new CEO failed and was fired within a year, but the following CEO that was hired did a great job, the company was ultimately successful, had a very strong IPO, and my angel investment ended up being worth 50x. The dynamic between the angels and the VCs originally cost the company some time and potential market leadership, although the story ultimately had a very happy ending.
- Case 2 (where I was the VC investor): I was leading a financing of an angel backed company. The largest angel investor didn’t like the valuation. The founders had been working for 9 months to try to raise money and were literally being held up by this angel. He was angry, hostile to the founders, generally unpleasant to deal with, and very irrational. We patiently worked through the issues (I really liked the founders.) At the 11th hour, the angel started insisting on new terms for himself (just him – not the other angels.) The company was out of money and had no options. I walked from the deal. The founders ended up giving the angel some of their equity to get him to support the deal (totally inappropriate behavior on his part.) We did the investments. Six months later the company was acquired – we made 3.5x our investment and the angel made over 5x his investment. Again, a successful outcome, but the entrepreneurs ended up with less then they should have gotten (and a lot of unnecessary stress.)
3. Is there anything a business owner can or should do to resolve the differences that may exist between his early stage angel investors and his later-stage venture investors?
- Pick your angel (and your VC) carefully.
- Do your homework / due diligence – make sure you know who / what your angels (and VC) are.
- Hire a real lawyer and do a real seed / Series A financing. Treat the angel investment professionally – just like you would an early stage VC investment.
Ken Norton has an incredible post up about his visit to Enron in 1999 while he was CTO at NBCi. Thanks for Mark Pincus for the link. I’ve filed this under “Internet Axis of Evil” because – even though “bogus stuff that doesn’t work” isn’t in Fred’s list, it belongs.
Heidi Roizen – one of my partners at Mobius Venture Capital and my close friend – just did her first podcast titled Heidi Roizen on Venture Capital: Silicon Valley is Back. Heidi never disappoints – enjoy!
This week’s Sunday New York Times was a treasure trove. In addition to having an incredible NY Times Magazine this week (Money 2005), Ben Stein had a phenomenal essay titled “Lessons in Gratitude, at the Basement Sink.” In contrast to the articles in the Magazine (money, money, money), Stein asserts that “Gratitude … is the only totally reliable get-rich-quick scheme.” He finishes with a lesson his dad taught him: “The zen of dishwashing. The zen of gratitude. The zen of riches.”
Everyone should read this – and be grateful for whatever you have today.
I’ve been working my way through Eric von Hippel’s newest book Democratizing Innovation (Eric was my doctoral advisor at MIT – I didn’t get my Ph.D.) I needed a break (I’m reading it carefully because I’m worried that Eric will call me up and ask me hard questions about the book.) Amy and I went into Boulder yesterday for massages (the power was out at the hotel – so no massages) so we swung by The Boulder Bookstore to pick up some reading material for the time between ~massage and dinner.
Amy picked up the Sunday NY Times (great NY Times Magazine this weekend, BTW) and I picked up The Washingtonienne. I’d seen a review somewhere that it was titillating, provocative, enlightening, and a fast fun read. I found it titillating, provocative, depressing, and useful for anyone that’s thinking about blog privacy issues.
- Titillating: The story of The Washingtonienne was reasonably widespread in Washington DC and across the blogosphere in 2004. The author – Jessica Cutler – was fired from her job as an low level staffer in Sen. Mike DeWine’s (R-Ohio) office for blogging at work about her personal life. And – it was a pretty raunchy, hard partying, high sex life.
- Provocative: See titillating. Then – as you watch everything fall apart in the second half of the book, think about what was really going on.
- Depressing: Near the end of the book, Jessica gets introspective in a useful way. It’s powerful in a similar way as A Million Little Pieces and – while not as deep or intense – it’s emotionally revealing and pretty brave stuff. However, when you step back and think about it – and then think about the DC life that Jessica is describing – you can’t help but feel down about a subset of the human condition in our nation’s capital.
- Useful: As an active blogger, I spend plenty of time thinking about what is “appropriate” to write about. Companies are now coming out with blogging policies. There have been plenty of high profile firings of bloggers, along with some celebrity work bloggers. While Jessica’s story is an edge-case, it’s a useful one.
Jessica’s being a great American and turning her story into her 15 minutes of fame. If you are into blogging, privacy, or sex, there’s enough here to keep you interested for a couple of hours.
