Tag Archives: Entrepreneurship

When Should I Apply for Angel Funding?

Posted on by

So you decided to apply to an angel network for funding.  When is the best time to apply?

Before you run out of money, of course.  But most startups these days have some flexibility given the low cost of lean design as well as funding from self, friends and family.

If you have a truly exceptional startup, or a truly exceptional track record, don’t wait, apply asap.  What is a truly exceptional startup?  As Justice Potter Stewart said in 1964, “I know it when I see it.”

If you are in the other 99.8% of startups, you should be more strategic about timing.

Some angel groups like to be the first outside funding source.  These favor earlier companies with lower valuations, and regularly lead rounds of $500k and up.  For them, the sooner you apply, the better.  Consider them as soon as you need funds beyond friends and family, and have a hint of demonstrable traction.  New York Angels is one of these groups.

For most all angel networks, better to try to wait until you have basic business traction, which I see as:
  1. A working product,
  2. Some revenue and market validation,
  3. Your co-founders are in place (e.g., “I’m looking for a co-founder with [insert skill]” is a red flag.)
It is also better to wait will you have some basic financing traction.  This means:
  1. You have a credible lead investor,
  2. You have at least $100-200k and 20% of your round committed,
  3. You have deal terms largely agreed by the lead and committed investors.

Yes, this is an chicken and egg problem. How do you get there without funding?  Wing it?  Sorry about the pun.  Here’s where being a scrappy entrepreneur is a plus.

Most companies that raise angel network funding successfully do so after they have some business and financing traction.  There are many more entrepreneurs seeking funding than there are early stage angels and VCs.  Supply and demand means that investors can wait, at least in most cases. Harvard Business School Alumni Angels is one large angel network that prefers companies with at least some basic business and financing traction, and most angel networks fall in this group.

Waiting and self-funding for more months than you’d like isn’t fun.  But it may save you time and money, and lead to more fun over the long haul.

Some additional suggestions as your move ahead:
  1. Focus first on angel groups and micro-VCs who could lead your round.
  2. If you do pitch before having a lead investor committed, be prepared for other investors to wait until you find a lead.
  3. Put forward your ask for funding amount and terms, and indicate that you are negotiable once you identify a lead.  [If you say that terms are “TBD and up to the lead” you risk coming across as clueless].
  4. Don’t be so greedy that spend too much time with a funding ask that is above the market, and you run out of money and never raise a dime.
  5. Never insist on a SAFE note with a serious angel.  They know that is so unfavorable to angels that it can easily be a worthless investment in at otherwise successful company.

Good luck!

 

The Facts on Deal Valuation and Structure

Posted on by

Attention Entrepreneurs:  Investors at different stages have varied interests so you are likely to get different counsel from Big VCs, Big Accelerators, and other Big Shots.

I’ll keep this post brief and fact-based.  Early stage financing has supply and demand, and deal terms and valuation are determined by market factors.  When you determine valuation and deal structure for your company, consider the current data on Angel financing.

66% of Angel financings are done at a pre-money valuation of $4.5 million and under.60% of angel financing is done with Preferred Stock.

The source of this data is the Angel Capital Association’s new Angel Funders Report, dated August 2018 and released October 2018.  Drawn from 432 investment rounds in 2017 across 393 companies totaling $102 million invested.  Companies were located in 36 US States, Canada, and Israel.

So when you set your terms, the closer you can price your deal based on its merits relative to other angel deals getting funded, the faster your funding round will go, and the quicker you can get back to your business fundamentals.

Angel Valuation Survey

Posted on by

The median valuation of tech companies funded pre-revenue is $2.75 million, according to a just released survey of angel groups from Gust. With the costs of starting a tech business falling, this means an entrepreneur can raise $500k and only give up 18% of his company to do so.  With the promise of revenue down the road, and no financial history on which to base a valuation, this seems reasonable.  Every company is of course different, but if an entrepreneur can conserve capital, he or she can retain a large share of the company.  Since I’m often asked about valuation, I’ve posted data from some of the larger angel groups below:

2012 Valuation Survey of Angel Groups  
Median pre-money valuation of pre-revenue companies
Software, Internet, Mobile and telecom deals
$ millions
All Groups:  Median 2.75  
All Groups:  Average 2.96
Selected groups:
Alliance of Angels (Seattle) 0.8
Atlanta Technology Angels 1.8
Robin Hood Ventures (Phila) 2
Vancouver Angels 2
Ohio TechAngels (Columbus) 2.45
New York Angels 2.45
Band of Angels (Silicon Valley) 2.75
Launchpad Angels (Boston) 2.75
Mid-Atlantic Angel Group (Phila) 3
Hub Angels (Boston) 3.13
Golden Seeds (NY, Boston, CA) 3.35
Sand Hill Angels (Silicon Valley) 3.5
Tech Coast Angels (So. CA) 3.6

VC as Psychologist

Posted on by

Here’s a Washington Post interview with my former Bain colleague (vintage 1980’s!) John Backus, a managing partner at New Atlantic Ventures in VA.

What do VCs actually do for their money?  Backus says:

“We are basically professional guides to the entrepreneur to help them navigate rapidly evolving industries and solve difficult problems,” Backus said. “We’re like their corporate psychologist.”

Read more here.