The MIT Enterprise Forum session on Wednesday night was fun. There were about 45 people who attended, so the small media room at DU was fairly packed. This was the first time I had been to one of these, so I was surprised to see the makeup of the crowd.
For some reason I was expecting a crowd full of MIT grads and stuffy CXO types. I couldnt have been more wrong. There were lots of young entrepreneurs like Danny Newman, Jason Eckenroth, Chris Stock, Michael Sitarzewski and Kevin Cawley in attendance. There also seemed to be a good number of founders from small service oriented companies present.
After about an hour of watching the broadcast on angel investing from Boston, the attention turned to a small local panel made up of private investors, entrepreneurs, and venture capitalists. I had been invited to sit on this panel, and wasnt quite sure what to expect.
The crowd really got into it, and what followed were lots of great questions. I wanted to repeat the gist of a few of the better questions.
One person said that they were trying to raise $1M for his company. Correctly noting that he did not live in Silicon Valley, he remarked that this amount seemed to be in the no mans land between angel investment and venture funding. We effectively answered this question by saying youre probably right. Not phased by the panels obviously high tolerance for ambiguity the young man pressed on by asking so what do I do then?. The advise was to go and do something with less money. Many young entrepreneurs dont understand that good angel investors will be prepared to double down once or twice if things are going well. Its a great lesson: If you need a million ask for $250k, say what youre going to do with it, and then do it. If things are going well, raising a second round will be possible.
Another person said that they were confused by some angel investors ambiguity towards the annual rate of return that they were seeking. The panel discussed the fact that angels often state fuzzy goals like a 10x return on investment. So she pressed the panel with a barrage of completely reasonable questions intended to nail this down such as Over what period of time? Annually? Across their whole portfolio? I think this gets to the heart of one of the fascinating subjects discussed in Angel Investing: An Insiders View which is that there are many motivations for angel investing. Certainly, angels arent looking for 10-20% annualized returns. Angels are looking for a rocket ship. The honest answer is We want a 10,000 percent return on investment in 3 years. Angels just dont say this because they dont want to sound stupid. They realize that in many ways their portfolio companies are lottery tickets. Its just that the game is a heck of a lot more fun than watching ping pong balls line up. If you ask me, most angel investors dont want to lose their money, and they want a chance to hit one or two out of the park while getting the mental exercise and reward of helping to build interesting companies.
Finally, there was a lively discussion about whether or not a pre-revenue startup should bring in a seasoned executive with a $130k per year salary. Coincidentally, I had just advised a startup a few days ago to steer very clear of such a person. Even if youre just a bunch of product guys, and even if you know you have a gap to fill at CEO or need a VP of BizDev so badly it hurts, dont pay this kind of money for it. The person you are talking to is not an entrepreneur if they are demanding this sort of salary while you take none and eat Ramen noodles. If this person were confident in you, your company, and their own abilities then they would be asking for equity instead of salary. Entrepreneurial people take small risks and work for a startup, but entrepreneurs take real risks and work on a startup.
If you get the chance, come and check out the next MIT Enterprise Forum session (not yet announced). I have to say that Jim Pollock does a great job organizing it and ensuring a lively discussion on the topic at hand. Thanks Jim!