At the beginning of summer, I was brought on as an AngelList associate intern at Rockies Venture Club. Unsure of what that would entail, it turns out, I was going to be building a following on AngelList, one of the most disruptive, and uniquely social investment platforms to date. The focus of this post is not about the platform or how useful AngelList is, because it been vindicated by many notable Venture Capitalist and by the amount of capital that has been raised on the platform already, but to rather talk about AngelList in accordance with social proof. Read more
Rockies Venture Club recently launched a beta program for due diligence analytics, assembling a team of highly capable industry and academic individuals in order to streamline the time consuming process and assist angel investors with making the most informed decisions possible. This is an extremely exciting prospect because research shows that extensively researching a company at the onset of a deal pays off for angel investors. Read more
Finding capital is no easy task. Lots of start-ups struggle early on with where to find the capital they need to bring a great product (or service) to market or to tend to a broken technology in need of some work. Funding Your Dreams: Calling All Entrepreneurs, a panel at this year’s WILD Summit, covered just this. Once you’ve determined how much capital you need, how do you put together your fundraising strategy? Who do you ask for funding and are you offering something in return? What do you need to know before you start? Read more
If I could have any job in the world, it would be to be a full time angel investor. Angels get to meet super-smart people with cutting edge ideas, they work with other angels who have deep sector expertise and ask great questions, they are intellectually stimulated in evaluating and negotiating deals and they can make a lot of money. Read more
In many ways Angel Investors are looking for the same things as Venture Capitalists, but there are some big differences that companies should be aware of that will play a part in shaping their financing strategy.
Here are a few obvious contrasts that you should be aware of.
Let’s start with Definitions: An angel investor is a high net worth individual with a net worth excluding their home of $1 million or more, or who has an income of $200,000 per year (or $300,000 for a married couple) with the expectation that this income will continue into the future. Angels differ from Friends and Family who will typically invest very early on when all you’ve got is an idea and who will invest in YOU rather than in your company. Venture Capitalists are typically formed as Limited Partnerships in which the Limited Partners invest in the Venture Capital fund. The fund manager is sometimes called the General Partner and the job of the General Partner is to source good deals and to invest in the ones that they think will return the most money to the Limited Partners.
Size of Investment: Angels investing as individuals typically invest between $25,000 and $100,000 of their own money. While there are deals that are more than $100K and less than $25K, this is the area most angels fall into. Angel Groups work to syndicate many angels together into a single investment that may average $750,000 or more. Angel groups are becoming more prevalent and are a great way to get investment more quickly and all at the same terms. Venture capitalists invest an average of $7 million in a company.
Stage of Investment: Angel investors are typically investing in deals earlier than Venture Capitalists. They don’t like to invest in anything that’s just an idea, so the entrepreneur starts with Friends and Family to finance the early stage of the company up to where there is perhaps a prototype or Beta versions of the product. Angel investors most commonly fund the last stage of technical development and early market entry. Venture Capitalists will then come in with a “Series A” investment to take the company through rapid growth and rapidly develop market share. VCs will help a company to grow until they are ready to go public or be acquired, so the dollars they invest will be increasingly larger and larger as the rounds progress.
Due Diligence: Angels range from due diligence that might include having coffee or lunch with an entrepreneur to doing more thorough background checks and research with experts. When angels invest in groups they tend to do more due diligence than they do as individuals. Venture Capitalists have to do a lot more due diligence because they have a fiduciary duty to their Limited Partners. Venture Capitalists may spend as much as $50,000 or even more to conduct thorough research on their investment prospects.
Decision Making: Angels make decisions typically on their own and are not beholden to anyone except perhaps their spouses. VCs will have an investment committee who will work together to make decisions so that they are as objective as possible and won’t be swayed by just one member’s excitement over a deal.
Returns: Angels are investing earlier than VCs and so they have a higher risk to take into account. Despite this, they tend to look for about the same kind of returns that VCs look for – something like 10X the investment over five years. The reason they look for such a high return is that half of their investments are likely to go belly up and not return anything to the investor. VCs and Angels want to see a return across their entire portfolio of investments that is 20-30% per year.
Time Frame: Most Angels and VCs look for an Exit, or Liquidity Event in which they get their money back, within three to five years. Some investments take longer, of course, but Angels need to get their money back and VCs are even more under the gun since a typical Venture Capital Fund has a lifespan of ten years, after which the fund must return all capital and profits to the Limited Partners.
Board Involvement: When angels invest as a group, there will typically be an angel from the group who will sit on the board and represent the investors’ interests. If the angel is a significant contributor, then they may stay on the board even after venture capitalists invest. In other cases, the VC will take the seat representing the investors and the angel may stay on as a non-voting observer, or may retire from the board entirely.