Fred Wilson wrote a long post on his investment in del.icio.us six weeks ago. I’ve been playing with del.icio.us and some of the other tagging services and finally got around to putting a del.icio.us link on my blog posts. So – while you can’t yet tag del.icio.us from within NewsGator Online (hint, hint), you can click through to my blog and tag directly if you so desire. Of course, if you are an avid del.icio.us user, blogger, or podcast junkie, there are already plenty of ways to use del.icio.us with Feedburner.
In 1994 when I was first playing around with the Web, catalog publishing was a common example of something that would eventually shift to the Web over time. Last week, Thomas Register announced that they were discontinuing their print publication in favor of the Internet in a move that reflected “an over 10–year transition to the Internet as the primary information source of the industrial market.”
I love this shit. Do you remember Industry.Net which morphed into Nets, Inc. – run by Jim Manzi (ex-CEO of Lotus) straight down the tubes in the Spring of 1997 over three years before the Internet bubble peaked? Perot Systems ended up picking up the whole thing for about $9 million in one of the most “gossipy” failures of 1997.
Nets was going to do what Thomas Register did, but on the Web instead of print. A decade later, Thomas Register will be 100% web-based. If you are looking for an Orifice Plate Flow Meter, a DC to DC Transformer, or a Cryogenic Solenoid Valve, you no longer need to buy an expensive book every year. And – it only took them 10 years to get there.
Jim is the founder and CEO of Oxlo Systems (we are investors.) Jim was previously the co-founder and COO of Raindance Communication (again, we were investors – see a pattern?) We’ve worked together on various things since 1997 – Jim’s continued persistence was one of the reasons I invested in Dante Group (which was then acquired by webMethods for a nice 3.5x return in six months in 2003 – not a home run – but a nice venture deal – especially after the dry spell that was 2001 – 2002.)
Jim had a busy spring. On May 31, he announced that Oxlo had closed a $5 million financing consisting of us, Appian Ventures, and Waypoint Ventures. This loads up their gas tank nicely through the end of 2006. Jim wrote a couple of posts on the financing process – including Fundraising…, Expectations and the First Chicago Method, Not everyone calculates an IRR, Well I did it again (a priceless story), and Everything-Assured Capital. If you are raising VC money – or thinking about it – run, don’t walk your mouse – to read these posts. Now that the financing process is over, I hope Jim will write more about it.
While it’s easy to fall into the trap of “stopping everything else” when you are fundraising, Jim knows that’s an ineffective way to run a young company. Oxlo continues to make steady progress with two major announcements in May – an exclusive partnership with BIGFNI and an integration relationship with RouteOne’s Credit Application Management System. If you know anything about the auto industry, you know these are two big dominos that Oxlo needed to get to fall – and they have. Well done Jim and team.
Nerd week continues (and my pile of technology crap on the floor slowly diminishes). At the Microsoft VC Summit last month, our parting gift (Microsoft has always given out nice gifts) was a Roku SoundBridge M1000. For the past few years, we’ve been using a Turtle Beach Audiotron which has worked well until recently. About six months ago, it stopped noticing when I ripped new CDs to my file server (I use my Mac G5 to rip to an old Windows NT Server box – it’s about all I use the G5 for – I know, not so smart.) I’d occasionally thrash around and try to figure out the problem with the Audiotron (it worked fine – it just decided it wasn’t going to add anything new to its playlists no matter what I did, including hitting it with my fist, which occasionally works with electronics.)
Now – I suck at the “A” part of “A/V”. I’ve never really understood it so whenever something doesn’t work, I patiently endure Amy’s berating while begging that Ross will come over to my house and fix stuff for me (which he eventually does.) So – it was with some trepidation that I opened the Roku box.
I was done fifteen minutes later. I took it out of the box, inserted the WiFi card that comes with it, put the batteries into the remote control, plugged it in to the same cables the Audiotron was plugged into (hint to the “A” impaired – put new device in exactly the same place and connection as old device), turned it on, and it worked. Flawlessly. It found both my Mac iTunes library and my SlimServer (hmm – I thought I’d uninstalled that when I couldn’t get Amy to use the Slimp3 player that I tried once). Zero set up, zero configuration. Perfect.
I now have an Audiotron for sale. It’s in perfect condition (except for a bruise from my fist – actually the bruise is on my fist, not the Audiotron), comes with a full set of cables and a remote control, and has no sales tax. It appears to go for around $150 + shipping on ebay (the auction that ends today has it at $152.50) – make me an offer. Paypal accepted.