Angel vs. Venture Capital Strategy: Raising capital from Angels is hard work. The capital raise always distracts entrepreneurs from doing the actual work of building product and getting in contact with customers. Entrepreneurs should try to put off their capital raise as long as possible, so that they can build value and get a higher valuation for their company before raising capital and diluting their equity. Sometimes angel investment is a great way to get enough traction to capture the eye of a good Venture capitalist. Other times angels will continue investing and you might never need to go to a VC. Your strategy for angels vs. VC investment will include factors such as 1) your ability to work for extended periods with little or no income, 2) the availability of Angel Investing Groups in your area, 3) the number and types of VCs in your area. (e.g. do they invest in early stage companies, etc.) and finally, because money is an accelerator for business, you will need to determine the need for rapid development of product and market. If your project is highly capital intensive and there are others who are nipping at your heels, then you probably have no choice but to raise capital as early as possible. If your strategy involves starting with Angels and then going to VCs for Series A investment, keep in mind the following: 1) angels will usually want 20-30% of your equity for their investment so be sure to keep enough equity available for follow-on investments, 2) make sure your documentation is VC Friendly. Use standard term sheets (check out nvca.org for a good template). Your deal should look as much like other deals in terms of incorporation, term sheets, board structure, etc. in order to be attractive. 3) Try to eliminate or minimize participation of non-accredited investors in your deal. Even though you can legally have a certain amount of non-accredited investors in certain types of deals, it’s best to leave them out if you’re going the VC route.
For more information on Angel Investing (either as an Angel or an Entrepreneur) consider attending the Colorado Capital Conference Tuesday and Wednesday November 15th-16th. We will have an audience of experienced Angel Investors examining 8 companies that are currently raising early stage capital in addition to two panels and two keynote speakers.
Angel Investors or those who want to learn about Angel Investing in Denver, may consider our Angel Investing Accelerator on Thursday, November 10th
Peter Adams is the Executive Director of Rockies Venture Club and Co-Author of Venture Capital for Dummies, John Wiley & Sons, August 2013. Available at Amazon.com, Barnes and Noble and your local bookstore.
Crowdfunding has been a growing force in the financial industry, disrupting sectors each time it reaches a new one. Microloan platforms like Kiva and peer-to-peer lending such as Prosper have proven to be a quickly growing alternative in debt, and have increased access and choice for those looking for financing. Companies such as Indiegogo and Kickstarter have given rise to donation and pre-sale based funding for a wide range of people and businesses, and with the implementation of the JOBS act, equity can be sold over similar platforms as well. New technologies that connect people in meaningful ways have a way of changing the world, and P2Bi plans to be a part of that.
One area of financing that has not been disrupted by crowdfunding (yet) is the business receivables market. The idea of a business selling its invoices (accounts receivable) to a 3rd party to raise cash isn’t a new idea, and was even established in the Code of Hammurabi nearly 4,000 years ago. However, this $136 billion industry (in the US alone) has been quiet with relatively little innovation. Transparency has been an issue in the factoring industry in the past, and since it usually involves business-to-business transactions, it isn’t found in a public light very often.
P2Bi (Peer-to-Business Investor) is working to change this. As the first crowdfunded business receivables market, they have opened up a new and transparent path to finance growing companies, and have been connecting investors with small businesses since early 2012. This is an increasingly important gap to fill – according to a Pepperdine report, nearly 2/3 of small businesses in the US were recently unable to secure bank loans, where many had the ability and desire to repay loans but not the credit for a traditional bank to provide funding to them. With P2Bi, business owners are able to find competitively priced loans, and accredited investors can buy into portfolios of asset-backed business receivables, which are likely to generate a higher interest rate than cash instruments that are currently returning closer to 0 than even 1%. P2Bi works with a wide variety of small businesses, with the exception of transportation and construction.
P2Bi recently raised a Series A investment round, including investors from the Rockies Venture Club and John Spiers (who recently exited NexGen), among others. This follows their August 2012 seed round, and will be used to help the business scale. Among other activities, they will be hiring for multiple positions (LINK) and relocating from Louisville, CO to Denver. “We’re really excited about moving to Denver. It makes the most sense with the density of businesses and the finance industry in Denver,” said Krista Morgan, co-founder and CMO. P2Bi will also benefit from local investors and connections in the community. “Peter Adams (of RVC) was really instrumental in getting investors there and convincing them to come on board, Krista said.
Congratulations to P2Bi on closing their Series A, and best wishes helping small businesses grow while creating value in Colorado!
Tim Harvey is a Master’s of Engineering Management student at CU-Boulder and a regular contributor to the Rockies Venture Club. He has started a few businesses (nothing big yet) and most recently worked as a Fortune 500 marketing consultant with a neuroscience-based startup. Prior to that he was an investment advisor for individuals and corporations, holding FINRA Series 7 and 66 licenses.
Fundraising for start-ups is a popular topic these days. There is a lot of glory in receiving big money from investors. After all, there must be promise in your company if Angels or VCs are willing to invest.
Have you ever tried to reach the pot of gold at the end of a rainbow? Literally. Like, have you ever seen a rainbow and tried to walk or drive to the end of it? It’s impossible. The end of the rainbow is elusive. And its location fluctuates and often disappears altogether. This is a fantastic metaphor for fundraising.
An entrepreneur is sometimes more likely to grow a company by financing it themselves and working hard to build their business from the ground up. What’s more, the bootstrapping entrepreneur will gain better control over the future decisions–something that may disappear with big investors on board.
Sure, some start-ups do gain a bit of notoriety when they become venture-backed, but at what price? If someone is going to give you loads of money, they don’t do so without expecting a lot in return. Fundraising is “really like celebrating someone going into debt. Even equity investors expect a payback.” Does a business founder really want to owe everything to backers? If you have a strong notion of how you want to build your company, it can pay to make your way independently.
So what exactly does bootstrapping a business involve? Bootstrapping in business means building a start-up by using internal cash flow (as opposed to money from family, friends, or investors) and little to no external help. This method of growth is undeniably slower than big investments up front, but the time and effort can pay off. As “angel investor and wine entrepreneur Gary Vaynerchuk has said, ‘My dad taught me that when you borrow money it’s the worst day of your life.’” The bootstrapper can obtain financial independence and pursue the mission of her start-up unabated if she is willing to go the distance. Nobody will be knocking on her door looking for a return on investment except herself.
What are some ways bootstrappers can keep the company afloat in this entrepreneurial journey? After all, it’s not easy by any means, and there will be perils around many a corner. Startups can grow by reinvesting profits in their own growth if bootstrapping costs are low and return on investment is high. The entrepreneur can also continue working otherwise to fund the new venture. Or the business model might require customer financing – asking for payment up front before the service or product is delivered. And of course, there are an unlimited amount of other creative solutions for bootstrapping, ones to be determined most useful on a per-company basis.
What are some examples of successful bootstrapping? You might see somebody with experience in start-ups creating a new business. Nick Denton is a good example –after leaving his first company, First Tuesday, this guy worked out of an inexpensive storefront to build Gawker, a company now valued at $150 million. On the other end, you have Sophia Amoruso who worked inconsequential odd jobs until she earned profitability and $30 million in annual sales with her clothing start-up, Nasty Gal. She bootstrapped her way to success in five years of sales on Ebay.
All of this bootstrapping talk isn’t meant so much as a deterrent to fundraising as it is used to suggest an alternative method for more securely and independently building your business instead. Nobody can deny the allure of that pot of gold at the end of the entrepreneurial rainbow. I mean, who would say she doesn’t want her idea or product to hit it big in all senses of that phrase? It’s just that very few ventures will actually end that way so easily and without consequence. If you want control, financially and structurally, of your company, it just might be better to spend the time buying a pot, finding gold bit by bit to fill it, and then painting the rainbow yourself.
Stacy Gregg is an educator, runner, reader, and mom to two energetic pre-schoolers. She joined the Rockies Venture Club at the end of 2012 to support the communications side of the organization.
Location: American Mountaineering Center Theater, 710 Tenth Street Golden, CO 80401 (map)
Time: February 12, 5-7:30pm
- Basic Members get 50% off registration.
- Full and Keystone Members get in free and are welcome to bring a guest for free!
5:00-5:55 Networking Happy Hour
5:55-6:45 Updates on Crowdfunding Panel
6:45-7:30 Four great pitches
RVC presents a 3-D look at crowd funding. Our panel will start with the high level fundraising laws that are coming soon due to the Federal JOBS Act from Amy Bowler of Holland and Hart. We will also Learn about what funding portals are doing to prepare themselves for the coming crowdfunding revolution from David Milliken of Funding Launchpad. Finally, we will hear lessons learned from Gordon Nuttall, CEO of Couragent, a company that is currently fundraising using crowdfunding with an intrastate offering.
P2Bi – A company that uses crowdfunding to raise money for factoring
Couragent – Maker of the FlipPad Scanner, and currently raising capital through crowdfunding
Tensegrity – A local company with a superior prosthetic foot raising capital for their go-to-market phase.
Crowdfunding Offerings – Their product ‘Mainstreet Crowd’ is a crowdfunding platform that focuses on local and regional offerings.
Please pre-register if possible.
$10 surcharge on door registrations.
Tim Harvey, Software & Biotechnology Consultant
Joni Gale Kripal’s idea for a Kickstarter project began with just her and a friend, looking for something they wanted and couldn’t find on the market – an iPad attachment with practical organization and the elegant design they were looking for. Joni says simply, “I made it for myself because I wanted it,” and they saw the potential in the market as well as talent within themselves to build a business. Although her project wasn’t fully funded, she considers it a positive experience and has some thoughts for anyone considering crowdfunding.
Kickstarter (funded by Index Ventures and Union Square Ventures, among others) is a way for anyone in the world to fund creative projects and is open to creators from the US and UK. Kickstarter specifically requires that all projects be creative in nature, although other platforms focus on different areas. These types of crowdfunding platforms rely on “backers” not investors, people who find these campaigns online, believe in the idea, and agree to put in cash for the project at certain levels. Based on their level of support, backers get rewards, such as the products they’re funding, or a one-of-a-kind experience. There is technically no “investment,” so the creator(s) keep 100% of their equity. This also means an entrepreneur is not likely to find mentorship or guidance going through crowdfunding.
So far, Joni and her partner had just invested sweat equity and personal money, and as they were looking to scale the business they realized they needed more cash to do so. They chose Kickstarter over other services primarily because of the “all or nothing” premise. Other platforms, like Indiegogo or RocketHub have a “keep-it-all” scenario, where an entrepreneur keeps all of the money raised, even if the campaign hasn’t met its fundraising goals. With an all-or-nothing premise, if the goal isn’t reached by the deadline (as in Joni’s situation), no money is collected from the backers. In this case, they won’t expect anything else from you, which limits your risk and sets their expectations upfront. In addition, backers may recruit others before the deadline just because they want to see the idea succeed. For these reasons, ideas tend to be either popular and hit their goal, or don’t get very far – there is little middle ground on Kickstarter. Joni’s biggest take away from her experience was market research insight and real world feedback, and she also had some more specific recommendations as well.
If you’re considering crowdfunding, the first thing to do is to back a few projects that you find interesting to get a feel for how it works. It’s a good idea to have a solid website and a multi-channel social media campaign running prior to launching your project. Keep in mind that having established users liking, tweeting, and blogging about you prior to the project can create credibility for new people finding your idea. Twitter can certainly be useful, and Pinterest could be even more important, especially if your idea is visual in nature and/or is more targeted toward females, as they are 80% of Pinterest’s user base (TechCrunch on Pinterest). Be thoughtful with the rewards that you give backers, and structure the package levels simply. Rewards that are close to the heart of your idea are likely to do well, because backers resonated with them in the first place. Decisions made on social media tend to be fast, making first impressions ever more important, so if you use video (which is a good idea) don’t be afraid to spend some money on video production. It can also be helpful to overestimate your funding needs, as fees and unexpected challenges always come up.
There are things to be careful with as well. As always, read the fine print and keep up on any changes in your business environment. A platform’s rules may change during your experience with them, as Joni’s did, so pay attention to the ones that affect your project. When the JOBS act is implemented (Forbes infographic here), it will change some things in the industry, so be aware of that as well. Fees will cut into your margins, 10-15% in Joni’s case, since Kickstarter takes 5%, Amazon Payments 3-5%, and shipping for backer’s rewards are usually included. “You have to discount to get on Kickstarter,” she says. Competitors can see your ideas out in the open, so if necessary look into filing patents or other IP protection. As always, be careful in hiring any outside professionals, as there are shady “consultants” who cold-email to offer marketing, design, or other little services than are little more than a scam. Do your diligence if you hire someone, and if the offer sounds too good to be true, it usually is.
Joni sees her Kickstarter project experience and education as a good thing and something she would do again. She doesn’t consider it a failure, but a learning experience that is part of her entrepreneurial process. It gave her a new level of market insight as well as a chance for market exposure and feedback from potential customers. In the end, Joni’s positive attitude and learning from her project means that her experience is a valuable stepping stone in building her business.
About the author:
Tim is pursuing a Master’s from CU-Boulder in Engineering Management, after a few years working with entrepreneurs following an undergrad in Cognitive Neuroscience at U. of Denver. He started his first business at age 19 and currently consults for startup companies, primarily in software and biotechnology.